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 Standard or Hours or Rate Cost Direct materials 2.00 ounces $30.00 per ounce $ 60.00 Direct labor 0.50 hours $14.00 per hour 7.00 Variable manufacturing overhead 0.50 hours $ 3.40 per hour 1.70 Total standard cost per unit $68.70 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 10,000 ounces at a cost of $287,000. 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 20 lab technicians to work on the production of Fludex. During November, they each worked an average of 130 hours at an average pay rate of $12.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,700. e. During November, the company produced 3,400 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 20 technicians employed in the production of Fludex consisted of 4 senior technicians and 16 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:

1-a:Material price variance:

=Actual material used×(Standard rate for material-Actual rate for material)

Actual material used=Beginning materials inventory+Material purchased-Ending materials inventory

=0+10000-3000=7000 ounce

Standard rate=$ 30 per ounce

Actual rate=Total cost of material purchase/Material purchased in ounce

=287000/10000

=$ 28.7 per ounce

Material price variance = 7000 × ($30 - $28.7) = $9100 (F)

(Since actual rate is less than standard rate, variance is favorable)

Material quantity variance:

=Standard rate for materials × (Standard materials required-Actual material used)

Standard rate=$ 30 per ounce

Standard materials required=Actual units produced×Material required per unit

=3400×2=6800 ounce

Actual material used=7000 ounce

Material quantity variance = $30×(6800-7000)= $6000 (U)

(Actual material used is more than the standard material required.Hence, variance is unfavorable)

1-b. Yes Since the material price variance is favorable

2-a: Labor rate variance:

=Actual hours worked×(Standard labor rate-Actual labor rate)

Actual hours worked=20×130=2600 hours

Standard labor rate=$14 per hour

Actual labor rate=$12 per hour

Labor rate variance=2600×(14-12)=$5200 (F)

(Actual labor rate is less than standard labor rate.Hence variance is favorable)

Labor efficiency variance:

=Standard labor rate×(Standard labor hours required-Actual labor hours worked)

Standard labor rate=$14 per hour

Standard labor hours required=Actual units produced×Labor hours required per unit

=3400×0.5=1700 hours

Actual hours worked=2600 hours

Labor efficiency variance=14×(1700-2600)=$12600 (U)

(Actual hours worked is more than the standard hours required.Hence, variance is unfavorable)

2-b. No

3-a: Variable overhead rate variance:

=Actual labor hours ×(Standard variable overhead rate-Actual variable overhead rate)

Actual hours worked=2600 hours

Standard variable overhead rate=$3.4 per hour

Actual variable overhead rate=Actual variable overhead cost/Actual hours worked

=4700/2600=$1.81 per hour

Variable overhead rate variance=2600×(3.4-1.8)=$ 4160 (F)

(Actual variable overhead rate is less than standard variable overhead rate.Hence variance is favorable)

Variable overhead efficiency variance=Standard variable overhead rate×(Standard hours-Actual hours)

Standard variable overhead rate=$3.4 per hour

Standard labor hours required=Actual units produced×Labor hours required per unit

=3400×0.5=1700 hours

Actual hours worked=2600 hours

Variable overhead efficiency variance=3.4×(1700-2600)=$3060 (U)

(Actual hours worked is more than the standard hours required.Hence, variance is unfavorable)

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