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 distiling process. The company has developed standard costs for one unit of Fludex, as follows: Standard Price or Rate $17.00 per ounce $13.00 per hour Standard Cost Standard Quantity Direct materials Direct labor Variable manufacturing overhead 2.30 ounces 0.60 hours 0.60 hours $ 39.10 7.80 $2.50 per hour1.50 $48.40 During November, the following activity was recorded relative to production of Fludex: a. Materials purchased, 11,500 ounces at a cost of $178,825. b. There was no beginning inventory of materials; however, at the end of the month, 3,150 ounces of material remained in ending inventory c. The company employs 17 lab technicians to work on the production of Fludex. During November, they worked an average of 160 hours at an average 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 $3,000. e. During November, 3,500 good units of Fludex were produced Required 1. For direct materials: 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). Materials price variance Materials quantity variance 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 contraci?

Explanation / Answer

1.a

Actual price = $178825/11500 = $15.55 per ounce

Materials price variance = AQ(AP-SP)

11500 ounces($15.55-$17.00) =$16,675 F

Materials Quantity Variance:

SP(AQ-SQ)

AQ= 11500-3150 = 8350

$17 per ounce (8350 ounces – 8050 ounces)

$5100 U

*3500 units x 2.30 ounces = 8050 ounces

b.

New price $15.55 is lower than the old price $17.00 which leads to favorable price variance of $16,675 per month. I would recommend company to sign the contract. Yes

2.a

Labor rate variance AH(AR-SR)

(17 X 160 HOURS)($11.50-$13.00)

2720 HOURS ($1.50) = $4080F

Labor efficiency variance SR(AH-SH)

13(2720-2100)= 8060 U

*3500*0.60 hours = 2100

            2.b No, new labour mix should not be recommend because of unfavorable labor efficiency      varainace

3.A

Variable overhead rate variance:

AH(AR-SR)

2720($1.10-$2.50) = 3808 F

*3000/2720 =$1.1

Variable overhead effiecincy variance:

SR(AH-SH)

$2.50(2720-2100) = $1550 U

*AR = 3000/2720 =$1.10

3.b

No,both the variances are calculated by comparing actual labour hours to standard labour hours. if one variance is unfavorable other will be unfavorable as well. so it should not be recommended

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