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	2.00	ounces	$	30.00	per ounce	$	60.00
Direct labor	0.50	hours	$	14.00	per hour		7.00
Variable manufacturing overhead	0.50	hours	$	3.40	per hour		1.70
Total standard cost per unit						$	68.70

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

Materials purchased, 10,000 ounces at a cost of $287,000.

There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.

The company employs 20 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 $4,700.

During November, the company produced 3,400 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

1(A)Computation of Direct Material Price & Quantity Variance:
Direct Material Price Price variance	(SP-AP)AQ	($30 - $28.7)* 10000	$13,000	Favourable
Direc Material Quantity Variance	(SQ-AQ)SP	(6800 - 7000) * $30	($6,000)	Un Favourable
1(B) Yes the company can sign the contract with new material Supplier as the overall material cost variance is favourable.
2(A)Computation of Direct Labour Rate & Efficiency Variance:
Direct Labour Rate variance	(SR-AR)AH	($14 - $12) * 2600	$5,200	Favourable
Direct Labour Efficiency Variance	(SH-AH)SR	(1700 - 2600) * 14	($12,600)	Un Favourable
2(B) No, because the overall labour cost variance is negative.
(3) Computation of variable Overhead Rate & Efficiency & Spending Variance:
Direct Variable Overhead Rate Variance	(SR-AR)*AH	($3.4 - $1.81) * 2600	$4,134	Favourable
Direct Variable Overhead Efficiency Variance	(SH-AH)SR	(1700 - 2600)* $3.4	($3,060)	Un Favourable
Direct Variable Overhead Spending Variance	Price variance+ Quantity Variance		$1,074	Favourable
Working Notes:
1) Actual Price in Material Price Variance = 287000 / 10000 = $28.7
2) Standard Quantity in Material Quantity Variance = 3400units * 2ounces = 6800 Ounces
3) Actual Quantity in Material Quantity Variance = 10000ounces - 3000ounces = 7000 Ounces
4) Actual Hours in Labor Rate Variance / Labor efficiency Variance = 20*130 = 2600 Hours
5) Standard Hours in Labor efficiency Variance / Variable Overhead efficiency Variance = 0.5 * 3400units = 1700Hours
6) Actual Rate in Variable Overhead Rate Variance = $4700 / 2600 = $1.81