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	$	22.00	per ounce	$	46.20
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	2.50	per hour		2.00
Total standard cost per unit						$	60.20

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

1. Materials purchased, 10,500 ounces at a cost of $216,825.

2. There was no beginning inventory of materials; however, at the end of the month, 2,600 ounces of material remained in ending inventory.

3. The company employs 20 lab technicians to work on the production of Fludex. During November, they each worked an average of 180 hours at an average pay rate of $14.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $7,000.

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 20 technicians employed in the production of Fludex consisted of 8 senior technicians and 12 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.

1) For direct materials, compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Materials quantity variance=? and U or F

Materials price Variance=? and U or F

2) For direct materials, 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?

yes or no

3) For direct labor, compute the rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Labor efficiency variance=? and U or F

Labor rate variance= ? and U or F

4) In the past, the 20 technicians employed in the production of Fludex consisted of 8 senior technicians and 12 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?

yes or no

5) Compute the variable overhead rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Variable overhead rate variance=? and F or U

Variable overhead effiency variance=? and F or U

Answer 1

• All working forms part of the answer
• Workings

Actual DATA for		3750	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	8350	$            21.60	$        180,360.00
Direct labor	3420	$              10.50	$           35,910.00
Variable Overhead	3420	$                1.812865…	$             6,200.00

Standard DATA for		3750	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.2 ounces x 3750 units)=8250 ounces	$                23.00	$     189,750.00
Direct labor	( 0.7 hrs x 3750 units)=2625 hrs	$                12.00	$       31,500.00
Variable Overhead	( 0.7 hrs x 3750 units)=2625 hrs	$                   3.00	$         7,875.00

• Requirement 1

--Part ‘a’

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                     23.00	-	$                    21.60	)	x	8350
	11690
	Variance		$            11,690.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	8250	-	8350	)	x	$                        23.00
	-2300
	Variance		$              2,300.00			Unfavourable-U

--Part ‘b’

YES, because supplier’s rate per ounce is LOWER than standard rate.

• Requirement 2

--Part ‘a’

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                     12.00	-	$                    10.50	)	x	3420
	5130
	Variance		$              5,130.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2625	-	3420	)	x	$                        12.00
	-9540
	Variance		$              9,540.00			Unfavourable-U

--Part ‘b’

NO, because it has resulted in Lower efficiencies as reflected in Efficiency Variance.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        3.00	-	$                       1.81	)	x	3420
	4060
	Variance		$              4,060.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	2625	-	3420	)	x	$                           3.00
	-2385
	Variance		$              2,385.00			Unfavourable-U