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	2.30	ounces	$	24.00	per ounce	$	55.20
Direct labor	0.80	hours	$	15.00	per hour		12.00
Variable manufacturing overhead	0.80	hours	$	3.50	per hour		2.80
Total standard cost per unit						$	70.00

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

Materials purchased, 12,500 ounces at a cost of $282,500.

There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.

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 $14.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $8,000.

During November, the company produced 4,100 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 4 senior technicians and 22 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

1(a) Materials price variance = AQ (AP – SP)

12500 ounces ($22.60 per ounce* – $24 per ounce) = $17,500 F

*$282500 / 12500 ounces = $22.60 per ounce

Materials quantity variance = SP (AQ – SQ)

$20.00 per ounce (9500 ounces – 9430 ounces) = $1400 U

*4100 units × 2.30 ounces per unit = 9430 ounces

1(b) Yes, the contract probably should be signed. The new price of $22.60 per ounce is substantially lower than the old price of $24 per ounce and it also resulting in a favorable price variance of $17500

2(a)

Labor rate variance = AH (AR – SR)

3900 hours ($14 per hour – $15 per hour) = $3900 F

Labor efficiency variance = SR (AH – SH)

$15 per hour (3900 hours – 3280 hours) = $9300 U

*26 technicians × 150 hours per technician = 3900 hours

**4100 units × 0.80 hours per technician = 3280 hrs

2(b) No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $14 to $15 and it also resulting $3900 favorable labor rate variance,

3.(a)

Variable overhead spending variance = AH (AR – SR)

3900 hours ($2.05 per hour* – $3.50 per hour) = $5655 F

*$8000 / 3900 hours = $2.05 per hour

Variable overhead efficiency variance = SR (AH – SH)

$2.05 per hour (3900 hours – 3280 hours) = $1271 U

* Based on direct labor hours:

*26 technicians × 150 hours per technician = 3900 hours

**4100 units × 0.80 hours per technician = 3280 hrs