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 or Hours		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
Total standard cost per unit						$	71.20

During November, the following activity was recorded related to the production of Fludex:

1. Materials purchased, 14,000 ounces at a cost of $289,800.

2. There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory.

3. The company employs 26 lab technicians to work on the production of Fludex. During November, they each worked an average of 150 hours at an average pay rate of $15.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000.

5. During November, the company produced 3,900 units of Fludex.

Required:

1. For direct materials:

a. Compute the price and quantity variances.

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?

2. For direct labor:

a. Compute the rate and efficiency variances.

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 reduce labor costs. Would you recommend that the new labor mix be continued?

3. Compute the variable overhead rate and efficiency variances.

Answer 1

1) For disrect a) material materials. price & Quant ince (i) mat axial price variance : actual Quantity puqchased standard hate actual na late achial Quantity purchased - TUOO Ounces Standard rate pel ounce = $92 actual rate at which material is purchased - $289800 TUOoo cu $ 90.7 materid pice variance Tucco x ($22 - $ 20.7) ounces = $ 18900 favouable (il material Quantity variance - nyte → Standard Quantity allowed for actual output (sa) Given 1 unit of output reauide 2.50 ounces of makerial for 3900 unit of output, material allowed as per standards = 3goounits X 8.50 ounces SQ = 9750 Ounces actuel Quantity used for actual output (AA) material purchased 14000 ounces (a) closing stock (uoso) ouncy 9950 ounces material consumed - standard rate per ounces & 22 . : material Quantity Variance = (SQ-AQ) X SR +(9750 - 9450) x 2a $4400 unfavoueble (on adresse

0 standard rate per lounce = $88 But the supplies is suppling @ $80.7 per oung which is beneficial to company. Therefore it wo the company is recommended to enter into tong teem purchase contract with supplier 2) For directo labour a) direct labour rate Ee Efficiency variances (i) siate variance standard rate per houd $16 actual rate per hour = $ 15 actual tous worked = 26 lab technicians x iso hours - 3900 hours. h r rate variance = 3900 hours x (16-15) = 3900 x1 = $3900 favouable % Labour effeciency variance, standard houss allowed for actual output (SH) - = punit = 0.9 housy (standard) for 3900 unit, standard hours allowed = 3900 units x 0.9 hius u st SH = 3510 hours. y de tractante b

w Labour effeciency variana eh actual hour worked 86 technician x 150 hours AH = 3900 houp standard rete per hour = $16 labour effeciency variance (Standard hour for acted output - actual hour , worked standard lote per hour w $6240 ad veade b) = | 3510 - 3900) x 16 cash Javan da bih since laboue effecienty vasiance is advease, the it implies that the experiment made by Company by employing more assistants & few senior technicians resulted in adverse results. Therefore the new labous mix is not recommendable V F

Variable over head rate variance le - Standard variable over head rate per houd- & 2 per how standard houses allowed for actual output - 3900 unit.x. 0.9 hour ] 3510 hours standard cost for variable overheads 351082 (for actual output) - $ 7020 into actual variable overheads = $5000 banon variable oven heade rate variana - $ 7020-$5000 - 2020 favouable

variable over head efficiency variance- standard actual houx x worked = (standard hours for actual output oved head robo standard hours for actual ocetput (3900 unitx o'q hours) c 3510 hour actual hoces worked 3900 hour ( 126 technicians x 150 hours = $ 2. standard over head rate per have a cu variance to valiable over head officiency - (250 - 300 ) x 9 = $780 adresse