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 or Hours		Standard Price or Rate			Standard Cost
Direct materials	2.20	ounces	$	23.00	per ounce	$	50.60
Direct labor	0.60	hours	$	14.00	per hour		8.40
Variable manufacturing overhead	0.60	hours	$	2.50	per hour		1.50
Total standard cost per unit						$	60.50

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

Materials purchased, 12,000 ounces at a cost of $259,800.

There was no beginning inventory of materials; however, at the end of the month, 3,100 ounces of material remained in ending inventory.

The company employs 25 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.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,200.

During November, the company produced 4,000 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 25 technicians employed in the production of Fludex consisted of 4 senior technicians and 21 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

• All working forms part of the answer
• Workings

Actual DATA for		4000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	8900 [12000 – 3100]	$            21.65 [259800/12000]	$        192,685.00
Direct labor	3250 [25 x 130]	$              12.00	$           39,000.00
Variable Overhead	3250	$                1.29 [4200/3250] *not rounded off	$             4,200.00

Standard DATA for		4000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.2 ounces x 4000 units)=8800 ounces	$                23.00	$     202,400.00
Direct labor	( 0.6 hours x 4000 units)=2400 hours	$                14.00	$       33,600.00
Variable Overhead	( 0.6 hours x 4000 units)=2400 hours	$                   2.50	$         6,000.00

• Requirement 1

--Part ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     23.00	-	$                    21.65	)	x	8900
	12015
	Variance		$            12,015.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8800	-	8900	)	x	$                        23.00
	-2300
	Variance		$              2,300.00			Unfavourable-U

--Part ‘b’

YES, it would be recommended because the price per ounce offered by the seller is LESS than the standard price per ounce.

• Requirement 2

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     14.00	-	$                    12.00	)	x	3250
	6500
	Variance		$              6,500.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2400	-	3250	)	x	$                        14.00
	-11900
	Variance		$            11,900.00			Unfavourable-U

--Part ‘b’

NO, this is not recommended as using too many assistants has led to FALL in efficiency as evident by Unfavourable efficiency variance.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        2.50	-	$                       1.29	)	x	3250
	3925
	Variance		$              3,925.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2400	-	3250	)	x	$                           2.50
	-2125
	Variance		$              2,125.00			Unfavourable-U