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.

Materials price variance		F
Materials quantity variance		U
Labor rate variance		F
Labor efficiency variance		U
Variable overhead rate variance		F
Variable overhead efficiency variance		U

Answer 1

Solution 1:

Standard quantity of direct material (SQ) = 3750*2.50 = 9375 ounces

Standard rate of direct material (SP) = $20 per ounces

Actual quantity of direct material purchased (AQ) = 12000 ounces

Actual quantity of direct material consumed = 12000 - 2500 = 9500 ounces

Actual price of direct material (AP) = $225,000/12000 = $18.75 per ounce

Material price variance = (SP - AP)*AQ purchased = ($20 - $18.75)*12000 = $15,000F

Material quantity variance = (SQ - AQ) * SP = (9375 - 9500)*$20 = $2,500 U

b. As price of new supplier is lesser than standard price of material, therefore it is recommended that company should sign the contract with new supplier subject to new supplier should provide desired quality material.

Solution 2:

Standard hours of direct labor (SH) = 3750*1.40 = 5250 hours

Standard rate of direct labor (SR) = $22.50 per hour

Actual hours of direct labor (AH) = 35*160 = 5600 hours

Actual rate of direct labor (AR) = $22 per hour

Labor rate variance = (SR - AR)*AH = ($22.50 - $22) * 5600 = $2,800 F

Labor efficiency variance = (SH - AH)*SR = (5250 - 5600)*22.50 = $7,875 U

b. As number of assistant employed are more than senior technicians, due to which average labor rate was decreased by $0.50 per hour from standard rate. However deployment of assistant resulted in extra time taken by labor in production resulting in unfavorable efficiency variance of $7,875. Therefore it is recommended new laboe mix should not be continued.

Solution 3:

Standard hours of direct labor (SH) = 3750*1.40 = 5250 hours

Standard rate of variable overhead (SR) = $3.50 per hour

Actual hours of direct labor (AH) = 35*160 = 5600 hours

Actual rate of variable overhead (AR) = $18,200 / 5600 = $3.25 per hour

Variable overhead rate variance = (SR - AR)*AH = ($3.50 - $3.25) * 5600 = $1,400 F

Variable overhead efficiency variance = (SH - AH)*SR = (5250 - 5600)*$3.50 = $1,225 U