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 or Hours Standard Price or Rate Standard Cost Direct materials 2.50 ounces $ 22.00 per ounce $ 55.00 Direct labor 0.90 hours $ 16.00 per hour 14.40 Variable manufacturing overhead 0.90 hours $ 2.00 per hour 1.80 Total standard cost per unit $ 71.20 During November, the following activity was recorded related to the production of Fludex: Materials purchased, 14,000 ounces at a cost of $289,800. There was no beginning inventory of materials; however, at the end of the month, 4,050 ounces of material remained in ending inventory. The company employs 26 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 $15.00 per hour. Variable manufacturing overhead is assigned to Fludex on the basis of direct labor-hours. Variable manufacturing overhead costs during November totaled $5,000. During November, the company produced 3,900 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

Answer 1

Answer and Explanation:

a. The computation is shown below:

Material price variance

= Actual Quantity × (Standard Price - Actual Price)

= 14,000 × ($22 - $289,800 ÷ 14,000)

= 14,000 × ($22 - $20.70)

= 14,000 × $1.30

= $18,200 favorable

Material quantity variance

= Standard Price × (Standard Quantity - Actual Quantity)

= $22 × (3,900 units × 2.5 - 14,000 ounces - 4,050 ounces)

= $22 × (9,750 - 9,950)

= $22 × 200

= $4,400 unfavorable

b. Yes the contract should be signed as it is the actual price i.e $20.70 is less than the standard price $22