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 Standard Quantity Standard Price Standard or Hours or Rate $22.00 per ounce $16.00 per hour $ 2.00 per hour Cost Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit 2.50 ounces 0.90 hours 0.90 hours $55.00 14.40 1.80 $71.20 During November, the following activity was recorded related to the production of Fludex a. Materials purchased, 14,000 ounces at a cost of $289,800 b. There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory C. The company employs 26 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 $15.00 per hour d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000 e. During November, the company produced 3,900 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?

Explanation / Answer

a) Material price variance = (22*14000-289800) = 18200 F

Material quantity variance = (3900*2.5-9950)*22 = 4400 U

b) For material company should sign the contract

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