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 Standard Cost
or Hours or Rate
Direct materials 2.60 ounces $20.00 per ounce $52.00
Direct labor 0.60 hours $16.00 per hour 9.60
Variable manufacturing-
overhead 0.60 hours $4.50 per hour 2.70
$64.30

During November, the following activity was recorded relative to production of Fludex:
a. Materials purchased 13,000 ounces at a cost of $244,400.
b. There was no beginning inventory of materials; however, at the end of the month, 3,300 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 150 hours at an average rate of $14.00 per hour.
d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $6,500.
e. During November, 3,600 good units of Fludex were produced.

Required:
1. For direct materials:
1.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).)
2. 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

Answer:

Material Price Variance= $ 11640 favorable

Material Quantity Variance= $6800 Unfavorable

Explanation:

Becton Labs, Inc.

Standard Quantity= 2.6ounce * 3600 units =  9360 ounces

Actual quantity used:  Purchases Less Ending Inventory 13000 ounces- 3300 ounces=  9700 ounces

Actual price : $244,400/13,000=  $ 18.8

Standard price : $ 20.00

Material Price Variance= (Actual Price * Actual Quantity)- (Standard Price * Actual Quantity)

Material Price Variance= ($ 18.80 * 9700)-($20.0 *9700)= $ 182360- $ 194000= 11640 Favorable

Material Price Variance= $ 11640 favorable

Material Quantity Variance= (Standard Price * Actual Quantity)-(Standard Price * Standard Quantity)

Material Quantity Variance=($20 *9700)-($ 20 * 9360)

Material Quantity Variance=$ 194000-187200= 6800

Material Quantity Variance= $6800 Unfavorable

Total direct materials variance= $ 11640 favorable -$6800 Unfavorable

Total direct materials variance= 4840 favorable

2. Yes they should as he is offering less price than the standard price.

Even if more material is used the total material variance is favorable indicating a gain not a loss.