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	$	25.00	per ounce	$	55.00
Direct labor	0.50	hours	$	15.00	per hour		7.50
Variable manufacturing overhead	0.50	hours	$	3.00	per hour		1.50
Total standard cost per unit						$	64.00

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

Materials purchased, 12,000 ounces at a cost of $282,000.

There was no beginning inventory of materials; however, at the end of the month, 2,750 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 110 hours at an average pay rate of $11.50 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2,400.

During November, the company produced 4,100 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 5 senior technicians and 20 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
• Actual data and Standard data for actual 4100 units summarised:

Actual DATA for		4100	units
	Quantity (AQ)	Rate (AR)	Actual Cost
	[A]	[B]	[A x B]
Direct Material	9250 ounces [12000 – 2750]	$            23.50 [282000/12000]	$       2,17,375.00
Direct labor	2750 hours [25 x 110 hours]	$              11.50	$           31,625.00
Variable Overhead	2750 hours	$                0.87 [2400 / 2750]	$             2,400.00
Standard DATA for		4100	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	9020 ounces [4100 x 2.2]	$              25.00	$       2,25,500.00
Direct labor	2050 hours [4100 x 0.5 hours]	$              15.00	$           30,750.00
Variable Overhead	2050	$                3.00	$             6,150.00

• Requirement 1

‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     25.00	-	$                    23.50	)	x	9250
	13875
	Variance		13875			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	9020	-	9250	)	x	$                        25.00
	-5750
	Variance		5750			Unfavourable-U
Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$         2,25,500.00	-	$        2,17,375.00	)
	8125
	Variance		8125			Favourable-F

‘b’

YES, the company should be recommended to sign the contract with the said new supplier because the material rate is below than standard rate for material, and there is existence of Favourable material price variance.

• Requirement 2

‘a’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     15.00	-	$                    11.50	)	x	2750
	9625
	Variance		9625			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2050	-	2750	)	x	$                        15.00
	-10500
	Variance		10500			Unfavourable-U
Labor Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$             30,750.00	-	$            31,625.00	)
	-875
	Variance		875			Unfavourable-U

‘b’

In order to reduce labor cost, few technicians were employed and more assistant were used in November. However this resulted in consumption of more hours than budgeted leading to Unfavourable Labor efficiency variance. The effect of which was so intense that it neautralized the positive favourable labor rate variance. Hence, this new labor mix should be DISCONTINUED.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        3.00	-	$                       0.87	)	x	2750
	5850
	Variance		5850			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2050	-	2750	)	x	$                           3.00
	-2100
	Variance		2100			Unfavourable-U
Variable Overhead Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$               6,150.00	-	$              2,400.00	)
	3750
	Variance		3750			Favourable-F