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	$	16.00	per ounce	$	35.20
Direct labor	0.80	hours	$	12.00	per hour		9.60
Variable manufacturing overhead	0.80	hours	$	2.50	per hour		2.00
Total standard cost per unit						$	46.80

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

Materials purchased, 11,000 ounces at a cost of $160,600.

There was no beginning inventory of materials; however, at the end of the month, 3,100 ounces of material remained in ending inventory.

The company employs 23 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 $4,200.

During November, the company produced 3,500 units of Fludex.

1. For direct materials, compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Materials price variance Materials quantity variance

For direct materials, 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?

	Yes No

For direct labor, compute the rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Labor rate variance Labor efficiency variance

In the past, the 23 technicians employed in the production of Fludex consisted of 7 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?

	Yes No

Compute the variable overhead rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Variable overhead rate variance Variable overhead efficiency variance

Answer 1

1)	for direct materials
	a.	price and quantity variance
			Standard	-	Actual	*	Actual	=	Variance
			price		price		quantiy
materials price variance			16		14.6		11,000	=	15400	F
			standard	-	Actual	*	Standard	=	Variance
			qty		qty		price
materials quantity variance			7700		7,900		16		3200	U
	b.	yes
2)	for direct labor
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
labor price variance			12		11		3450	=	3450	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
labor efficiency variance			2800		3,450		12		7800	U
	b.	no
3)	for variable overhead
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
Variable overhead rate			2.5		1.22		3,450	=	4425	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
variable overhead efficiency			2800		3,450		2.5		1625	U