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 or Hours Standard Price or Rate $28.00 per ounce $13.00 per hour 3.60 per hour Standard Cost Direct materials 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 c. The company employs 21 lab technicians to work on the production of Fludex. During November, they each worked an average of d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs e. During November, the company produced 4,200 units of Fludex. inventory. 140 hours at an average pay rate of $11.50 per hour. during November totaled $4,400 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?

Explanation / Answer

1). Direct Material price variance at time of purchaes = Std cost for actual purchases - Actual purchases
=13500 * 28.0 - 361800 = 378000-361800 = 16200 F
Direct Material price variance at time of qty issued = Std cost for actual qty used - Actual cost of qty used
Actual qty used = 13500-2900 = 10600 ounces
Price variance = 28*10600 - 361800/13500*10600 = 296800 - 284080 = 12720 F

Direct material qty variance = (Std qty for actual prodcution - Actual Qty)* Std rate
=(4200 units * 2.50 - 10600)*28 = (10500-10600)*28 = 2800 U

b). If the supplier is anxious about the long term contract then it is not recommended to purchase from him because he may mismanage the delivery timings and can result in loss to company.

2). Direct labour rate variance = (Std rate - Actual rate)*Actual hrs
= (13 - 11.50)*2940 = 4410 F
Actual hrs = 21 technicians * 140 hrs each = 2940 hrs

Direct labour efficiency variance = (Std hrs for actual production - Actual hrs)*Std rate
= (0.50 hrs *4200 units - 2940) * 13 = 10920 U

b). When fewer seniors and more assistant technicians are employed, the time requirement increased which results in unfavourable variance of $10920. Hence it is not advisable to continue the new labour mix.

3). Variable overhead rate variance = Budgeted variable ovehead for actual hrs - Actual variable overhead
= 2940 hrs *3.60 - 4400 = 10584 - 4400 = 6184 F

Variable overhead efficiency variance = Standard variable overhead for actual production - Budgeted variable overhead for actual hrs.
= 4200 *1.8 - 10584 = 7560 - 10584 = 3024 U

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