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	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
					$	60.50

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

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

b. There was no beginning inventory of materials; however, at the end of the month, 3,100 ounces of material remained in ending inventory.

c. The company employs 25 lab technicians to work on the production of Fludex. During November, they worked an average of 130 hours at an average rate of $12.00 per hour.

d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,200.

e. During November, 4,000 good units of Fludex were produced .

Required:

1. For direct materials:

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

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?

	Yes
	No

2. For direct labor:

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

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 save costs. Would you recommend that the new labor mix be continued?

	Yes
	No

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

Answer 1

Explanation:

1.
a.

In the solution below, the materials price variance is computed on the entire amount of materials purchased whereas the materials quantity variance is computed only on the amount of materials used in production:

Actual Quantity of Input, at Actual Price			Actual Quantity of Input, at Standard Price			Standard Quantity Allowed for Output, at Standard Price
(AQ × AP)			(AQ × SP)			(SQ × SP)
			8,900 ounces × $23.00 per ounce			8,800 ounces* × $23.00 per ounce
$259,800			= $2,04,700			= $2,02,400
	Price variance, $16,200 F
	12,000 ounces × $23.00 per ounce
		= $276,000
				Quantity Variance, $2,300 U

*4,000 units × 2.2 ounces per unit = 8,800 ounces

Materials price variance:

Actual Price = $2,59,800 ÷ 12,000 ounces = $21.65 per ounce

b.

Yes, the contract should be signed. The new price of $21,65 per ounce is lower than $23.00 per ounce, which resulted in a favourable price variance of $16,200. Also, the material of the new supplier appears to be good for production as it has small materials quantity variance. 2. a. Actual Hours of Input, at the Actual Rate Actual Hours of Input, at the Standard Rate Standard Hours Allowed for Output, at the Standard Rate (AH × AR) (AH × SR) (SH × SR) 3,250 hours* × $12 per hour 3,250 hours × $14.00 per hour 2,400 hours** × $14.00 per hour = $39,000    = $45,500 = $33,600 Rate Variance, $6,500 U        Efficiency Variance, $10,200 U     Spending variance, $16,700 U *25 technicians × 130 hours per technician = 3,250 hours **4,000 units × 0.60 hours per technician = 2,400 hours b. No, the new labor mix probably should be continued. as it decreases the average hourly labor cost from $14.00 to $12.00, causing a $6,500 unfavourable labor rate variance, and again by a large unfavourable labor efficiency variance for the month. Thus, the new labor mix increases overall labor costs.