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	2.60	ounces	$	29.00	per ounce	$	75.40
Direct labor	0.60	hours	$	12.00	per hour		7.20
Variable manufacturing overhead	0.60	hours	$	3.50	per hour		2.10
Total standard cost per unit						$	84.70

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

Materials purchased, 14,000 ounces at a cost of $388,500.

There was no beginning inventory of materials; however, at the end of the month, 2,950 ounces of material remained in ending inventory.

The company employs 22 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 $11.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,500.

During November, the company produced 4,200 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 22 technicians employed in the production of Fludex consisted of 5 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

The materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production
1.a.	Materials price variance = AQ (AP – SP)
	14,000 ounces ($27.75 per ounce* – $29.00 per ounce) = $17,500 F
	*$388,500 ÷ 14,000 ounces = $27.75 per ounce
	Materials quantity variance = SP (AQ – SQ)
	$29.00 per ounce (11,050^ ounces – 10,920* ounces) = $3,770 U
	*4200 units x 2.60 ounces = 10,920 ounces
	^ 14,000-2,950(inventory at the end)=11,050
	Materail Price Variance		$17,500	F
	Material quantity Variance		$3,770	U
b.	Yes
	The contract probably should be signed. The new price of $27.75 per ounce is lower than the old price of $29.00 per ounce, resulting in a favorable price variance of $17,500 for the month
2.a.	Labor rate variance = AH (AR – SR)
	3,300 hours ($11.00 per hour – $12.00 per hour) = $3,300			F
	Labor efficiency variance = SR (AH – SH)
	$12.00 per hour (3,300 hours – 2,520 hours) = $9,360			U
	actual	150*22	3300
	standard	4200*0.60	2520
	Labour Rate Variance		$3,300	F
	Labour efficiency variance		$9,360	U
b.	No
3	Variable overhead spending variance = AH (AR – SR)
	3,300 hours ($1.67 per hour* – $3.50 per hour) = $6,039			F
	*$5,500÷ 3,300 hours = $1.67 per hour
	Variable overhead efficiency variance = SR (AH – SH)
	$3.50 per hour (3,300 hours – 2,520 hours) = $2,730			U
	Variable overhead rate variance		$6,039	F
	Variable overhead efficiency variance		$2,730	U