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 2.50 ounces 0.90 hours 0.90 hours Standard Price or Rate $22.00 per ounce $16.00 per hour $ 2.00 per hour Standard Cost $ 55.00 14.40 1.80 $ 71.20 During November, the following activity was recorded related to the production of Fludex: a. Materials purchased, 14,000 ounces at a cost of $289,800. b. There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory. c. The company employs 26 lab technicians to work on the production of Fludex. During November, they each worked an average of 150 hours at an average pay rate of $15.00 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000. e. During November, the company produced 3,900 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 26 technicians employed in the production of Fludex consisted of 6 senior technicians and 20 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

Answer

• Working data

Actual DATA for		3900	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	9950	$                20.70	$        205,965.00
Direct labor	3900	$                15.00	$           58,500.00
Variable Overhead	3900	$                   1.28	$             5,000.00

Standard DATA for		3900	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.5 ounce x 3900 units)=9750 ounce	$                22.00	$     214,500.00
Direct labor	( 0.9 hours x 3900 units)=3510 hours	$                16.00	$       56,160.00
Variable Overhead	( 0.9 hours x 3900 units)=3510 hours	$                   2.00	$         7,020.00

• Requirement 1

Part A

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                              22.00	-	$                    20.70	)	x	9950
	12935
	Variance		$            12,935.00			Favourable-F
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	9750	-	9950	)	x	$                        22.00
	-4400
	Variance		$              4,400.00			Unfavourable-U

Part B

YES, it is recommended because the prices offered by the seller are LESS than the standard price of material.

• Requirement 2

Part A

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              16.00	-	$                    15.00	)	x	3900
	3900
	Variance		$              3,900.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	3510	-	3900	)	x	$                        16.00
	-6240
	Variance		$              6,240.00			Unfavourable-U

Part B

NO, it is not recommended, because this has led to lower efficiencies among workers, as evident by Unfavourable Efficiency Variance, calculated above.

• Requirement 3

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                2.00	-	$                       1.28	)	x	3900
	2800
	Variance		$              2,800.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	3510	-	3900	)	x	$                           2.00
	-780
	Variance		$                  780.00			Unfavourable-U