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

Answer:

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.

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