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:

During November, the following activity was recorded related to the production of Fludex:

Materials purchased, 11,500 ounces at a cost of $259,325.

There was no beginning inventory of materials; however, at the end of the month, 2,700 ounces of material remained in ending inventory.

The company employs 23 lab technicians to work on the production of Fludex. During November, they each worked an average of 100 hours at an average pay rate of $11.00 per hour.

Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $2,300.

During November, the company produced 4,100 units of Fludex.

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?

2. For direct labor:

a. Compute the rate and efficiency variances.

b. In the past, the 23 technicians employed in the production of Fludex consisted of 4 senior technicians and 19 assistants. During November, the company experimented with fewer senior technicians and more assistants in order to reduce labor costs. Would you recommend that the new labor mix be continued?

3. Compute the variable overhead rate and efficiency variances.

Standard Quantity
or Hours Standard Price
or Rate Standard Cost Direct materials 2.10 ounces $ 24.00 per ounce $ 50.40 Direct labor 0.40 hours $ 14.00 per hour 5.60 Variable manufacturing overhead 0.40 hours $ 2.50 per hour 1.00 Total standard cost per unit $ 57.00 Req 1A Req 1B Req 2A Req 2B Req 3 For direct materials, compute the price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.) Materials price variance Materials quantity variance

Explanation / Answer

It is worthwhile to understand how different categories of varianaces are calculated:

Solution- 1 A:

Direct Material Price Variance= Actual Price*Qty Pruchased - Standard Price*Qty Purchased= 259,325 - 24*11500 = 16,675 Favorable variance

Direct Material Quantity Variance= (Actual Quantity used- Standard Quatnity used)*Standard rate= (8800- 4100*2.10) * 24= 4560 Unfaourable variance.

Actual Quantity used will be calculated by OPening Stock + Purchases- Closing stock= 0+11500-2700= 8800 ounces.

Solution- 1b: Company is having favourable price variance as compared to budget. It can be stated that it will be a good deal for the Organization to enter in to long term deal for buying the material.

Solution- 2a:

Labor Rate variance= (Actual Rate-Std Rate)*Actual Labour hour= (11-14)*2300= 6900 Favourable

Labor Efficiency variance= (Actual hours used- Standard hours used)*Standard rate= (2300- 4100*0.4)*14= $9240 Unfavourable

Solution-2 b: Overall Company is having negative labor variance. The reason is the numberof hours being spent. In november, company spent 2300 hours for production of 4100 units while the standard is 0.4 labour hour per unit which is 1640 hours in total. Company needs to re-look onto the mix so that number of hours can be reduced and a positive variance in total can be attained. Change in mix has resulted in cost saving as per rate variance but the number of hours has increased significantly.

Solution-3:

Variable Overhead spending variance= (Actual Rate-Std Rate)*Variable overhead hour= (1-2.5)*2300= 3450 Favourable variance

Actual rate for Overhead is 2300/2300= $1 per hour

Variable Overhead Efficiency variance= (Actual hours used- Standard hours used)*Standard rate= (2300-4100*0.4)*2.5= 1650 Unfavourable variance

Material Variance Material Price variance (Actual Price-Std Price)*Qty Purchased Material Quantity variance (Actual Quantity used- Standard Quatnity used)*Standard rate Labor Variance Labor Rate variance (Actual Rate-Std Rate)*Actual Labour hour Labor Efficiency variance (Actual hours used- Standard hours used)*Standard rate Variable Overhead Variance Variable Overhead spending variance (Actual Rate-Std Rate)*Variable overhead hour Variable Overhead efficiency variance (Actual hours used- Standard hours used)*Standard rate

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