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: During November, the following activity was recorded relative to production of Fludex:
(a) Materials purchased, 12,000 ounces at a cost of $225,000.
(b) There was no beginning inventory of materials; however, at the end of the month, 2,500 ounces of material remained in ending inventory.
(c) The company employs 35 lab technicians to work on the production of Fludex. During November, they worked an average of 160 hours at an average rate of $12 per hour.
(d) Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $18,200.
(e) During November, 3,750 good units of Fludex were produced.The company's management is anxious to determine the efficiency of Fludex production activities.
Required:
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? Explain.
2. For direct labor employed in the production of Fludex:
(a) Compute the rate and efficiency variances.
(b) In the past, the 35 technicians employed in the production of Fludex consisted of 20 senior technicians and 15 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? Explain.
3. Compute the variable overhead rate and efficiency variances. What relation can you see between this efficiency variance and the labor efficiency variance?