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	$	21.00	per ounce	$	50.40
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	3.50	per hour		2.80
Total standard cost per unit						$	65.20

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

1. Materials purchased, 13,500 ounces at a cost of $266,625.

2. There was no beginning inventory of materials; however, at the end of the month, 4,200 ounces of material remained in ending inventory.

3. The company employs 24 lab technicians to work on the production of Fludex. During November, they each worked an average of 140 hours at an average pay rate of $14.50 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,800.

5. During November, the company produced 3,800 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 24 technicians employed in the production of Fludex consisted of 4 senior technicians and 20 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

1. (a)

Actual cost per ounce of raw material = $266,625 / 13,500 ounces i.e. $19.75 per ounce

Raw material used for actual production = 13,500 - 4,200 = 9,300 ounces

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

= ($21 - $19.75) * 9,300

= $11,625 (F)

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

= [(3,800 units @ 2.4 ounces) - 9,300) * $21

= -$3,780 i.e. $3,780 (U)

(b) The company should sign long term contract with the new supplier because the supplier is offering the raw material at a cost of $19.75 as compared with the standard cost of $21 per ounce.

2. (a)

Actual working hours = 24 technicians at 140 hours each

= 3,360 hours

Standard working hours = 3,800 units @ 0.8 hours i.e. 3,040 hours

Labor Rate Variance = (Standard Rate - Actual Rate) * Actual working hours

= ($15 - $14.50) * 3,360

= $1,680 (F)

Labor Efficiency Variance = (Standard Hours - Actual Hours) * Standard rate

= (3,040 - 3,360) * $15

= -$4,800 i.e. $4,800 (U)

(b) The new labor mix has decreased the efficiency of the labor. Hence new labor mix is nor recommended.

3.

Variable Rate Variance = (Standard rate * Actual hours) - Actual variable expense

= ($3.50 * 3,360) - $6,800

= $4,960 (F)

Variable overhead Efficiency Variance = (Standard hours * Standard rate) - (Actual hours * Standard rate)

= (3,040 * $3.5) - (3,360 * $3.5)

= -$1,120 i,e, $1,120 (U)