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	2.50	ounces	$	19.00	per ounce	$	47.50
Direct labor	0.70	hours	$	15.00	per hour		10.50
Variable manufacturing overhead	0.70	hours	$	4.00	per hour		2.80
Total standard cost per unit						$	60.80

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

1. Materials purchased, 12,500 ounces at a cost of $223,125.

2. There was no beginning inventory of materials; however, at the end of the month, 3,250 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 150 hours at an average pay rate of $12.50 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,100.

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 4 senior technicians and 17 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

• Working data

Actual DATA for		3500	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	12500	$                17.85	$        223,125.00
Direct labor	3150	$                12.50	$           39,375.00
Variable Overhead	3150	$                   1.62	$             5,100.00

Standard DATA for		3500	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.5 ounce x 3500 units)=8750 ounce	$                19.00	$     166,250.00
Direct labor	( 0.7 hours x 3500 units)=2450 hours	$                15.00	$       36,750.00
Variable Overhead	( 0.7 hours x 3500 units)=2450 hours	$                   4.00	$         9,800.00

• Requirement 1

Part A

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              19.00	-	$                    17.85	)	x	12500
	14375
	Variance		$            14,375.00			Favourable-F

OR

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              19.00	-	$                    17.85	)	x	9250
	10637.5
	Variance		$            10,637.50			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8750	-	9250	)	x	$                        19.00
	-9500
	Variance		$              9,500.00			Unfavourable-U

Part B

YES, it is recommended because the prices offered by the seller are LESS than the standard price of material.

• Requirement 2

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              15.00	-	$                    12.50	)	x	3150
	7875
	Variance		$              7,875.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2450	-	3150	)	x	$                        15.00
	-10500
	Variance		$            10,500.00			Unfavourable-U

Part B

NO, it is not recommended, because this has led to lower efficiencies among workers, as evident by Unfavourable Efficiency Variance, calculated above.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                4.00	-	$                       1.62	)	x	3150
	7500
	Variance		$              7,500.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2450	-	3150	)	x	$                           4.00
	-2800
	Variance		$              2,800.00			Unfavourable-U