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	$	23.00	per ounce	$	50.60
Direct labor	0.60	hours	$	14.00	per hour		8.40
Variable manufacturing overhead	0.60	hours	$	2.50	per hour		1.50
Total standard cost per unit						$	60.50

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

Materials purchased, 12,000 ounces at a cost of $259,800.

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 25 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 $4,200.

During November, the company produced 4,000 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 25 technicians employed in the production of Fludex consisted of 4 senior technicians and 21 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

Solution 1:

Standard quantity of material for actual production = 4000 * 2.20 = 8800 ounce

Actual quantity of material purchased = 12000 ounce

Actual quantity of material used = 12000 - 3100 = 8900 ounce

Standard price of material = $23

Actual price of material = $259,800 / 12000 = $21.65

Material price variance = (SP - AP) * AQ purchased = ($23 - $21.65) * 12000 = $16,200 F

Material quantity variance = (SQ - AQ) * SR = (8800 - 8900) * $23 = $2,300 U

Solution 1b:

As price offered by new supplier is lower than standard price, therefore company should sign the contract with new supplier.

Solution 2a:

Standard hours of direct labor = 4000 * 0.6 = 2400 hours

Standard rate of direct labor = $14 per hour

Actual hours of direct labor = 25*130 = 3250 hours

Actual rate of direct labor = $12 per hour

Direct labor rate variance = (SR - AR) * AH = ($14 - $12) * 3250 = $6,500 F

Direct labor efficiency variance = (SH - AH) * SR = (2400 - 3250) * $14 = $11,900 U

Solution 2b:

The new mix resulting in favorable direct labor rate variance, however due to inexperienced staff engaged more, time taken in production increased resluting in unfavorable labor efficiency variance. As direct labor inefficiency variance is higher than favorable rate variance, therefore new labor mix should not be continued.

Solution 3a:

Standard hours of direct labor = 4000*0.6 = 2400 hours

Standard rate of variable overhead= $2.50 per hour

Actual hours of direct labor = 25*130 = 3250 hours

Actual rate of variable overhead = $4,200 / 3250 = $1.292307 per hour

Variable overhead rate variance = (SR - AR) * AH = ($2.50 - $1.292307) * 3250 = $3,925 F

Variable overhead efficiency variance = (SH - AH) * SR = (2400 - 3250) * $2.50 = $2,125 U