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 Cost or Hours or Rate Direct materials 2.60 ounces $20.00 per ounce $52.00 Direct labor 0.60 hours $16.00 per hour 9.60 2.70 Variable manufacturing overhead 0.60 hours $ 4.50 per hour $64.30 Total standard cost per unit

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

1. Materials purchased, 13,000 ounces at a cost of $244,400.

2. There was no beginning inventory of materials; however, at the end of the month, 3,300 ounces of material remained in ending inventory.

3. The company employs 20 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.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,500.

5. During November, the company produced 3,600 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

• All working forms part of the answer
• Workings

Actual DATA for		3600	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	9700	$            18.800	$        182,360.00
Direct labor	3000	$              14.00	$           42,000.00
Variable Overhead	3000	$                2.17	$             6,500.00

Standard DATA for		3600	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.6 ounce x 3600 units)=9360 ounce	$                20.00	$     187,200.00
Direct labor	( 0.6 hours x 3600 units)=2160 hours	$                16.00	$       34,560.00
Variable Overhead	( 0.6 hours x 3600 units)=2160 hours	$                   4.50	$         9,720.00

• Requirement 1

Part A

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     20.00	-	$                    18.80	)	x	9700
	11640
	Variance		$            11,640.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	9360	-	9700	)	x	$                        20.00
	-6800
	Variance		$              6,800.00			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
(	$                     16.00	-	$                    14.00	)	x	3000
	6000
	Variance		$              6,000.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2160	-	3000	)	x	$                        16.00
	-13440
	Variance		$            13,440.00			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
(	$                        4.50	-	$                       2.17	)	x	3000
	7000
	Variance		$              7,000.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2160	-	3000	)	x	$                           4.50
	-3780
	Variance		$              3,780.00			Unfavourable-U