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 Stand Direct naterials Direct labor Variable manufacturing overhead Total standard cost per unit 2 20 ounces 0.50 hours 0.50 hours or Rate $25.00 per ounce $15.00 per hour 3.00 per hour $55.00 .50 $64.00 During November, the following activity was recorded related to the production of Fludex a Materials purchased, 12,000 ounces at a cost of $282,000. b. There was no beginning Inventory of materials; however, at the end of the month, 2,750 ounces of material remained in ending C. The company employs 25 lab technicians to work on the production of Fludex. During November, they each worked an average c 110 hours at an average pay 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 $2,400 e. During November, the company produced 4,100 units of Fludex. 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 25 technicians employed in the production of Fludex consisted of 5 senior technicians and 20 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? Prex 2 Next 8 3 4 9

Explanation / Answer

Part 1 – For Direct materials

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 (AP) (282,000 / 12,000)

$23.500

per ounce

Standard Price (SP)

$25.000

per ounce

Variance or Difference in Price

$1.500

per ounce

x Actual Quantity PURCHASED

12000

ounce

Material Price Variance

$18,000

Favorable

Favorable because actual cost paid for material purchase is less than anticipated.

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 used = Total Purchased Quantity 12,000 – Ending Inventory 2750 = 9,250 Ounces

Direct Material Quantity Variance

Standard Quantity Allowed for actual production:

Actual Production/Activity

4100

Units

x Allowed Standard Quantity Per Unit

2.2

ounce

Total Standard Quantity Allowed for actual production (SQAP)

9020

ounce

Actual Quantity USED (AQU)

9250

ounce

Variance or Difference in Quantity (AQU - SQAP)

230

ounce

x Standard Price (SP)

$25.00

per kilogram

Material Quantity Variance

$5,750

Unfavorable

Unfavorable because actual quantity used is higher than standard quantity at standard cost

Recommendation

Overall Material Variance is 18,000 F + 5,750 U = $12,250 F

Since overall material variance is favorable, it is not recommended to enter into a contract with new supplier.

Part 2 – For Labor

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)

$11.50

Per Hour

Standard Hourly Rate (SHR)

$15.00

Per Hour

Variance or Difference in Rate

$3.50

Per Hour

x Actual Labor Hours worked (110 hrs*25)

2750

Hours

Labor Rate Variance

$9,625

Favorable

Favorable Labor Rate Variance because actual hourly rate paid is less than standard hourly rate.

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

4100

Units

x Allowed Standard Hours Per Unit

0.5

hours

Total Standard Hours Allowed for actual production (SHAP)

2050

hours

Actual Labor Hours Worked (AH)

2750

hours

Variance or Difference in Hours (AH - SHAP)

700

hours

x Standard Hourly Rate (SHR)

$15

per hour

Labor Efficiency Variance

$10,500

Unfavorable

Unfavorable Labor Efficiency Variance because the Actual Hours Worked is higher than the allowed standard hours at standard rate

Recommendation

Since overall labor variance is $9625F + $10,500 U = $875 U

It means the efficiency of labor is not upto the mark. It is suggested to try new labor mix in order to reduce the labor cost.

Part 3 --- Variable overhead rate and efficiency variance

Variable Overhead Rate = (AH x AR) – (AH*SR)

= $2400 – (2750*$3)

= $2,400 - $8,250

= $5,850 Favorable

Variable Efficiency Variance

Variable Overhead Efficiency/Quantity Variance

Standard Hours Allowed for actual production:

Actual Production

4,100

Units

x Allowed Standard Hours Per Unit

0.5

hours

Total Standard Hours Allowed for actual production (SHAP)

2050

hours

Actual Direct Labor Hours (AH)

2750

Hours

Variance or Difference in Hours (SHAP - AH)

700

hours

x Standard Hourly Variable Overhead Rate (Refer Note 1)

$3.00

per hour

Variable Overhead Efficiency Variance

$2,100

Unfavorble

Direct Material Price Variance

Actual Price (AP) (282,000 / 12,000)

$23.500

per ounce

Standard Price (SP)

$25.000

per ounce

Variance or Difference in Price

$1.500

per ounce

x Actual Quantity PURCHASED

12000

ounce

Material Price Variance

$18,000

Favorable

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