Question

Becton Labs, Inc., produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elaborate distilling process. The company has developed standard costs for one unit of Fludex, as follows: Standard Quantity Standard Price or Rate Standard Cost Direct materials 2.50 ounces $ 22.00 per ounce $ 55.00 Direct labor 0.90 hours $ 16.00 per hour 14.40 Variable manufacturing overhead 0.90 hours $ 2.00 per hour 1.80 $ 71.20 During November, the following activity was recorded relative to production of Fludex: a. Materials purchased, 14,000 ounces at a cost of $289,800. b. There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory. c. The company employs 26 lab technicians to work on the production of Fludex. During November, they worked an average of 150 hours at an average rate of $15.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000. e. During November, 3,900 good units of Fludex were produced . Required: 1. For direct materials: a. Compute the price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) b. The materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract? Yes No 2. For direct labor: a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).) b. In the past, the 26 technicians employed in the production of Fludex consisted of 6 senior technicians and 20 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued? Yes No 3. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

Answer 1

		Standard Quantity	Standard Price	Standard Cost
	Direct Material	2.50 ounces	22 per ounce	55
	Direct Labour	0.90 Hours	16 per hour	14.40
	Variable manufacturing Overhead	0.90 Hours	2 per hour	1.80
				71.20
	Material purchased	14000 ounces		289,800
	Closing inventory	4050 ounces
	Lab technician	26
	Avg hours	150
	Rate per hour	15
	Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours
	Variable manufacturing overhead			5,000
	Unit Produced			3,900
1	Material price variance=	AQ (SP – AP)
		AQ	9950
		AP	20.7
		SP	22
		12,935	F
	Material Quantity Variance	SP(SQ-AQ)
		SP	22
		SQ	9750
		AQ	9950
		(4,400)	U
	b. The materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract?
	Yes
	Because overall material total variance =		8535	F
2	For direct labor:
	Labour rate variance =	Actual Hours*(Standard Rate-Actual Rate)
		AH	3900
		SR	16
		AR	15
		3900	F
	Labour efficiency variance	Standard rate*(Standard Hours- actual hours)
		SR	16
		SH	3510
		AH	3900
		(6,240)	U
	In the past, the 26 technicians employed in the production of Fludex consisted of 6 senior technicians and 20 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued?
	No
	Because Total labour cost variance =		(2,340)	U
3	variable overhead
	Variable overhead rate variance=	Actual hour at standard rate - Actual variable overhead
	Actual hours at Standard rate	7800
	Actual Variable overhead	5000
		2800	F
	Variable overhead efficiency variance =	Standard rate (Standard Hour - Actual hour)
		SR	2 per hour
		Standard hours	3510
		Actual Hours	3900
		(780)	U