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 2.68 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 7.29 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

Answer 1

1. For Direct material variance:

Standard quantity of direct material for 4200 units = 4200 units * 2.60 ounce per unit = 10,920 ounce

Standard price per ounce of direct material (Given) = $29 per ounce

Standard material cost for 4200 units of Fludex = Standard quantity * Standard price = 10,920 ounce * $29 per ounce = $316,680

Actual quantity of direct material used = 14,000 - 2,950 = 11,050 ounce

Actual price per ounce of direct material = $388,500 / 14,000 ounce = $27.75 per ounce

Actual material cost for 4200 units of Fluddex = Actual quantity * Actual price = 11,050 ounce * $27.75 per ounce = $306,637.50

a. Material price variance = (standard price - actual price) * actual quantity = ($29 - $27.75) * 11,050 ounce = $13,812.50 (F)

Material quantity variance = (standard quantity - actual quantity) * standard price = (10,920 - 11,050) * $29 = $3,770 (U)

b. Recommendation for new contract: From material price variance, it can be observed that the price offered by the existing supplier is less than the standard price estimated by the company. Hence, if the new supplier is willing to offer the material at price less than the existing supplier i.e. below $27.75 per ounce then the company can accept the offer from new supplier.

2. For Direct labor variance:

Standard hours of direct labor for 4200 units = 4200 units * 0.60 hours per unit = 2,520 hours

Standard rate per hour of direct labor (Given) = $12 per hour

Standard labor cost for 4200 units of Fludex = Standard hours * Standard rate = 2,520 hours * $12 per hour = $30,240

Actual hours of direct labor worked = 22 technicians * 150 hours = 3,300 hours

Actual rate per hour of direct labor (Given) = $11 per hour

Actual labor cost for 4200 units of Fluddex = Actual hours * Actual rate = 3,300 hours * $11 per hour = $36,300

a. Labor rate variance = (standard rate - actual rate) * actual hours = ($12 - $11) * 3,300 hours = $3,300 (F)

Labor efficiency variance = (standard hour - actual hour) * standard rate = (2,520 - 3,300) * $12 = $9,360 (U)

b. Recommendation for new labor mix: From labor efficiency variance, it can be observed that the actual hours worked by the technicians are more because of employing fewer senior technicians and more assistants. Hence this will result in unfavourable condition and cannot be encouraged.

3. For Variable overhead variance:

Standard hours of direct labor for 4200 units = 4200 units * 0.60 hours per unit = 2,520 hours

Standard rate per hour of variable overhead (Given) = $3.50 per hour

Standard variable overhead cost for 4200 units of Fludex = Standard hours * Standard rate = 2,520 hours * $3.50 per hour = $8,820

Actual hours of direct labor worked = 22 technicians * 150 hours = 3,300 hours

Actual rate per hour of direct labor (Given) = $5,500 / 3,300 hours = $1.67 per hour

Actual variable overhead cost for 4200 units of Fluddex = Actual hours * Actual rate = 3,300 hours * $1.67 per hour = $5,500

Variable overhead rate variance = (standard rate - actual rate) * actual hours = ($3.50 - $1.67) * 3,300 hours = $6,050(F)

Variable overhead efficiency variance = (standard hour - actual hour) * standard rate = (2,520 - 3,300) * $3.50 = $2,730(U)