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: Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit Standard Quantity or Hours 2.40 ounces 0.80 hours 0.80 hours Standard Price or Rate $21.00 per ounce $15.00 per hour $ 3.50 per hour Standard Cost $ 50.40 12.00 2.80 $ 65.20 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 13,500 ounces at a cost of $266,625. b. There was no beginning inventory of materials; however, at the end of the month, 4,200 ounces of material remained in ending inventory c. The company employs 24 lab technicians to work on the production of Fludex. During November, they each worked an average of 140 hours at an average pay rate of $14.50 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,800. e. During November, the company produced 3,800 units of Fludex.

Answer 1

Given	Purchase cost of raw materials	= 2,66,625
	Cost/ounce	= 2,66,625/13,500
		= 19.75 / ounce
	For Direct materials
a )	Material Price variance	= AQ * SP - AQ * AP
		= (13,500-4,200)*21 - (13,500-4,200)*19.75
		= 11,625 (Favourable)
	Material Quantity variance	= SQ * SP - AQ * SP
		= (3,800*2.4) * 21 - (13,500-4,200)*21
		= 3,780 (Unfavourable)
b)	Since, the new supplier is offering the products at a low cost (i.e) 19.75/ounce which is less than standard price of 21/ounce, the company can enter into a long term contract with the supplier.
	Also, the quality of product seems to be good because there is no much quantity variance
	For Direct Labour
a)	Labour Rate variance	= AH * SR - AH * AR
		= (24 * 140) * 15 - (24 * 140) * 14.5
		= 1,680 (Favourable)
	Labour Efficiency variance	= SH * SR - AH * SR
		= (3,800*0.80) * 15 - (24*140)*15
		= 4,800 (Unfavourable)
b)	The gain on reducing the senior technicians is 1,680. However, the loss due to inefficiency of assistants is 4,800. So, the new labour mix is not recommended
	For Variable Overheads
	Actual Overhead	= 6,800
	Actual labour hours	= 3,360
	Overhead/hour	= 2.02381
	Variable overhead rate variance	= AH * SR - AH * AR
		= (24*140)* 3.50 - (24*140) * 2.02381
		= 4,960 (Favourable)
	Variable overhead efficiency variance	= SH * SR - AH * SR
		= (3,800*0.80)*3.5 - (24*140)*3.5
		= 1,120 (Unfavourable)
Note
SQ	Standard Quantity
AQ	Actual quantity
SH	Standard hours
AH	Actual hours
SR	Standard rate
AR	Actual rate
AP	Actual price
SP	Standard Price