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 2.60 ounces 0.60 hours 0.60 hours Standard Price or Rate $29.00 per ounce $12.00 per hour $ 3.50 per hour Standard Cost $75.40 7.20 2.10 $ 84.70 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 14,000 ounces at a cost of $388,500. b. There was no beginning inventory of materials; however, at the end of the month, 2,950 ounces of material remained in ending inventory. c. The company employs 22 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 $11.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,500. e. During November, the company produced 4,200 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 22 technicians employed in the production of Fludex consisted of 5 senior technicians and 17 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

Answer

• Workings

Actual DATA for		4200	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	14000	$                27.75	$        388,500.00
Direct labor	3300	$                11.00	$           36,300.00
Variable Overhead	3300	$                   1.67	$             5,500.00

Standard DATA for		4200	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.6 ounces x 4200 units)=10920 ounces	$                29.00	$     316,680.00
Direct labor	( 0.6 hours x 4200 units)=2520 hours	$                12.00	$       30,240.00
Variable Overhead	( 0.6 hours x 4200 units)=2520 hours	$                   3.50	$         8,820.00

Note:

Material Price Variance can have two possible answers:

>#1 based on actual qty purchased

>#2 based on actual qty used.

Both the answers have been provided.

• Requirement 1

Part A
--Possible Two Answers for ‘PRICE VARIANCE’ and their calculation

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              29.00	-	$                    27.75	)	x	14000
	17500
	Variance		$            17,500.00			Favourable-F

OR

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              29.00	-	$                    27.75	)	x	11050
	13812.5
	Variance		$            13,812.50			Favourable-F

Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	10920	-	11050	)	x	$                        29.00
	-3770
	Variance		$              3,770.00			Unfavourable-U

Part B

YES, it is recommended because the prices offered by the seller are LESS than the standard price of material.

• Requirement 2

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              12.00	-	$                    11.00	)	x	3300
	3300
	Variance		$              3,300.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2520	-	3300	)	x	$                        12.00
	-9360
	Variance		$              9,360.00			Unfavourable-U

Part B

NO, it is not recommended, because this has led to lower efficiencies among workers, as evident by Unfavourable Efficiency Variance, calculated above.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                3.50	-	$                       1.67	)	x	3300
	6050
	Variance		$              6,050.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2520	-	3300	)	x	$                           3.50
	-2730
	Variance		$              2,730.00			Unfavourable-U