Answered Essay: Becton Labs, Inc., produces various chemical compounds for industrial use. One compound, called Fludex, is prepared using an elabor

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    2.00 ounces $ 30.00 per ounce $ 60.00
  Direct labor    0.50 hours $ 14.00 per hour 7.00
  Variable manufacturing overhead    0.50 hours $ 3.40 per hour 1.70
$ 68.70
    During November, the following activity was recorded relative to production of Fludex:

 

a. Materials purchased, 10,000 ounces at a cost of $287,000.
b. There was no beginning inventory of materials; however, at the end of the month, 3,000 ounces of material remained in ending inventory.
c. The company employs 20 lab technicians to work on the production of Fludex. During November, they worked an average of 130 hours at an average rate of $12.00 per hour.
d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $4,700.
e. During November, 3,400 good units of Fludex were produced .
Required:
1. For direct materials:
a. Compute the price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e, zero variance).)

 

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
No
2. For direct labor:
a. Compute the rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e, zero variance).)

 

b. In the past, the 20 technicians employed in the production of Fludex consisted of 4 senior technicians and 16 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?
Yes
No
3. Compute the variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e, zero variance).)

 

Expert Answer

 

Standard Cost for 1 Unit:
Quantity Rate Per Unit Amount
  Direct materials 2.00 30 60.00
  Direct labor 0.50 14 7.00
  Variable manufacturing overhead 0.50 3.4 1.70
Total 68.70
Standard Cost for Actual Production:
Quantity Rate Per Unit Amount
  Direct materials 6800 30 204000
  Direct labor 1700 14 23800
  Variable manufacturing overhead 1700 3.4 5780
Total 233580
Actual Data: Production 3400
  Direct materials 7000 28.7 200900 3100
  Direct labor 2600 12 31200 -7400
  Variable manufacturing overhead 2600 1.81 4700 1080
236800
Direct Material Based Questions:
Direct Material Price Variance: (Standard Price – Actual Price)Actual Qty Consumed
(30-28.7)*7000
9100 Favourable
Direct Material Quantity Variance: (Standard Qty – Actual Qty)Standard Price
(6800-7000)*30
-6000 Adverse
Since the Material Price Variance is positive and Favourable, we should enter into contract with Supplier
Direct Labor Based Questions:
Direct Labor Rate Variance: (Standard Rate – Actual Rate)Actual Hours
(14-12)*2600
5200 Favourable
Direct Labor Efficency Variance: (Standard Hours- Actual Hours)Standard Rate
(1700-2600)*14
-12600 Adverse
Overall Labor Variance -7400
Since the Overall Labor Variance is Negative, So this labor mix is not benefitting to Company
It is beneficial as far as rate is concerned but not for Efficency wise.
Variable Cost Based Questions:
Variable Cost Rate Variance: (Standard Rate – Actual Rate)Actual Hours
(3.4-1.81)*2600
4140 Favourable
Variable Cost Efficency Variance: (Standard Hours- Actual Hours)Standard Rate
(1700-2600)*3.4
-3060 Adverse
Overall 1080
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