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	2.10	ounces	$	24.00	per ounce	$	50.40
Direct labor	0.40	hours	$	14.00	per hour		5.60
Variable manufacturing overhead	0.40	hours	$	2.50	per hour		1.00
Total standard cost per unit						$	57.00

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

Materials purchased, 11,500 ounces at a cost of $259,325.

There was no beginning inventory of materials; however, at the end of the month, 2,700 ounces of material remained in ending inventory.

The company employs 23 lab technicians to work on the production of Fludex. During November, they each worked an average of 100 hours at an average pay rate of $11.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2,300.

During November, the company produced 4,100 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 23 technicians employed in the production of Fludex consisted of 4 senior technicians and 19 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		4100	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	8800 [11500 – 2700]	$            22.55 [259325/11500]	$        198,440.00
Direct labor	2300 [23 x 100 hrs]	$              11.00	$           25,300.00
Variable Overhead	2300	$                1.00	$             2,300.00

Standard DATA for		4100	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.1 ounces x 4100 units)=8610 ounces	$                24.00	$     206,640.00
Direct labor	( 0.4 hours x 4100 units)=1640 hours	$                14.00	$       22,960.00
Variable Overhead	( 0.4 hours x 4100 units)=1640 hours	$                  2.50	$         4,100.00

• Requirement 1

Part A

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     24.00	-	$                    22.55	)	x	8800
	12760
	Variance		$            12,760.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8610	-	8800	)	x	$                        24.00
	-4560
	Variance		$              4,560.00			Unfavourable-U

Part B

YES, it is recommended because the price per ounce offered is LESS than Standard price per ounce.

• Requirement 2

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     14.00	-	$                    11.00	)	x	2300
	6900
	Variance		$              6,900.00			Favourable-F

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1640	-	2300	)	x	$                        14.00
	-9240
	Variance		$              9,240.00			Unfavourable-U

Part B

NO, it is not recommended, because this has led to LOWER efficiencies, as evident by the Unfavourable Efficency Variance

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        2.50	-	$                       1.00	)	x	2300
	3450
	Variance		$              3,450.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1640	-	2300	)	x	$                           2.50
	-1650
	Variance		$              1,650.00			Unfavourable-U