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 2.00 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

$ 68.70

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


a. Materials purchased, 10,000 ounces at a cost of $287,000.
b.
There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.

c.
The company employs 20 lab technicians to work on the production of Fludex. During November, they worked an average of 130 hours at an average rate of $12.00 per hour.

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

e. During November, 3,400 good units of Fludex were produced .
Required:
1. For direct materials:
a.
Compute the price and quantity variances. (Input all amounts as positive values. 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?
Yes
No
2. For direct labor:
a.
Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)




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 save costs. Would you recommend that the new labor mix be continued?

Yes
No


3.
Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

Answer 1

To calculate the variances for direct materials, calculate the price variance as the actual quantity of materials purchased multiplied by the difference between the actual price paid and the standard price, and calculate the quantity variance as the difference between the actual quantity used and the standard quantity allowed, multiplied by the standard price. For direct labor, calculate the rate variance as the actual hours worked multiplied by the difference between the actual rate and the standard rate, and calculate the efficiency variance as the difference between the actual hours worked and the standard hours allowed, multiplied by the standard rate. For variable overhead, calculate the rate variance as the actual hours worked multiplied by the difference between the actual rate and the standard rate, and calculate the efficiency variance as the difference between the actual hours worked and the standard hours allowed, multiplied by the standard rate.

Step-by-step explanation:

To calculate the variances for direct materials:

1. The price variance is calculated as the actual quantity of materials purchased multiplied by the difference between the actual price paid and the standard price.
   Price variance = (10,000 ounces x ($287,000/10,000 ounces - $30.00/ounce)) = $
   370,000 U
2. The quantity variance is calculated as the difference between the actual quantity used and the standard quantity allowed, multiplied by the standard price.
   Quantity variance = (10,000 ounces - 3,400 ounces) x $30.00/ounce = $204,000 F

The company should consider signing a long-term contract with the new supplier if the price variance is favorable, indicating that the actual price paid is lower than the standard price. However, the decision to sign a contract should also consider other factors such as the supplier's reliability and quality of materials.

To calculate the variances for direct labor:

1. The rate variance is calculated as the actual hours worked multiplied by the difference between the actual rate and the standard rate.
   Rate variance = (130 hours x ($12.00/hour - $14.00/hour))= $
   260 U
2. The efficiency variance is calculated as the difference between the actual hours worked and the standard hours allowed, multiplied by the standard rate.
   Efficiency variance = (130 hours - 0.50 hours x 3,400 units) x $14.00/hour = $
   3,646 F

The decision to continue with the new labor mix should be based on an evaluation of the cost savings achieved compared to the impact on product quality and customer satisfaction.

To calculate the variances for variable overhead:

1. The rate variance is calculated as the actual hours worked multiplied by the difference between the actual rate and the standard rate.
   Rate variance = $
   4,700 - (0.50 hours x $3.40/hour) = $
   4,700 - $1.70 = $
   4,698.30 UF
2. The efficiency variance is calculated as the difference between the actual hours worked and the standard hours allowed, multiplied by the standard rate.
   Efficiency variance = (0.50 hours x 3,400 units) x $3.40/hour = $
   5,780 UF