Question

7.       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 Quanity Standard Price/Rate Standard Cost

Direct materials . . . . . . . .             2.5 ounces                          $ 20.00 per ounce $ 50.00

Direct labor . . . . . . . . . . .     1.4 hours    $ 12.50 per hour 17.50

Variable manufacturing overhead 1.4 hours                                 $ 3.50 per hour                           4.90

   total $72.40

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

a. Materials purchased, 12,000 ounces at a cost of $ 225,000.

b. There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory.

c. The company employs 35 lab technicians to work on the production of Fludex. During November, they worked an average of 160 hours at an average rate of $ 12 per hour.

d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor- hours. Variable manufacturing overhead costs during November totaled $ 18,200.

e. During November, 3,750 good units of Fludex were produced .

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? Explain.

2. For direct labor:

a. Compute the rate and efficiency variances.

b. In the past, the 35 technicians employed in the production of Fludex consisted of 20 senior technicians and 15 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recom-mend that the new labor mix be continued? Explain.

3. Compute the variable overhead rate and efficiency variances. What relation can you see between this efficiency variance and the labor efficiency variance?

Answer 1

1 a. Material Price Variance = (Standard price - Actual price) x Actual units purchased.

Standard Price = $20 per ounce

Actual Price = 225,000 / 12,000 = $18.75 per ounce

Material Price Variance = (20 - 18.75) x 12,000 = $15,000 (F)

b. Material quantity variance = (Standard quantity required for actual output - Actual quantity used) x Standard rate

Standard quantity required for actual output = 2,5 x 3,750 units = 9,375 ounces

Actual quantity used = Total quantity purchased - closing inventory

= 12,000 - 2,500 = 9,500 ounces

Material quantity variance = (9,375 - 9,500) x 20 = $2,500 (U)

YES the company should sign the contract as the material price variance is favorable.

2. a. Labor Rate Variance = (Standard Rate - Actual Rate) x Actual hours worked

Standard Rate = 12.50 per hour

Actual Rate = 12 per hour

Labor Rate Variance = (12.50 - 12) x 160 x 35 = $2,800 (F)

b. Labor Efficiency variance = (Standard hours for actual output - Actual hours) x Standard rate

Standard hours for actual output = 1.4 hours x 3,750 = 5,250

Actual Hours = 35 x 160 = 5,600

Labor Efficiency variance = (5,250 - 5,600) x 12.50 = $4,375 (U)

NO new labor should be discontinued as there is overall unfavorable variance of $(4,375 - 2,800) = $1,575