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	$	27.00	per ounce	$	64.80
Direct labor	0.60	hours	$	12.00	per hour		7.20
Variable manufacturing overhead	0.60	hours	$	3.50	per hour		2.10
Total standard cost per unit						$	74.10

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

Materials purchased, 13,000 ounces at a cost of $330,200.

There was no beginning inventory of materials; however, at the end of the month, 2,850 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 $11.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,000.

During November, the company produced 4,200 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 20 technicians employed in the production of Fludex consisted of 7 senior technicians and 13 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. Direct Materials:

a. Price Variance = ( Standard price per unit - Actual price per unit) x Actual quantity purchased = $ ( 27.00 - 25.40) x 13,000 = $ 20,800 F

Quantity Variance = ( Standard quantity for actual output - Actual quantity used) x Standard price per unit = ( 4,200 x 2.40 ounce - 10,150 ounce) x $ 27.00 = $ 1,890 U

b. Yes. The favorable price variance far outweighs the unfavorable quantity variance.

2. Direct Labor:

a. Rate Variance = ( Standard hourly rate - Actual rate per hour) x Hours used = $ ( 12.00 - 11.00) x 3,200 = $ 3,200 F

Efficiency Variance ( Standard hours allowed for actual output - Actual hours used) x Standard hourly rate = ( 4,200 x 0.60 - 3,200) x $ 12.00 = $ 8,160 U

b. No. The savings in the favorable rate variance are totally offset by an unfavorable efficiency variance. The new labor mix results in higher overall labor costs.

3. Variable Overhead:

Rate Variance = $ ( 3.50 - 1.875) x 3,200 = $ 5,200 F

Efficiency Variance = ( 2,520 - 3,200) x $ 3.50 = $ 2,380 U