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 or Rate | Standard Cost | ||||
Direct materials | 1.20 ounces | $ | 7.00 | per ounce | $ | 8.40 |
Direct labor | 0.60 hours | $ | 14.00 | per hour | 8.40 | |
Variable manufacturing overhead | 0.60 hours | $ | 2.50 | per hour | 1.50 | |
| | |||||
$ | 18.30 | |||||
| | |||||
|
During November, the following activity was recorded relative to production of Fludex: |
a. | Materials purchased, 7,600 ounces at a cost of $50,920. | |
b. |
There
was no beginning inventory of materials; however, at the end of the
month, 2,950 ounces of material remained in ending inventory.
| |
c. |
The
company employs 10 lab technicians to work on the production of Fludex.
During November, they worked an average of 190 hours at an average rate
of $14.50 per hour.
| |
d. |
Variable
manufacturing overhead is assigned to Fludex on the basis of direct
labor-hours. Variable manufacturing overhead costs during November
totaled $4,200.
| |
e. | During November, 3,300 good units of Fludex were produced . |
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? |
Yes |
2. | For direct labor: |
a. |
Compute the rate and efficiency variances.
|
b. |
In
the past, the 10 technicians employed in the production of Fludex
consisted of 4 senior technicians and 6 assistants. During November, the
company experimented with fewer senior technicians and more assistants
in order to save costs. Would you recommend that the new labor mix be
continued?
|
No |
3. |
Compute the variable overhead rate and efficiency variances.
|
Explanation:
1.
a.
b.
2.
a.
b.
3.
a.
In
the solution below, the materials price variance is computed on the
entire amount of materials purchased whereas the materials quantity
variance is computed only on the amount of materials used in production:
|
Actual Quantity of Input, at Actual Price | Actual Quantity of Input, at Standard Price | Standard Quantity Allowed for Output, at Standard Price | |||||
(AQ × AP)
|
(AQ × SP)
|
(SQ × SP)
| |||||
4,650 ounces × $7.00 per ounce | 3,960 ounces* × $7.00 per ounce | ||||||
$50,920 | = $32,550 | = $27,720 | |||||
Price variance, $2,280 F
| | ||||||
7,600 ounces × $7.00 per ounce | | ||||||
= $53,200 | | ||||||
|
Quantity Variance,
$4,830 U |
*3,300 units × 1.2 ounces per unit = 3,960 ounces |
Materials price variance: |
Actual Price = $50,920 ÷ 7,600 ounces = $6.70 per ounce |
b.
Yes,
the contract probably should be signed. The new price of $6.70 per
ounce is substantially lower than the old price of $7.00 per ounce,
resulting in a favorable price variance of $2280 for the month.
Moreover, the material from the new supplier appears to cause little or
no problem in production as shown by the small materials quantity
variance for the month.
|
2.
a.
Actual Hours of Input, at the Actual Rate | Actual Hours of Input, at the Standard Rate | Standard Hours Allowed for Output, at the Standard Rate | |||||
(AH × AR)
|
(AH × SR)
|
(SH × SR)
| |||||
1,900 hours* × $14.50 per hour | 1,900 hours × $14.00 per hour | 1,980 hours** × $14.00 per hour | |||||
= $27,550 | = $26,600 | = $27,720 | |||||
Rate Variance,
$950 F |
Efficiency Variance,
$1,120 U | ||||||
|
Spending variance, $170 U
| |
*10 technicians × 190 hours per technician = 1,900 hours |
**3,300 units × 0.60 hours per technician = 1,980 hours |
b.
No,
the new labor mix probably should not be continued. Although it
decreases the average hourly labor cost from $14.50 to $14.00, thereby
causing a $950 favorable labor rate variance, this savings is more than
offset by a large unfavorable labor efficiency variance for the month.
Thus, the new labor mix increases overall labor costs.
|
3.
Actual Hours of Input, at the Actual Rate | Actual Hours of Input, at the Standard Rate | Standard Hours Allowed for Output, at the Standard Rate | |||||
(AH × AR)
|
(AH × SR)
|
(SH × SR)
| |||||
1,900 hours* × $2.50 per hour | 1,980 hours** × $2.50 per hour | ||||||
$4,200 | = $4,750 | = $4,950 | |||||
Rate Variance,
$550 F |
Efficiency Variance,
$200 U | ||||||
|
Spending variance, $750 F
| |
* Based on direct labor hours: |
10 technicians × 190 hours per technician = 1,900 hours |
**3,300 units × 0.60 hours per unit = 1,980 hours |
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