Becton Labs, Inc., produces various chemical compounds for industrial use. One c

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 or Hours or Rate $28.00 per ounce $13.00 per hour s 3.60 per hour Cost Direct materialts Direct labor Variable manufacturing overhead Total standard cost per unit 2.50 ounces 0.50 hours 0.50 hours $70.00 6.50 1.80 $78.30 During November, the following activity was recorded related to the 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 each worked an average of 140 hours at an average pay 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, the company produced 4,200 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 recommend that the company sign the contract?

Explanation / Answer

Solution 1a:

Standard quantity of material for actual production = 4200*2.50 = 10500 ounce

Actual quantity of material purchased = 13500 ounce

Actual quantity of material used = 13500 - 2900 = 10600 ounce

Standard price of material = $28 per ounce

Actual price of material = $361,800 / 13500 = $26.80

Material price variance = (SP - AP) * AQ purchased = ($28 - $26.80) * 13500 = $16,200 F

Material quantity variance = (SQ - AQ) * SR = (10500 - 10600) * $28 = $2,800 U

Solution 1b:

As price offered by the new supplier is lesser than standard price of material, therefore company should sign long term purchase contract with the new supplier.

Solution 2a:

Standard hours of direct labor = 4200*0.5 = 2100 hours

Standard rate of direct labor = $13 per hour

Actual hours of direct labor = 21*140 = 2940 hours

Actual rate of direct labor = $11.50 per hour

Direct labor rate variance = (SR - AR) * AH = ($13 - $11.50) * 2940 = $4,410 F

Direct labor efficiency variance = (SH - AH) * SR = (2100 - 2940) * $13 = $10,920 U

Solution 2b:

Employing more assistant rather senior technician resulted in favorable direct labor rate variance but unfavorable laor efficiency variance. Further unfavorable efficiency variance is higher than favorable rate variance, therefore it is recommended new labor mix should not be continued.

Solution 3:

Standard hours of direct labor = 4200*0.5 = 2100 hours

Standard rate of variable overhead= $3.60 per hour

Actual hours of direct labor = 2940

Actual rate of variable overhead = $4,400 / 2940 = $1.49659

Variable overhead rate variance = (SR - AR) * AH = ($3.60 - $1.49659) * 2940 = 6,184 F

Variable overhead efficiency variance = (SH - AH) * SR = (2100 - 2940) * $3.60 = $3,024 U

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