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 or
Rate
|
Standard
Cost
|
|
Direct materials
|
1.7 ounces
|
$6.20 per ounce
|
$10.54
|
|
Direct labor
|
.8 hours
|
$12.40 per hour
|
9.92
|
|
Variable manufacturing overhead
|
.80 hours
|
$2.70 per hour
|
2.16
|
|
|
|
$22.62
|
During November, the following activity was recorded relative to production of Fludex:
a. Materials purchased, 11,350 ounces at a cost of $68,100.
b. There was no beginning inventory of materials; however, at the end of the month, 1,900 ounces of material remained in ending inventory.
c. The company employs 40 lab technicians to work on the production of Fludex. During November, they worked an average of 80.00 hours at an average rate of $12.90 per hour.
d. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $7,680.
e. During November, 4,500 good units of Fludex were produced.
The company's management is anxious to determine the efficiency of the Fludex production activities.
Requirement 1: For direct materials used in the production of Fludex:
(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?
Requirement 2: For direct labor employed in the production of Fludex:
(a) Compute the rate and efficiency variances.