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	2.10	ounces	$	15.00	per ounce	$	31.50
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	3.50	per hour		2.80
Total standard cost per unit						$	46.30

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

1. Materials purchased, 10,500 ounces at a cost of $143,325.

2. There was no beginning inventory of materials; however, at the end of the month, 3,050 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 160 hours at an average pay rate of $13.50 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,800.

5. During November, the company produced 3,500 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 5 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

Becton Labs, Inc.

Particulars	Standard cost for 1 Unit	Standard cost for 3500 units	Actual cost for 3500 units
Quantity	Rate per unit	Cost ($)	Quantity	Rate per unit	Cost ($)	Quantity	Rate per unit	Cost ($)
Direct Material	2.1	15	31.5	7350	15	110,250	7450	13.65	101,692.5
Direct Labor	0.8	15	12	2800	15	42,000	3360	13.5	45,360
Variable Mfg Overhead	0.8	3.5	2.8	2800	3.5	9,800	3360	2.02	6,800
						162,050			153,852.5

Standard Quantity for 3500 units

Direct Material = 3500 units x 2.10 per ounces = 7350

Direct Labor = 3500 units x 0.80 hrs per unit = 2800

Variable manufacturing overhead = 3500 units x 0.80 hrs per unit = 2800

Actual Quantity of Direct material for actual units 3500

Units purchased 10,500 ounces for $143,325, so per ounces = $143,325 / 10500 = $13.65 per unit

Direct labor = 21 Lab technicians each worked an average of 160 hrs = 3360

Since Variable manufacturing hrs also same as per direct labour for 1 unit, so for actual units of 3500, variable manufacturing = 3360

1 Direct Materials

a) Compute the price and quantity variances.

Direct Material Price Variance = (Standard Price – Actual Price) x Actual Quantity

                                                = ($15 – 13.65) x 7,450

                                                = $10,057.50 (Favourable)

Direct Material Quantity Variance = (Standard Quantity – Actual Quantity) x Standard rate per unit

                                                     = (7,350 – 7,450) x $15

                                                     = $1,500 (Adverse)

b) It is recommended that company should go ahead with new supplier as Material price variance is favourable as actual price per ounce is lesser than standard price

2. Direct Labor

a) Compute the rate and efficiency variances.

         Direct Labor rate variance = (Standard rate – Actual rate) x Actual Hours

                                          = (15 – 13.5) x 2800

                                          = 4,200 (Favourable)

Direct Labor Efficiency variance = (Standard Hours – Actual hours) x Standard rate

                                                   = (2800 – 3360) x 15

                                                   = 8,400 (Adverse)

Total Labor variance = Labor rate variance + Labor Efficiency variance

                                  = 4200 (F) + (-8400) (A)

                                  = 4200 (Adverse)

c) As Labor Efficiency variance is adverse, so it wont help in reducing cost of labor, rather it increase, it is recommended that company should not be continued with this labor mix

3.Variable Manufacturing Overhead

Compute the variable overhead rate and efficiency variances.

Variable Overhead rate Variance = (Standard rate – Actual rate) x Actual Hours

                                                     = (3.5 – 2.02) x 3360

                                                     = 4,960 (Favourable)

Variable Overhead efficiency variance = (Standard Hours – Actual hours) x Standard rate

                                                              = (2800 – 3360) x 3.5

                                                             = 1960 (Adverse)