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	2.20	ounces	$	23.00	per ounce	$	50.60
Direct labor	0.70	hours	$	12.00	per hour		8.40
Variable manufacturing overhead	0.70	hours	$	3.00	per hour		2.10
Total standard cost per unit						$	61.10

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

1. Materials purchased, 11,000 ounces at a cost of $237,600.

2. There was no beginning inventory of materials; however, at the end of the month, 2,650 ounces of material remained in ending inventory.

3. The company employs 18 lab technicians to work on the production of Fludex. During November, they each worked an average of 190 hours at an average pay rate of $10.50 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,200.

5. During November, the company produced 3,750 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 18 technicians employed in the production of Fludex consisted of 5 senior technicians and 13 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.

Direct material price variance = Actual quantity purchased *Standard price - Actual quantity purchased *Actual price

Direct material price variance = 11,000*$23 - $237,600

Direct material price variance =253,000 - 237,600 = $15,400 Favorable

Direct material quantity variance = Standard quantity *Standard price - Actual quantity used*Standard price

Standard quantity = 3,750*2.20 = 8,250

Direct material quantity variance = 8,250*$23 - (11,000-2,650)*$23

Direct material quantity variance = $189,750 - 192,050 = $2,300 Unfavorable

b.Yes, the company should sign the contract as total material cost variance is favorable that is $15,400 F - $2,300 U = $13,100 F

2.

Direct labor rate variance = Actual hours *Standard rate - Actual hours *Actual rate

Actual hours = 190*18 = 3,420 hours

Direct labor rate variance = 3,420*$12 - 3,420*$10.50

Direct labor rate variance = $41,040 - 35,910 = $5,130 Favorable

Direct labor efficiency variance = Standard hours *Standard rate - Actual hours *Standard rate

Standard hours = 3,750*0.70 = 2,625 hours

Direct labor efficiency variance = 2,625*$12 - 3,420*$12

Direct labor efficiency variance = $31,500 - 41,040 = $9,540 Unfavorable

b. No, the new labor mix should not be continued as efficiency variance is unfavorable resulting in total labor cost variance to be unfavorable by $4,410 U($5,130 F - 9,540 U).

3.

Variable overhead rate variance = Actual hours *Standard rate - Actual hours *Actual rate

Variable overhead rate variance = 3,420*$3 - $6,200

Variable overhead rate variance = $10,260 - 6,200 = $4,060 Favorable

Variable overhead efficiency variance = Standard hours *Standard rate - Actual hours *Standard rate

Variable overhead efficiency variance = 2,625*$3 - 3,420*$3

Variable overhead efficiency variance = $7,875 - 10,260 = $2,385 Unfavorable