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	2.00	ounces	$	30.00	per ounce	$	60.00
Direct labor	0.50	hours	$	14.00	per hour		7.00
Variable manufacturing overhead	0.50	hours	$	3.40	per hour		1.70
Total standard cost per unit						$	68.70

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

1. Materials purchased, 10,000 ounces at a cost of $287,000.

2. There was no beginning inventory of materials; however, at the end of the month, 3,000 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 130 hours at an average pay rate of $12.00 per hour.

4. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,700.

5. During November, the company produced 3,400 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 4 senior technicians and 16 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

Actual materials used	7000	=10000-3000
Actual labor hours	2600	=20*130
1
a
Materials price variance	13000	F	=287000-(10000*30)
Materials quantity variance	6000	U	=30*(7000-3400*2)
b
Yes, as materials variance is favorable
2
a
Labor rate variance	5200	F	=2600*(12-14)
Labor efficiency variance	12600	U	=14*(2600-3400*0.5)
b
No, as labor variance is unfavorable
3
Variable overhead rate variance	4140	F	=4700-(2600*3.4)
Variable overhead efficiency variance	3060	U	=3.4*(2600-3400*0.5)