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	2.5	ounces	$	20.00	per ounce	$	50.00
Direct labor	1.4	hours	$	22.50	per hour		31.50
Variable manufacturing overhead	1.4	hours	$	3.50	per hour		4.90
Total standard cost per unit						$	86.40

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

Materials purchased, 12,000 ounces at a cost of $225,000.

There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory.

The company employs 35 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 $22 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200.

During November, the company produced 3,750 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 35 technicians employed in the production of Fludex consisted of 20 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.

Answer 1

Answer:

1.Material Price Variance = (Standard Price - Actual Price) * Actual Quantity

Actual Price = $225000/12000 = $18.75 per ounce

Material Price Variance = (20.00 - 18.75) *12000

                                       = $15000F

Material Quantity variance = ( Standard Quantity - Actual Quantity) * Standard Price

Standard Quantity = 3750 units * 2.50 ounce per unit = 9375 ounce

Actual Quantity = Total Purchased - Closing Inventory. 12000-2500 = 9500 ounce

Material Quantity variance = ( 9375 -9500) * 20

                                           = $2500U

Yes, the contract probably should be signed. The new price of $18.75 per ounce is substantially lower than the old price of $20.00 per ounce, resulting in a favorable price variance of $15,000 for the month. Moreover, the material from the new supplier appears to cause little or no problem in production as shown by the small materials quantity variance for the month.

2.Labor Rate variance = ( Standard Rate – Actual rate) * Actual Hours

Actual Hours = 35 technicians * 160 hour per technician = 5600 hours

Labor Rate Variance = (22.50 - 22.00) * 5600

                                  = 2800F

Labor Efficiency variance = (Standard Hour – Actual Hour) * Standard Rate

Standard Hour = 3750 units * 1.40 hour per technician = 5250 hours

Labor efficiency Variance = (5250 - 5600) * 22.50

                                          = 4375U

No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $22.50 to $22.00, thereby causing a $2,800 favorable labor rate variance, this savings is more than offset by a large unfavorable labor efficiency variance for the month. Thus, the new labor mix increases overall labor costs.

3.Variable Overhead rate Variance = ( Standard Rate – Actual Rate) * Actual Hours

Actual rate = Total Variable Overhead Cost / Actual Hours. 1800/5600 = $3.25 per hour

Variable Overhead Rate Variance = ( 3.50 – 3.25) * 5600

                                                    = 1400F

Variable Overhead Efficiency Variance = ( Standard Hours - Actual Hours) * Standard rate

Standard Hours = 3750 units * 1.40hours per unit = 5250 hours

Variable Overhead Efficiency variance = ( 5250 - 5600) * 3.50

                                                               = 1225U