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 2.00 ounces $ 21.00 per ounce $ 42.00 Direct labor 0.90 hours $ 12.00 per hour 10.80 Variable manufacturing overhead 0.90 hours $ 2.00 per hour 1.80 Total standard cost per unit $ 54.60

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

1. Materials purchased, 10,000 ounces at a cost of $197,000.

2. There was no beginning inventory of materials; however, at the end of the month, 2,550 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 170 hours at an average pay rate of $11.50 per hour.

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

5. During November, the company produced 3,700 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 6 senior technicians and 18 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)	for direct materials
	a.	price and quantity variance
			Standard	-	Actual	*	Actual	=	Variance
			price		price		quantiy
materials price variance			21		19.7		10,000	=	13000	F
			standard	-	Actual	*	Standard	=	Variance
			qty		qty		price
materials quantity variance			7400		7,450		21		1050	U
	b.	yes
2)	for direct labor
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
labor price variance			12		11.5		4080	=	2040	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
labor efficiency variance			3330		4,080		12		9000	U
	b.	no
3)	for variable overhead
			Standard	-	Actual	*	Actual	=	Variance
			rate		rate		hours
Variable overhead rate			2		1.18		4,080	=	3360	F
			standard	-	Actual	*	Standard	=	Variance
			hours		hours		rate
variable overhead efficiency			3330		4,080		2		1500	U