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 2.00 ounces $ 30.00 per ounce $ 60.00 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 $ 68.70 During November, the following activity was recorded related to the production of Fludex: Materials purchased, 10,000 ounces at a cost of $287,000. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory. The company employs 20 lab technicians to work on the production of Fludex. During November, they each worked an average of 130 hours at an average pay rate of $12.00 per hour. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,700. During November, the company produced 3,400 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 20 technicians employed in the production of Fludex consisted of 4 senior technicians and 16 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

• All working forms part of the answer
• Working for Variances: Actual Data and Standard data for 3,400 units.

Actual DATA for		3400	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	7000	$            28.700	$        200,900.00
Direct labor	2600	$              12.00	$           31,200.00
Variable Overhead	2600	$                1.81	$             4,700.00
Standard DATA for		3400	units
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct Material	6800	$              30.00	$        204,000.00
Direct labor	1700	$              14.00	$           23,800.00
Variable Overhead	1700	$                3.40	$             5,780.00

• Req 1

---Part ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     30.00	-	$                    28.70	)	x	7000
	9100
	Variance		$              9,100.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	6800	-	7000	)	x	$                        30.00
	-6000
	Variance		$              6,000.00			Unfavourable-U

----Part ‘b’

YES, I would recommend because the rate per ounce provided by the new supplier is LOWER than the Standard rate per ounce.

• Req 2

---Part ‘a’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     14.00	-	$                    12.00	)	x	2600
	5200
	Variance		$              5,200.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1700	-	2600	)	x	$                        14.00
	-12600
	Variance		$            12,600.00			Unfavourable-U

--Part ‘b’

NO, the new labor mix would not be recommended because use of excess of assistants has led to LOWER efficiency and has resulted in consumption of more actual hours than ‘standard hours’, as indicated by Efficiency Variance above.

• Req 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        3.40	-	$                       1.81	)	x	2600
	4140
	Variance		$              4,140.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	1700	-	2600	)	x	$                           3.40
	-3060
	Variance		$              3,060.00			Unfavourable-U