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: 2.50 ounces 8.50 hours 0.50 hours $28.00 per ounce $13.00 per hour $3.60 per hour $ 70.08 6.50 1.88 s 78.38 Direct labor 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 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:

Explanation / Answer

b. No.

The favorable price variance means the purchase price offered by the new supplier is lower than the standard price. However, the quantity variance is unfavorable. This could be due to the material purchased from the new supplier being of sub-standard quality. It is thus recommended that the company should not sign the contract with the new supplier.

b. No.

The unfavorable labor efficiency variance could be due to the change in the labor mix substituting senior technicians with assistants and hence should not be continued with as it offsets the favorable price variance due to reduced labor rate.

1 Direct material variances a. Price variance $16200 Favorable (AQP x AP) - (AQP x SP) = (13500 x $26.80) - (13500 x $28) = $361800 - $378000 = $16200 AP = $361800 / $13500 = $26.80 Quantity variance $2800 Unfavorable (AQ x SP) - (SQ x SP) = (10600 x $28) - (10500 x $28) = $296800 - $294000 = $2800 AQ = 13500 - 2900 = 10600 SQ = 4200 units x 2.50 ounces = 10500 ounces

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