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	2.40	ounces	$	18.00	per ounce	$	43.20
Direct labor	0.70	hours	$	14.00	per hour		9.80
Variable manufacturing overhead	0.70	hours	$	3.00	per hour		2.10
Total standard cost per unit						$	55.10

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

Materials purchased, 12,000 ounces at a cost of $198,000.

There was no beginning inventory of materials; however, at the end of the month, 3,200 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 160 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 $4,800.

During November, the company produced 3,600 units of Fludex.

Required:

1. For direct materials:

a. Compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

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. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

b. In the past, the 20 technicians employed in the production of Fludex consisted of 5 senior technicians and 15 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. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

1. For direct materials :

a)

Rate Variance

• Material Consumed - 12,000 Ounce - 3, 200 Ounce (Closing) = 8,800 Ounce
• Actual Rate of per ounce material = $198000/12000 = $16.5/Ounce
• Rate Differnce = Standard - Actaul = $18-$16.5 =$1.5
• Rate Variance =    8800*1.5 = $13,200 F

Qty Variance

• Material Consumed - 12,000 Ounce - 3, 600 Ounce (Closing) = 8,400 Ounce
• Standard Consumption as per norms = 2.4*3600 = 8640 Ounce
• Qty Differnce = Standard - Actaul = 8640 - 8800 = 160 Ounce U
• Qty Variance =    160* $ 18 (Qty. diff * Standard Price) = $2,880 U

b) Yes Becton Labs, Inc. should do long term contract with the supplier as calculation in (a) we are in net gain by summing up rate and qty. variance $10320 F ($2.87/Unit produced) even we have consume some extra qty than norms. Rate of new supplier is much cheaper than old supplier.

2. For direct labor:

a)

Rate varience

Standard Rate = $14 per hour

Actual Rate = $12 per hour

Actual hour worked = 160 Hours *20 = 3200 Hours

Rate Varience = (Standard Rate - Actual Rate)* Actual Hour Worked

                        = (14-12)*3200 = $6400 F

Efficiency varience

a)Actual Hour = 160 Hours *20 = 3200 Hours

b) Standard Hours= 3600*.7 = 2520 Hours

Efficence Varience = Actual Hours - Standard Hours * standard Rate per hour

                              = (3200 -2520)* 14 = $9520 U

b) No Becton Labs, Inc. should not continue its new labor mix as there is a net loss of $3120 ($9520-$6400) due to change of labor mix. So company should go back to its old labor mix.

3. Compute the variable overhead rate and efficiency variances

Rate varience

Standard Rate = $3 per hour

Actual Rate = $4800/(160*20) = $1.5

Actual hour worked = 160 Hours *20 = 3200 Hours

Rate Varience = (Standard Rate - Actual Rate)* Actual Hour Worked

                        = (3-1.5)*3200 = $4800 F

Efficiency varience

a)Actual Hour = 160 Hours *20 = 3200 Hours

b) Standard Hours= 3600*.7 = 2520 Hours

Efficence Varience = Actual Hours - Standard Hours * standard Rate per hour

                              = (3200 -2520)* 3 = $2040 U

Thanks