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	2.30	ounces	$	26.00	per ounce	$	59.80
Direct labor	0.50	hours	$	14.00	per hour		7.00
Variable manufacturing overhead	0.50	hours	$	3.40	per hour		1.70
Total standard cost per unit						$	68.50

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

1. Materials purchased, 12,500 ounces at a cost of $305,625.

2. There was no beginning inventory of materials; however, at the end of the month, 2,800 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 $12.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,200.

5. 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 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

1.(a).

The material price variance is computed on the entire amount of material purchased,

The formula for material Price variance =Actual Quantity *(Actual price - standard price)

Here Actual price = $305,625/12500 ounces=$24.45/ounces.

Therefore, Material price variance = 12500*($24.45-$26.00)

= $19,375 F Answer.

Now, Material quantity variance=Standard Price*(Actual quantity - Standard quantity)

Actual Quantity=12500-2800=9700 ounces

& Standard Quantity= 4200 units *2.30 per unit =9660 ounces

therefore, Material quantity variance= $26 per ounces(9700 ounces -9660 ounces)

=$ 26 per ounces *40 ounces

= 1040 U Answer.

(b).Yes ,the contract should be signed.

since ,new price $24.45 per ounce is lower than the old price $26.00 per ounce ,resulting in $19,375($26.00-$24.45=$1.55 *12500) price variance per month.

Also ,the material from the new contract appears little or no problem in production.

2.For direct labor :

(a) Labor Rate variance = Actual hours *(Actual rate - standard rate)

Actual hour= 21 technician * 150 per hour= 3150 hours.

Therefore, Labor Rate variance =3150 *($12-$14)

= 3150 *$2

= 6300 F Answer.

Labor efficiency variance=SR(AH-SH)

Standard hours= 4200 units * 0.50 hour/ unit

= 2100 hours

Therefore ,Labor efficiency variance = $14 /hour*(3150 hours - 2100 hours )

= $14/hours *1050 hours

= 14,700 U Answer.

3.Variable overhead variance= Actual hour *(Actual rate - standard rate)

Actual hour=3150 hour

Actual rate= variable manufacturing overhead/Actual hours

= $4200/3150 hour

=1.33 per /hour

Therefore, Variable overhead variance=3150 hour *(1.33 per/hour -3.40 per hour)

= 6520.5 F Answer.

Variable overhead efficiency variance= SR *(AH-SH)

Standard hour=2100 hours

Therefore,Variable overhead efficiency variance= 3.40 per hour *(3150 hours-2100 hours)

= 3570 U answer.