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	$	15.00	per ounce	$	31.50
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	3.50	per hour		2.80
Total standard cost per unit						$	46.30

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

1. Materials purchased, 10,500 ounces at a cost of $143,325.

2. There was no beginning inventory of materials; however, at the end of the month, 3,050 ounces of material remained in ending inventory.

3. The company employs 21 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 $13.50 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,800.

5. 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 21 technicians employed in the production of Fludex consisted of 5 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

	Standard Quantity(SQ)	Standard Price(SP)	Standard Cost(SC)
Direct Material	2.1	15	31.5
Direct Labour	0.8	15	12
Variable Manufacturing Overhead	0.8	3.5	2.8
Total standard cost			46.3
	Actual Quantity(AQ)	Actual price/unit	Actual Cost(AC)
Material Purchased	10500	13.65	143325
Closing Stock	3050	13.65	41632.5
Direct Material	7450	13.65	101692.5
Direct Labour	3360	13.5	45360
Variable Manufacturing Overhead	3360	2.02	6800

for 3500 units of Fludex
	Standard Quantity(SQ)	Actual Quantity(AQ)	Standard Cost	Actual Cost(AC)
			Per unit(SP)	Total(SC)	Per unit(AP)	Total(AC)
Direct Material	7350	7450	15	110250	13.65	101692.5
Direct Labour	2800	3360	15	42000	13.5	45360
Variable Manufacturing Overhead	2800	3360	3.50	9800	2.02	6800
Total cost				162050		153852.5
1.Material Variances	Equation	Computation
a.Matrial Price Variance	(SP-AP)*AQ	=(15-13.65)*7450	10057.5
Material Quantity Variance	(SQ-AQ)*SQ	=(7350-7450)*15	-1500
b.Since seller is selling for less than standard price long Term contract is acceptable
2 Labour Variances	Equation	Computation
a.labour rate variances	(SR-AR)*AH	=(15-13.5)*3360	5040
labour efficency variances	(SH-AH)*SR	=(2800-3360)*15	-8400
b.by new policy there is an increase in Direct Labour Hours hence Direct Labour cost is increased so the new policy is not recommended
3 Variable OH Variances	Equation	Computation
Variable OH Rate Variances	(SR-AR)*AH=(SR*AH)-(AR*AH)	=(2800*3.5)-6800	3000
Variable OH Efficiency Variances	(SH-AH)*SR	=(2800-3360)*3.5	-1960