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

Fludex Produced = 3,700 Units
	Standard			Actual
	SQ / SH	SR	Total	AQ / AH	AR	Total
Direct Material	7,770	22.00	170,940	7,900	20.65	163,135
Direct labor	2,960	15.00	44,400	3,600	14.00	50,400
Variable MOH	2,960	2.50	7,400	3,600	1.94	7,000
Answer 1-a.
AQ Used = 10,500 ounces - 2,600 ounces (End. Stock) = 7,900 ounces
AR per Ounce = $216,825 / 10,500 = $20.65 per ounce
Direct Material Price Variance = (SR - AR) X AQ Purchased
Direct Material Price Variance = ($22 - $20.65) X 10,500 Ounces
Direct Material Price Variance = $14,175 (F)
Direct Material Quantity Variance = (SQ - AQ) X SR
Direct Material Quantity Variance = (7,770 ounces - 7,900 Ounces) X $22
Direct Material Quantity Variance = $2,860 (U)
Answer 1-b.
Positive Feature of Contract:
1. Price of the material is lower than the standard rate (SR - $22 per ounce & AR - $20.65 per Ounce)
Negative Feature of Contract:
1. Direct Material Quantity variance is unfavourable. It indicates that the material purchased is of inferior quality. If so, long term contract is not appear to be wise at this time.
Answer 2-a.
Direct Labor Rate Variance = (SR - AR) X AH
Direct Labor Rate Variance = ($15 - $14) X 3,600 Hrs
Direct Labor Rate Variance = $3,600 (F)
Direct Labor Efficiency Variance = (SH - AH) X SR
Direct Labor Efficiency Variance = (2,960 hrs - 3,600 hrs) X $15
Direct Labor Efficiency Variance = $9,600 (U)
Answer 2-b.
The company should not change the labor mix, since the labor efficiency variance is unfavourable. The overall cost variance is unfavourable and it increases the overall cost of the labor.
Answer 3.
Variable Overhead Rate Variance = (SR - AR) X AH
Variable Overhead Rate Variance = ($2.50 - $1.94) X 3,600 hrs
Variable Overhead Rate Variance = $2,000 (F)
Variable Overhead Efficiency Variance = (SH - AH) X SR
Variable Overhead Efficiency Variance = (2,960 hrs - 3,600 hrs) X $2.50
Variable Overhead Efficiency Variance = $1,600 (U)