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	$	22.00	per ounce	$	55.00
Direct labor	0.90	hours	$	16.00	per hour		14.40
Variable manufacturing overhead	0.90	hours	$	2.00	per hour		1.80
Total standard cost per unit						$	71.20

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

Materials purchased, 14,000 ounces at a cost of $289,800.

There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory.

The company employs 26 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 $15.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000.

During November, the company produced 3,900 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 26 technicians employed in the production of Fludex consisted of 6 senior technicians and 20 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. For direct materials:

a. Compute the price and quantity variances.

Materials price variance = Standard Price−Actual Price×Actual Quantity.

= 22-(289800/14000) x (14000-4050)

= 12935 F

Materials quantity variance = Standard Quantity−Actual Quantity×Standard Price=

=(3900*2.5) - (14000-4050) x 22

= 4400 U

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? -

YES, The new price of $20.70 per ounce is substantially lower than the old price of $22.00 per ounce, resulting in a favorable price variance of $18200 for the month.So the contract should be signed.

2. For direct labor:

a. Compute the rate and efficiency variances.

Labor rate variance = Standard Rate−Actual Rate×Actual Hours

=(16 - 14.40) x (26*150)

= 6240 F

Labor efficiency variance = Standard Hours−Actual Hours×Standard Rate

=(3900*0.90) - (26*150) x 16

= 6240 U

b. YES, the new labor mix probably should be continued. As it decreases the average hourly labor cost from $16.00 to $15.00, thereby causing a $ 6240 favorable labor rate variance

3. Compute the variable overhead rate and efficiency variances.

Variable overhead Variance= Actual Hour x (Actual Rate-Standard rate)

= 3900 x (1.28 - 2.00)

= 780 U

Variable overhead efficiency Variance=Standard rate x (Actual Hour -Standard Hour)

= 2.00 x (3900 - 3510)

=780 F

Notes :

Actual Price = Cost / Material Purchased

=289800 / 14000

=20.70

Standard Hour = 3900 Units * 2.50 Hours

= 9850 Hour

Actual Quantity = Material Purchased - Material remained

= 14000-4050

= 9950 Units

Actual Hours = 26 lab technicians x 150 hours

=3900

Actual Rate = Variable manufacturing overhead / Actual Hours

=$5000 / 3900 Hours = $1.28 Per Hour

Standard Hour = 3900 units / 0.90 Hours per Unit

= 3510 Hours

** "F" for favorable, "U" for unfavorable