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	2.60 ounces	$	20.00	per ounce	$	52.00
Direct labor	0.60 hours	$	16.00	per hour		9.60
Variable manufacturing overhead	0.60 hours	$	4.50	per hour		2.70
					$	64.30

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

   

a.	Materials purchased, 13,000 ounces at a cost of $244,400.
b.	There was no beginning inventory of materials; however, at the end of the month, 3,300 ounces of material remained in ending inventory.
c.	The company employs 20 lab technicians to work on the production of Fludex. During November, they worked an average of 150 hours at an average rate of $14.00 per hour.
d.	Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,500.
e.	During November, 3,600 good units of Fludex were produced .

1.	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 20 technicians employed in the production of Fludex consisted of 4 senior technicians and 16 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

2.	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

1a)

Labor Rate/Price Variance

Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:

Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)

Here, actual time means time for which wage has been paid.

Direct Labor Rate/Price Variance
Actual Hourly Rate	$14.00	Per Hour
Standard Hourly Rate	$16.00	Per Hour
Variance or Difference in Rate	$2.00	Per Hour
x Actual Labor Hours worked (20*150)	3000	Hours
Labor Rate Variance	$6,000	Favorable

Labor Quantity/Efficiency Variance

Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.

Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production	3600	Units
x Allowed Standard Hours Per Unit	0.60	hours
Total Standard Hours Allowed for actual production (SHAP)	2,160	hours
Actual Labor Hours Worked	3,000	hours
Variance or Difference in Hours	840	hours
x Standard Hourly Rate (SHR)	$16.00	per hour
Labor Efficiency Variance	$13,440	Unfavorable

Part 1(b) –

Total Labor Cost Variance
Direct Labor Rate Variance (Refer above)	$6,000	Favorable
Direct Labor Efficiency Variance (Refer above)	$13,440	Unfavorable
Total Labor Cost Variance	$7,440	Unfavorable

The new labor mix would NOT BE RECOMMENDED.

The total labor cost variance is unfavorable. Hence the new labor mix would not be recommended since new labor mix will increase the labor cost.

Part 2 –

Variable Overhead Rate/Spending/Cost Variance
Actual Hourly Variable Overhead Rate ($6,500 / 150*20)	2.1667	Per Hour
Standard Hourly Variable Overhead Rate	4.50	Per Hour
Variance or Difference in Rate	2.33	Per Hour
x Actual Hours Worked	3000	Hours
Variable Overhead Rate/Spending Variance	$7,000	Favorable

Variable Overhead Efficiency/Quantity Variance
Standard Hours Allowed for actual production:
Actual Production	3,600	Square foot
x Allowed Standard Hours Per Unit	0.6	Hours
Total Standard Hours Allowed for actual production (SHAP)	2160	Hours
Actual Hours Worked (AH)	3000	Hours
Variance or Difference in Hours	840	hours
x Standard Hourly Variable Overhead Rate	$4.50	per hour
Variable Overhead Efficiency Variance	$3,780	Unfavorable

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