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	Standard Price or Rate			Standard Cost
Direct materials	2.20 ounces	$	16.00	per ounce	$	35.20
Direct labor	0.80 hours	$	12.00	per hour		9.60
Variable manufacturing overhead	0.80 hours	$	2.50	per hour		2.00
					$	46.80

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

   

a.	Materials purchased, 11,000 ounces at a cost of $160,600.
b.	There was no beginning inventory of materials; however, at the end of the month, 3,100 ounces of material remained in ending inventory.
c.	The company employs 23 lab technicians to work on the production of Fludex. During November, they worked an average of 150 hours at an average rate of $11.00 per hour.
d.	Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,200.
e.	During November, 3,500 good units of Fludex were produced .

Required:

1.	For direct materials:

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

            

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?

	Yes
	No

2.	For direct labor:

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

            

b.

In the past, the 23 technicians employed in the production of Fludex consisted of 7 senior technicians and 16 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to save costs. Would you recommend that the new labor mix be continued?

	Yes
	No

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

      

Answer 1

Material Price Variance = (Standard Price – Actual Price)*Actual Quantity

= (16 – 14.6)*11,000

= 15,400 F

Quantity Variance = (Standard Quantity – Actual Quantity)*Standard Price

= (2.2*3500 – 7900)*16

= 3,200 U

Yes, Since the price variance is highly positive but little unfavourable quantity variance

2. Rate Variance = (Standard Rate – Actual Rate)*Actual Hours

= (12-11)*3450

= 3,450 F

Efficiency Variance = (Standard Hours – Actual Hours)*Standard Rate

= (0.8*3500 – 3450)*12

= 7,800 U

No, very poor efficiency

3. Variable overhead rate variance = (Standard Rate – Actual Rate)*Actual Hours

= 2.50*3450 – 4200

= 4,425 F

Efficiency Variance = (Standard Hours – Actual Hours)*Standard Rate

= (2800-3450)*2.5

= 1,625 U