Becton Labs, Inc., produces various chemical compounds for industrial use. One c
ID: 2521983 • Letter: B
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, 12,500 ounces at a cost of $223,125.
There was no beginning inventory of materials; however, at the end of the month, 3,250 ounces of material remained in ending inventory.
The company employs 21 lab technicians to work on the production of Fludex. During November, they each worked an average of 150 hours at an average pay rate of $12.50 per hour.
Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,100.
During November, the company produced 3,500 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 21 technicians employed in the production of Fludex consisted of 4 senior technicians and 17 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 Quantityor Hours Standard Price
or Rate Standard Cost Direct materials 2.50 ounces $ 19.00 per ounce $ 47.50 Direct labor 0.70 hours $ 15.00 per hour 10.50 Variable manufacturing overhead 0.70 hours $ 4.00 per hour 2.80 Total standard cost per unit $ 60.80 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 Req 1A
Explanation / Answer
Part 1(a)
Material Price Variance
Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:
Material Price Variance = Actual Quantity (Standard Price – Actual Price)
Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.
Direct Material Price Variance
Actual Price ($223,125 / 12,500)
$17.85
per pound
Standard Price
$19.00
per pound
Variance or Difference in Price
$1.15
per pound
x Actual Quantity PURCHASED
12500
Pounds
Material Price Variance
$14,375
Favorable
Part 1(b)
Material Quantity/Efficiency/Usage Variance
Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:
Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)
Note --- Here actual quantity means actual quantity of material CONSUMED/USED
Direct Material Quantity Variance
Standard Quantity Allowed for actual production:
Actual Production/Activity
3500
Units
x Allowed Standard Quantity Per Unit
2.5
Pounds
Total Standard Quantity Allowed for actual production (SQAP)
8750
Pounds
Actual Quantity USED (AQU) (Purchase 12,500 - Ending Inventory 3250)
9250
Pounds
Variance or Difference in Quantity
500
Pounds
x Standard Price (SP)
$19.00
Per Pound
Material Quantity Variance
$9,500
Unfavorable
Recommendation
Total material variance = Material Price Variance $14,375 F + material usage variance $9,500 UF
= $4,875 Favorable
Since overall material variance is favorable, there is no need to sign the contract.
Hence the answer is NO
Part 2(a) –
Labor Rate Variance
Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:
Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)
Here, actual time means time for which wage has been paid.
Labor Rate Variance
Actual Hourly Rate (AHR)
$12.50
Per Hour
Standard Hourly Rate (SHR)
$15.00
Per Hour
Variance or Difference in Rate
$2.50
Per Hour
x Actual Labor Hours worked (21*150)
3150
Hours
Labor Rate Variance
$7,875
Favorable
Labor Quantity Variance
Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.
Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production
3500
Units
x Allowed Standard Hours Per Unit
0.7
hours
Total Standard Hours Allowed for actual production (SHAP)
2450
hours
Actual Labor Hours Worked (AH)
3150
hours
Variance or Difference in Hours
700
hours
x Standard Hourly Rate (SHR)
$15.00
per hour
Labor Efficiency Variance
$10,500
Unfavorable
Recommendation
Total Labor variance = Labor Rate Variance $7,875 F + Labor Efficiency Variance $10,500 UF = $2,625 Unfavorable
Since overall labor variance is unfavorable, It is not recommended to continue new labor mix.
Hence the answer is NO
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts.
Direct Material Price Variance
Actual Price ($223,125 / 12,500)
$17.85
per pound
Standard Price
$19.00
per pound
Variance or Difference in Price
$1.15
per pound
x Actual Quantity PURCHASED
12500
Pounds
Material Price Variance
$14,375
Favorable
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