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	2.00	ounces	$	30.00	per ounce	$	60.00
Direct labor	0.50	hours	$	14.00	per hour		7.00
Variable manufacturing overhead	0.50	hours	$	3.40	per hour		1.70
Total standard cost per unit						$	68.70

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

Materials purchased, 10,000 ounces at a cost of $287,000.

There was no beginning inventory of materials; however, at the end of the month, 3,000 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 130 hours at an average pay rate of $12.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,700.

During November, the company produced 3,400 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 4 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

1	Direct material variances
a.	Price variance	$13000	Favorable
	(AQP x AP) - (AQP x SP) = $287000 - (10000 x $30) = $287000 - $300000 = $13000
	Quantity variance	$6000	Unfavorable
	(AQ x SP) - (SQ x SP) = (7000 x $30) - (6800 x $30) = $210000 - $204000 = $6000
	AQ = 10000 - 3000 = 7000
	SQ = 3400 units x 2.00 ounces = 6800 ounces

b. The favorable price variance means the purchase price offered by the new supplier is lower than the standard price. However, the quantity variance is unfavorable. This could be due to the material purchased from the new supplier being of sub-standard quality. It is thus recommended that the company should not sign the contract with the new supplier.

2	Direct labor variances
a.	Rate variance	$5200	Favorable
	(AH x AR) - (AH x SR) = (2600 x $12) - (2600 x $14) = $31200 - $36400 = $5200
	AH = 20 x 130 hours = 2600 hours
	Efficiency variance	$12600	Unfavorable
	(AH x SR) - (SH x SR) = (2600 x $14) - (1700 x $14) = $36400 - $23800 = $12600
	SH = 3400 units x 0.50 hours = 1700 hours

b. The unfavorable labor efficiency variance could be due to the change in the labor mix substituting senior technicians with assistants and hence should not be continued with as it exceeds the favorable price variance achieved due to the reduced labor rate.

3	Variable overhead variances
	Rate variance	$4140	Favorable
	(AH x AR) - (AH x SR) = $4700 - (2600 x $3.40) = $4700 - $8840 = $4140
	Efficiency variance	$3060	Unfavorable
	(AH x SR) - (SH x SR) = (2600 x $3.40) - (1700 x $3.40) = $8840 - $5780 = $3060