There was no beginning inventory of materials; however, at the end of the month,

Question

   

There was no beginning inventory of materials; however, at the end of the month, 2,900 ounces of material remained in ending inventory.

The company employs 21 lab technicians to work on the production of Fludex. During November, they worked an average of 140 hours at an average rate of $11.50 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,400.

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 or no?

In the past, the 21 technicians employed in the production of Fludex consisted of 3 senior technicians and 18 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 or no?

During November, the following activity was recorded relative to production of Fludex: Standard Standard Price or Rate $28.00 per ounce $13.00 per hour S 3.60 per hour Standard Quantity r R Cost Direct materials Direct labor Variable manufacturing overhead 2.50 ounces 0.50 hours 0.50 hours $70.00 6.50 1.80 $78.30

Explanation / Answer

Solution:

1) For Direct Material

a)

Direct Material Price Variance = Actual Quantity Purchased (Standard Price – Actual Price) or Actual Quantity Purchased x Standard Price – Actual Quantity Purchased x Actual Price

= (13,500 x $28) - $361,800 = $378,000 - $361,800 = $16,200 F

Direct Material Quantity Variance = Standard Price x Standard Quantity for Actual Production – Standard Price x Actual Quantity Used

Standard Quantity for Actual Production = Actual Produced Units x Standard Quantity per unit = 4,200 Units x 2.50 ounce per unit = 10,500 Ounce

Actual Quantity Used = Actual Quantity Purchased – Ending Inventory = 13,500 – 2,900 = 10,600 Ounce

Direct Material Quantity Variance = ($28 x 10,500) – (10,600 x $28) = $294,000 - $296,800 = $2,800 U

b)

YES. It is recommended to the company to sign the contract for purchase of material. Since the Per Unit price is less than what company estimated.

2) For Direct Labor

a)

Direct Labor Rate Variance = Actual Hours (Standard Rate – Actual Rate) = 140 ($13 - $11.50) = $210 F

Actual Hours = 21 lab technicians x 140 Hours per month = 2,940 Hours

Direct Labor Efficiency Variance = Standard Rate (Standard Hours for Actual Production – Actual Hours)

Standard Hours for Actual Production = Actual Produced Units x Standard Hours per unit = 4,200 Units x 0.50 hours per unit = 2,100 Hours

Direct Labor Efficiency Variance = $13 (2,100 – 2,940) = $10,920 U

b)

Due to new experiment the price of direct labor rate is reduced but the efficiency in not upto the mark. Hence it is not advisable to company to apply new experiment.

3)

Variable Overhead Rate Variance = Actual Hours (Standard Rate – Actual Rate) = (2,940 x $3.60) - $4,400 = $10,584 - $4,400 = $6,184 F

Variable Overhead Efficiency Variance = Standard Rate (Standard Hours for actual production – Actual Hours) = $3.60 (2,100 – 2,940) = $3,024 U

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