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 2.50 ounces $ 28.00 per ounce $ 70.00 Direct labor 0.50 hours $ 13.00 per hour 6.50 Variable manufacturing overhead 0.50 hours $ 3.60 per hour 1.80 $ 78.30 During November, the following activity was recorded relative to production of Fludex: a. Materials purchased, 13,500 ounces at a cost of $361,800. b. There was no beginning inventory of materials; however, at the end of the month, 2,900 ounces of material remained in ending inventory. c. The company employs 21 lab technicians to work on the production of Fludex. During November, they worked an average of 140 hours at an average rate of $11.50 per hour. d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,400. e. During November, 4,200 good units of Fludex were produced . Required: For direct materials: a. Compute the price and quantity variances. (Round your "price per ounce" answers to 2 decimal places. 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?

Answer 1

A. Materials price variance 16,200 F

Materials quantity variance 2,800 U

B. Yes

Step-by-step explanation:

A. Computation for the price and quantity variances For direct materials

Calculation for Materials price variance

Materials price variance=361,800-(13,500*28)

Materials price variance=361,800-378,000

Materials price variance=16,200 FAVOURABLE

Calculation for Materials quantity variance

First step is to calculate Actual materials used

Actual materials used=13,500-2,900

Actual materials used=10,600

Now let compute the Materials quantity variance

Materials quantity variance=28*(10,600-4,200*2.5)

Materials quantity variance=2,800

UNFAVORABLE

Therefore the price will be 16,200 FAVOURABLE and quantity variances will be 2,800 UNFAVORABLE For direct materials

B. Based on the above calculation I Would recommend that the company sign the contract because Materials variance is Favorable