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, caled Fludex s prepared using an elaborate distling process. The company has developed standard costs for one unit of Fludex, as follows or Rato Cost Direct matenals Direct labor Variable manufacturing overhead 2 40 ounces 080 hours 0.80 hours $21.00 per ounce $15.00 per hour $ 50.40 12.00 2.80 $ 3 50 per hour $ 65.20 During November, the following activity was rocorded relaive to production of Fludox a Materials purchased, 13,500 ounces at a cost of $266 625 b There was no beginning inventory of materials; however, at the ond of the month, 4,200 ounces af c The company employs 24 lab technicians to work on the production of Fludex. During November, they d. Variable material remained in ending inventory worked an average of 140 hours at an average rate of $1450 per hour. acturing overhead is assigned to Fludex on the basis of dract labor-hours. Variable manufacturing overhead costs duning November fotaled $6,800 e During November, 3,800 good units of Fludex were produced Required: 1. For direct matorials a. Compute the price and quantty variances. (input all amounts as posiltive values. Indicate thie effect of each variance by selecting-r·for tavorable,V for unarorabie, and hone, ir ne effect fie, zero variance). Materials price variance Materials quansty variance b. The matenials were purchased from a new supplier who is anxious to enter into a long-torm purchase contract Would you recommend that the company sign the contract? O Yes O No 2. For direct labor: a Compute the rate and eficiency variances. (input all amounts as positive valucdicate the for no effect of each variance by selecting "F for favorable, "U" for unfavorable, and effect (ie, zero variance)) Labor tate variance Labor efficiency variance

Explanation / Answer

Actual price of materials per ounce = $266,625 / 13,500

= $19.75.

Actual quantity required to make one unit of fludex = Quantity of material used / No. of units produced

= (13,500-4200) / 3600

= 9300 / 3600

= 2.583 ounces.

Actual overhead rate per hour = $6800 / (24*140)

= $2.02

1.

a. Material Price Variance = Standard Price for actual quantity used - Actual price for actual quantity used

= (21 * 9300) - (19.75 * 9300)

= $11,625 (Favourable)

Material Quanntity Variance = (Standard quantity * Actual price) - (Actual quantity * Actual price)

= (3600 * 2.40 * 19.75) - (9300 * 19.75)

= 13,035 (Unfavourable) (or) -13,035.

b. Yes, it is better for the company to sign the contract with the new supplier, since the actual price estimated per ounce is less than the standard price per ounce.

2.

a. Labour Rate Variance = (Actual time * Standard rate per hour) - (Actual time * Actual rate per hour)

= (140 * 24 * 15) - (140 * 24 * 14.50)

= 1680 (Favourable)

Labour Efficiency Variance = Standard labour cost of actual output - Actual labour cost

= (3600 * 0.80 * 15) - (24 * 140 * 14.50)

= 5520 (Unfavourable) (or) -5520.

b. No, the labour efficiency has decreased and resulted in increase of total labour cost. Hence, it is not recommendable to continue the new labour mix.

3.

Variable Overhead Rate Variance = (Actual time * Standard rate per hour) - (Actual time * Actual rate per hour)

= (140 * 24 * 3.50) - (140 * 24 * 2.02)

= 4972.80 (Favourable)

Variable Overhead Efficiency Variance = Standard overheads for acutal production - Actual overheads incurred

= (3600 * 0.80 * 3.50) - 6800

= 3280 (Favourable).

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