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	2.10	ounces	$	24.00	per ounce	$	50.40
Direct labor	0.40	hours	$	14.00	per hour		5.60
Variable manufacturing overhead	0.40	hours	$	2.50	per hour		1.00
Total standard cost per unit						$	57.00

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

1. Materials purchased, 11,500 ounces at a cost of $259,325.

2. There was no beginning inventory of materials; however, at the end of the month, 2,700 ounces of material remained in ending inventory.

3. The company employs 23 lab technicians to work on the production of Fludex. During November, they each worked an average of 100 hours at an average pay rate of $11.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2,300.

5. During November, the company produced 4,100 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 23 technicians employed in the production of Fludex consisted of 4 senior technicians and 19 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(a):

Direct materials:

Standard price = $24 per ounce

Actual price = 259325 / 11500 = $22.55

Standard quantity = 4,100 * 2.10 = 8610 ounces

Actual quantity = 11500 - 2700 = 8800 ounces

Material Price variance = (AP - SP) * AQ = (24 - 22.55) * 8800 = $12,760 (Favorable)

Material quantity variance = (AQ - SQ) * SP = (8800 - 8610) * 24 = $4560 (Unfavorable)

Hence:

Material Price variance = $12,760 (Favorable)

Material quantity variance = $4,560 (Unfavorable)

Answer 1(b):

Yes, I would recommend that the company sign the contract.

Reason: Price is cheaper by (24-22.55=) $1.45 per ounce. Although quantity variance is unfavorable but overall material variance is favorable by (12760 - 4560=) $8,200.

Answer 2(a):

Direct labor:

Actual rate = $11 per DLH

Actual hours = 100 * 23 = 2300 DLH

Standard rate = $14 per DLH

Standard hours = 4100 * 0.40 = 1640 DLH

Labor rate variance = (AR - SR) * AH = (11 - 14) * 2300 = $6,900 (Favorable)

Labor efficiency variance = (AH - SH) * SR = (2300 - 1640) * 14 = $9,240 (Unfavorable)

Hence:

Labor rate variance = $6,900 (Favorable)

Labor efficiency variance = $9,240 (Unfavorable)

Answer 2(b):

No, I would not recommend that the new labor mix be continued. New mix although had reduced average rate per labor hour but it has affected productivity. Overall new mix has resulted in unfavorable labor variance of (9240 - 6900=) $2,340

Answer 3:

Variable Overhead (VOH):

Standard rate Per DLH = $2.50

Standard DLH = 1640

Actual VOH = $2300

Variable Overhead rate variance = Actual VOH - Actual Hours * Standard rate = 2300 - 2300 * 2.50 = $3,450 (Favorable)

Variable overhead efficiency variance = SR * (AH - SH) = 2.50 * (2300 - 1640) = $1,650 (Unfavorable)

Hence:

Variable Overhead rate variance = $3,450 (Favorable)

Variable overhead efficiency variance = $1,650 (Unfavorable)