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Becton Labs, Inc
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
or HoursStandard Price
or RateStandard CostDirect materials2.20ounces$16.00per ounce$35.20Direct labor0.80hours$12.00per hour 9.60Variable manufacturing overhead0.80hours$2.50per hour 2.00Total standard cost per unit $46.80
During November, the following activity was recorded related to the production of Fludex:
- Materials purchased, 11,000 ounces at a cost of $160,600.
- There was no beginning inventory of materials; however, at the end of the month, 3,100 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 150 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 $4,200.
- 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 23 technicians employed in the production of Fludex consisted of 7 senior technicians and 16 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.
Expert Solution
1 a. Computation of Materials price variance:
Materials price variance = AQ * (AP - SP)
= 11,000 ounces * ($14.60 per ounce - $16.00 per ounce)
= $15,400 F
**Actual price = $160,600 / 11,000 ounces = $14.60 per ounce
Materials quantity variance = SP * (AQ - SQ)
= $16.00 per ounce * ( 7,900 ounces - 7,700 ounces)
= 3,200 U
**Actual Quantity (AQ) = 11,000 ounces - 3,100 ounces = 7,900 ounces
**Standard Quantity (SQ) = 3,500 units * 2.20 ounces = 7,700 ounces
b. Yes, the contract should be accepted. The new price of $14.60 per ounce is low as compared to the old price of $16.00 per ounce.
2. a. Computation of Labor rate variance:
Labor rate variance = AH * (AR - SR)
= 3,450 hours* ($11.00 per hour - $12.00 per hour)
= $3,450 F
Labor efficiency variance = SR * (AH - SH)
= $12.00 per hour * (3,450 hours - 2,800 hours)
= $7,800 U
**Actual Hours (AH) = 23 technicians * 150 hours per technician = 3,450 hours
**Standard Hours (SH) = 3,500 units * 0.80 hours per technician = 2,800 hours
b. No, the new labor mix is not feasible hence should not be adopted, as it decreased the average hourly labor cost from $12.00 to $11.00.
3. Computation of variable overhead rate variance and efficiency variance:
Variable overhead rate variance = AH * (AR - SR)
= 3,450 hours ($1.22 per hour - $2.50 per hour)
= $4,425 F
**Actual rate (AR) = $4,200 / 3,450 hours = $1.22 per hour
Variable overhead efficiency variance = SR * (AH - SH)
= $2.50 per hour (3,450 hours - 2,800 hours)
= $1,625 U
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