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 2.50 ounces $ 22.00 per ounce $ 55.00
Direct labor 0.90 hours $ 16.00 per hour 14.40
Variable manufacturing overhead 0.90 hours $ 2.00 per hour 1.80
Total standard cost per unit $ 71.20
During November, the following activity was recorded related to the production of Fludex:

Materials purchased, 14,000 ounces at a cost of $289,800.

There was no beginning inventory of materials; however, at the end of the month, 4,050 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 $15.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000.

During November, the company produced 3,900 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 6 senior technicians and 20 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

Yes

The Material Price Variance is very favourable to the Company. Hence, Company can continue with the same material and supplier

No

The Labour Efficiency Variance is Unfavourable to the Company. Hence, it won't be good to continue with the new labor mix.

Step-by-step explanation:

Material price variance = (AP-SP)*AQ

AP = Actual price per quantity = $2,89,800 / 14,000 = $20.70

SP = Standard price per quantity = $22.00

AQ = Actual quantity consumed= 14,000 - 4050 = 9,950

F= Favourable

U = Unfavourable

Material price variance

AP (a) SP (b) Variance (c=b-a) AQ (d) Total variance (e=c*d) F/U

$20.70 $22.00 1.3 9950 12,935 F

Material quantity variance = (AQ-SQ)*SP

AQ = Actual quantity consumed= 14,000 - 40550 = 9,950

SQ = Standard quantity = 3900 * 2.50 = 9,750

SP = Standard price per quantity = $22.00

F= Favourable

U = Unfavourable

Material quantity variance

AQ (a) SQ (b) Variance (c=b-a) SP (d) Total variance (e=c*d) F/U

9,950 9,750 -200 $22.00 -4400 U

Yes

The Material Price Variance is very favourable to the Company. Hence, Company can continue with the same material and supplier

2) Labor Rate variance = (AR-SR)*AH

AR = Actual Rate per hour = $15.00

SR = Standard Rate per hour = $16.00

AH = Actual hours = 150 * 26 = 3900

F= Favourable

U = Unfavourable

Labor Rate variance

AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U

$15.0 $16.00 1.00 3900 3900 F

Labor Efficiency variance = (AH-SH)*AR

AH = Actual hours = 150 * 26 = 3900

SH = Standard Hours = 3900 * 0.9 = 3510

SR = Standard Rate per hour = $16.00

F= Favourable

U = Unfavourable

Labor Efficiency variance

AH (a) SH (b) Variance (c=b-a) SR (d) Total variance (e=c*d) F/U

3900 3510 -390 $16.00 -6240 U

No

The Labour Efficiency Variance is Unfavourable to the Company. Hence, it won't be good to continue with the new labor mix.

3) VOH spending variance = (AR-SR)*AH

AR = Actual Rate per hour = $5000 / 4050 = $1.235

SR = Standard Rate per hour = $2.00

AH = Actual hours = 150 * 26 = 3900

F= Favourable

U = Unfavourable

VOH spending (rate) variance

AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U

$1.235 $2.00 0.765 3900 2984 F

VOH efficiency variance = (AH-SH)*SR

AH = Actual hours = 150 * 26 = 3900

SH = Standard Hours = 3900 * 0.9 = 3510

SR = Standard Rate per hour = $2.00

F= Favourable

U = Unfavourable

VOH efficiency variance

AH (a) SH (b) Variance (c=b-a) Price (d) Total variance (e=c*d) F/U

3900 3510 -390 $2.00 -780 U