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	$	22.00	per ounce	$	46.20
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	2.50	per hour		2.00
Total standard cost per unit						$	60.20

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

Materials purchased, 10,500 ounces at a cost of $216,825.

There was no beginning inventory of materials; however, at the end of the month, 2,600 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 180 hours at an average pay rate of $14.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $7,000.

During November, the company produced 3,700 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 8 senior technicians and 12 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 for		3700	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	7900 [10500 – 2600]	$            20.65 [216825 / 10500]	$        163,135.00
Direct labor	3600 [20 x 180]	$              14.00	$           50,400.00
Variable Overhead	3600	$                1.94	$             7,000.00
Standard DATA for		3700	units
	Quantity (SQ)	Rate (SR)	Standard Cost
Direct Material	7770 [3700 x 2.1]	$              22.00	$        170,940.00
Direct labor	2960 [3700 x 0.8]	$              15.00	$           44,400.00
Variable Overhead	2960	$                2.50	$             7,400.00

• Requirement 1

Answer ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     22.00	-	$                   20.65	)	x	7900
	10665
	Variance		$            10,665.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	7770	-	7900	)	x	$                        22.00
	-2860
	Variance		$              2,860.00			Unfavourable-U

Answer ‘b’

YES, because the actual rate of material is Lower than the Standard rate (of $22 per pound)

• Requirement 2

Answer ‘a’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     15.00	-	$                    14.00	)	x	3600
	3600
	Variance		$              3,600.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2960	-	3600	)	x	$                        15.00
	-9600
	Variance		$              9,600.00			Unfavourable-U

Answer ‘b’

NO, because using more assistant in November has led to fall in efficiency of labor force (hence unfavourable efficiency variance).

The new labor mix SHOULD NOT BE CONTINUED.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        2.50	-	$                       1.94	)	x	3600
	2000
	Variance		$              2,000.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2960	-	3600	)	x	$                           2.50
	-1600
	Variance		$              1,600.00			Unfavourable-U