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 2.60 ounces $ 29.00 per ounce $ 75.40 Direct labor 0.60 hours $ 12.00 per hour 7.20 Variable manufacturing overhead 0.60 hours $ 3.50 per hour 2.10 Total standard cost per unit $ 84.70 During November, the following activity was recorded related to the production of Fludex: Materials purchased, 14,000 ounces at a cost of $388,500. There was no beginning inventory of materials; however, at the end of the month, 2,950 ounces of material remained in ending inventory. The company employs 22 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 $11.00 per hour. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,500. During November, the company produced 4,200 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 22 technicians employed in the production of Fludex consisted of 5 senior technicians and 17 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

	A	Direct Material Standard- Quantity(Ounce)per unit	2.6
	SP	Direct Material- Standard Price per Ounce	$29.00
	B	Standard direct material cost per unit	$75.40
	C	Direct Labor- Standard Quantity(Hour)per unit	0.6
	SR	Direct Labor- Standard Rate per Hour	$12
	D	Standard labor cost per unit	$7.20
	E	Variable manufacturing overhead rate per hour	$3.50
	F=C*E	Variable manufacturing overhead cost per unit	$2.10
	G=B+D+F	Total standard cost per unit	$84.70
	AP	Actual Direct Material price per ounce	$        27.75	(388500/14000)
	AQ	Actual Quantity of Direct Materials used(Ounce)	11050	(14000-2950)
	AR	Actual Labor hour rate	$11.00
	AH	Actual labour hour used	3300	(22*150)
	H	Actual Variable overhead cost	$5,500
	I	Quantity Produced	4200
	SQ=A*I	Standard Direct material quantity	10920
	SH=C*I	Standard direct labor hour	2520
	1	DIRECT MATERIALS VARIANCES
	a.	Mterial Price Variance=Actual Quantity*(Standard Price -Actual Price)
		Material Price Variance=AQ*(SP-AP)=11050*(29-27.75)	$13,812.50	FAVOURABLE
		Material Quantity Variance=Standard Price*(Standard Quantity-Actual Quantity)
		Material Quantity Variance=SP*(SQ-AQ)=29*(10920-11050)	($3,770.00)	UNFAVOURABLE
	b	Yes, company can go ahead and sign the contract.
		There is Favourable Rate variance
		Overall material cost variance is favourable
	2	DIRECT LABOR VARIANCES
	a	Direct labor Rate Variance=AH*(SR-AR)=3300*(12-11)	$3,300.00	FAVOURABLE
		Direct labor quantity variance=SR(SH-AH)=12*(2520-3300)	($9,360)	UNFAVOURABLE
	b	No, ths labor mix has resulted in unfavourable cost variance