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: SHOW WORK

	Standard Quantity or Hours		Standard Price or Rate			Standard Cost
Direct materials	2.40	ounces	$	27.00	per ounce	$	64.80
Direct labor	0.60	hours	$	12.00	per hour		7.20
Variable manufacturing overhead	0.60	hours	$	3.50	per hour		2.10
Total standard cost per unit						$	74.10

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

Materials purchased, 13,000 ounces at a cost of $330,200.

There was no beginning inventory of materials; however, at the end of the month, 2,850 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 160 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 $6,000.

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 20 technicians employed in the production of Fludex consisted of 7 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

• All working forms part of the answer
• Data for Variance Calculation: Actual data and Standard data for 4200 units:

Actual DATA for		4200	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	10150	$            25.40	$        257,810.00
Direct labor	3200	$              11.00	$           35,200.00
Variable Overhead	3200	$                1.88	$             6,000.00
Standard DATA for		4200	units
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct Material	10080	$              27.00	$        272,160.00
Direct labor	2520	$              12.00	$           30,240.00
Variable Overhead	2520	$                3.50	$             8,820.00

• Requirement 1 ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     27.00	-	$                    25.40	)	x	10150
	16240
	Variance		$            16,240.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	10080	-	10150	)	x	$                        27.00
	-1890
	Variance		$              1,890.00			Unfavourable-U

• Requirement 1 ‘b’

YES, it would be recommended because the cost per pound is LOWER than Standard cost per pound.

• Requirement 2 ‘a’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     12.00	-	$                    11.00	)	x	3200
	3200
	Variance		$              3,200.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2520	-	3200	)	x	$                        12.00
	-8160
	Variance		$              8,160.00			Unfavourable-U

• Requirement 2 ‘b’

NO, the new labor should be dis-continued because using extra additional assistants has resulted in Lower Efficiency and higher amount of hours to produce [as seen in Efficiency ratios].

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        3.50	-	$                       1.88	)	x	3200
	5200
	Variance		$              5,200.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2520	-	3200	)	x	$                           3.50
	-2380
	Variance		$              2,380.00			Unfavourable-U