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	2.30	ounces	$	17.00	per ounce	$	39.10
Direct labor	0.60	hours	$	13.00	per hour		7.80
Variable manufacturing overhead	0.60	hours	$	2.50	per hour		1.50
Total standard cost per unit						$	48.40

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

Materials purchased, 11,500 ounces at a cost of $178,825.

There was no beginning inventory of materials; however, at the end of the month, 3,150 ounces of material remained in ending inventory.

The company employs 17 lab technicians to work on the production of Fludex. During November, they each worked an average of 160 hours at an average pay rate of $11.50 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $3,000.

During November, the company produced 3,500 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 17 technicians employed in the production of Fludex consisted of 4 senior technicians and 13 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		3500	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	8350	$            15.550	$        129,842.50
Direct labor	2720	$              11.50	$           31,280.00
Variable Overhead	2720	$                2.39	$             6,500.00

Standard DATA for		3500	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.3 ounces x 3500 units)=8050 ounces	$                17.00	$     136,850.00
Direct labor	( 0.6 hours x 3500 units)=2100 hours	$                13.00	$       27,300.00
Variable Overhead	( 0.6 hours x 3500 units)=2100 hours	$                   2.50	$         5,250.00

• Requirement 1

PART A

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     17.00	-	$                    15.55	)	x	8350
	12107.5
	Variance		$            12,107.50			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8050	-	8350	)	x	$                        17.00
	-5100
	Variance		$              5,100.00			Unfavourable-U

PART B

Yes, it is recommended, because the price per ounce offered by supplier is LESS than standard price per ounce.

• Requirement 2

PART A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     13.00	-	$                    11.50	)	x	2720
	4080
	Variance		$              4,080.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2100	-	2720	)	x	$                        13.00
	-8060
	Variance		$              8,060.00			Unfavourable-U

PART B

NO, it is not recommended, because using too many assistants had led to lower efficiencies as disclosed by Unfavourable Efficeincy Variance.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        2.50	-	$                       2.39	)	x	2720
	300
	Variance		$                  300.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2100	-	2720	)	x	$                           2.50
	-1550
	Variance		$              1,550.00			Unfavourable-U