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 0.50 hours 0.50 hours Standard Price or Rate $26.00 per ounce $14.00 per hour $ 3.40 per hour Standard Cost $59.80 7.00 1.70 $68.50 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 12,500 ounces at a cost of $305,625 b. There was no beginning inventory of materials; however, at the end of the month, 2,800 ounces of material remained in ending inventory c. The company employs 21 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 $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 $4,200. 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 21 technicians employed in the production of Fludex consisted of 4 senior technicians and 17 assistants. During November the comnany experimented with fewer senior technicians and more assistants in order to reduce labor costs. Would you

Answer 1

Solution 1a:

Standard quantity of material for actual production = 4200*2.30 = 9660 ounce

Actual quantity of material purchased = 12500 ounce

Actual quantity of material used = 12500 - 2800 = 9700 ounce

Standard price of material = $26 per ounce

Actual price of material = $305,625 / 12500 = $24.45

Material price variance = (SP - AP) * AQ purchased = ($26 - $24.45) * 12500 = $19,375 F

Material quantity variance = (SQ - AQ) * SR = (9660 - 9700) * $26 = $1,040 U

Solution 1b:

As price offered by the new supplier is lesser than standard price of material, therefore company should sign long term purchase contract with the new supplier.

Solution 2a:

Standard hours of direct labor = 4200*0.5 = 2100 hours

Standard rate of direct labor = $14 per hour

Actual hours of direct labor = 21*150 = 3150 hours

Actual rate of direct labor = $12 per hour

Direct labor rate variance = (SR - AR) * AH = ($14 - $12) * 3150 = $6,300 F

Direct labor efficiency variance = (SH - AH) * SR = (2100 - 3150) * $14 = $14,700 U

Solution 2b:

Employing more assistant rather senior technician resulted in favorable direct labor rate variance but unfavorable labor efficiency variance. Further unfavorable efficiency variance is higher than favorable rate variance, therefore it is recommended new labor mix should not be continued.

Solution 3:

Standard hours of direct labor = 4200*0.5 = 2100 hours

Standard rate of variable overhead= $3.40 per hour

Actual hours of direct labor = 3150

Actual rate of variable overhead = $4,200 / 3150 = $1.33333

Variable overhead rate variance = (SR - AR) * AH = ($3.40 - $1.33333) * 3150 = 6,510 F

Variable overhead efficiency variance = (SH - AH) * SR = (2100 - 3150) * $3.40 = $3,570 U