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: Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit Standard Quantity or Hours 2.30 ounces 0.80 hours 0.80 hours Standard Price or Rate $24.00 per ounce $15.00 per hour $ 3.50 per hour Standard Cost $55.20 12.00 2.80 $70.00 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12,500 ounces at a cost of $282,500. b. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory. c. 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 $14.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $8,000. e. During November, the company produced 4,100 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 4 senior technicians and 22 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. Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Reg 2A Req 2B Reg 3 For direct materials, compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.) Materials price variance Materials quantity variance

Answer 1

Part 1 a

	Standard price	-	Actual price	X	Actual quantity	=	Variance
Materials price variance	24		22.60		12500		17500	F
	Standard quantity	-	Actual quantity	X	Standard price	=	Variance
Material quantity variance	9430		9500		24		1680	U

Actual price = 282500/12500

Actual quantity used = 12500-3000 = 9500

Standard quantity = 4100*2.30 = 9430

Part 1 b

Yes, the contract probably should be signed. The new price of $22.60 per ounce is substantially lower than the old price of $24 per ounce, resulting in a favorable price variance of $17500 for the month. Moreover, there is a little or no problem in production which is depicted from the small materials quantity variance for the month.

Part 2 a

	Standard rate	-	Actual rate	X	Actual hours	=	Variance
Labor rate variance	15.0		14.0		3900		3900	F
	Standard hours	-	Actual hours	X	Standard rate	=	Variance
Labor efficiency variance	3280		3900		15		9300	U

Actual hours = 26*150 = 3900

Standard hours =4100*0.8 =3280

Part 2 b

No, it is not advisable to continue new labor mix probably. In spite of decrease in the average hourly labor cost from $15 to $14, which results into the $3900 favorable labor rate variance. The overall labor efficiency variance is greater than the labor rate variance. This shows that the new labor mix increases overall labor costs.

Part 3 a

	Standard rate	-	Actual rate	X	Actual hours	=	Variance
Variable overhead rate variance	3.50		2.05		3900		5655	F
	Standard hours	-	Actual hours	X	Standard rate	=	Variance
Variable overhead efficiency variance	3280		3900		3.50		2170	U

Actual rate per unit = 8000/3900 = 2.05