USA: +1 (725) 712-1730 
Sign in
| 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 or Rate |
Standard Cost | ||||
| Direct materials | 2.30 ounces | $ | 17.00 | per ounce | $ | 39.10 |
| Direct labor | 0.60 hours | $ | 13.00 | per hour | 7.80 | |
| Variable manufacturing overhead | 0.60 hours | $ | 2.50 | per hour | 1.50 | |
| $ | 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).) |
| 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? | ||||
|
| 2. | For direct labor: |
| a. | Compute the rate and efficiency 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).) |
| b. | In the past, the 17 technicians employed in the production of Fludex consisted of 4 senior technicians and 13 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? | ||||
|
| 3. | Compute the variable overhead rate and efficiency 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).) |
Expert Answer
Solution
1.a.
Materials price variance = AQ (AP – SP)
=11,500 ounces ($15.55 per ounce* – $17.00 per ounce)
= $16,675 F
*$178,825 ÷ 11,500 ounces = $15.55 per ounce
Materials quantity variance = SP (AQ – SQ)
$17.00 per ounce (8,350 ounces *– 8,050 ounces**)
= $5100 U
*Actual material used:11500 ounce-3150 ounce=8350 ounce
**3,500 units × 2.3 ounces per unit = 8050 ounces
1.b.
Yes. The contract would be signed. New price of $15.55 is less than the old price of $17, due to which having favourable price variance. Also there is less material quantity variance which makes the overall material variance favourable.
2.a
AH=17 technician×160 hours=2,720 hours
Labor rate variance = AH (AR – SR)
=2,720 hours ($11.50 per hour – $13.00 per hour)
= $4,080 F
Labor efficiency variance = SR (AH – SH)
=$13.00 per hour (2,720 hours – 2,100 hours*)
= $8,060 U
*.60 hours×3500 units=2100 hours
2.b.
No , the new mix should not be continued. It gives the favourable rate variance but this benefit is offset by unfavorable efficiency variance. Overall labour variance is unfavorable.
