Question

ecton 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

	Standard rate of material	22
	Standard quantity of material	7770
	Actual rate	20.65
	Actual material consumed	7900
	Standard labor rate	15
	Standard hours	2960
	Actual labor hours	3600
	Actual labor rate	14
	Actual variable OH Rate	1.94
	Standard variable OH Rate	2.5
1
a	Direct material price variance	(SR-AR)*AQ	(22-20.65)*10500
			14175	F
	Direct material quantity variance	(SQ-AQ)*SR	(7770-7900)*22
			2860	U
b	Yes, will recommend to sign the contract as the net is a favourable variance.
2a	Direct labor rate variance	(SR - AR)*Actual labor hours	(15-14)*3600
			3600	F
	Direct labor efficiency variance	(SH - AH)*SR	(2960-3600)*15
			9600	U
b	No, the new labor mix should not be continued as the net unfavourable variance is there.
	Variable overhead rate variance	(SVOHR - AVOHR)*Actual labor hours	(2.5-1.94)*3600
			2000	F
		(SH - AH)*SVOHR	(2960-3600)*2.5
			1600	U