ABC 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 Qty Standard Price or Rate Standard Cost
Direct materials 2.5 ounces $20.00 per ounce $50.00
Direct labor 1.4 hours $12.50 per hour $17.50
Variable manufacturing overhead 1.4 hours $3.50 per hour $ 4.90
& nbsp; $72.40
During November the following activity was recorded by the company relative to production of Fludes:
a. Materials purchased, 12000 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 inventoy.
c. The company employs 35 lab technicians to work on the production of Fludex. During November, each worked an average of 160 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 $18,200.
e. During November, 3,750 good units of Fludex were produced.
The company’s management is anxious to determine the efficiency of the Fluxed production activities.
Required:
1. For direct materials used in the production of Fludex: compute the price and quantity variances.
2. For direct labor employed in the production of Fludex: compute the rate and efficiency variances.
3. Compute the variable overhead spending and efficiency variances
- 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) | |||||||||||||
| 12,000 ounces × $20.00 per ounce |
9,375 ounces* × $20.00 per ounce |
||||||||||||||
| $225,000 | = $240,000 | = $187,500 | |||||||||||||
| | | | |||||||||||||
| Price Variance,
$15,000 F |
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| 9,500 ounces × $20.00 per ounce = $190,000 |
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| | |||||||||||||||
| Quantity Variance, $2,500 U | |||||||||||||||
*3,750 units × 2.5 ounces per unit = 9,375 ounces
Alternatively:
Materials price variance = AQ (AP – SP)
12,000 ounces ($18.75 per ounce* – $20.00 per ounce) = $15,000 F
*$225,000 ÷ 12,000 ounces = $18.75 per ounce
Materials quantity variance = SP (AQ – SQ)
$20.00 per ounce (9,500 ounces – 9,375 ounces) = $2,500 U
- Yes, the contract probably should be signed. The new price of $18.75 per ounce is substantially lower than the old price of $20.00 per ounce, resulting in a favorable price variance of $15,000 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.
- 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 |
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| (AH × AR) | (AH × SR) | (SH × SR) | |||||||||||||
| 5,600 hours* × $12.00 per hour |
5,600 hours × $12.50 per hour |
5,250 hours** × $12.50 per hour |
|||||||||||||
| = $67,200 | = $70,000 | = $65,625 | |||||||||||||
| | | | |||||||||||||
| Rate Variance,
$2,800 F |
Efficiency Variance,
$4,375 U |
||||||||||||||
| Total Variance, $1,575 U |
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| * | 35 technicians × 160 hours per technician = 5,600 hours |
| ** | 3,750 units × 1.4 hours per technician = 5,250 hrs |
Alternatively:
Labor rate variance = AH (AR – SR)
5,600 hours ($12.00 per hour – $12.50 per hour) = $2,800 F
Labor efficiency variance = SR (AH – SH)
$12.50 per hour (5,600 hours – 5,250 hours) = $4,375 U
- No, the new labor mix probably should not be continued. Although it decreases the average hourly labor cost from $12.50 to $12.00, thereby causing a $2,800 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) | |||||||||||||
| 5,600 hours* ×
$3.50 per hour |
5,250 hours** ×
$3.50 per hour |
||||||||||||||
| $18,200 | = $19,600 | = $18,375 | |||||||||||||
| | | | |||||||||||||
| Spending Variance,
$1,400 F |
Efficiency Variance,
$1,225 U |
||||||||||||||
| Total Variance, $175 F |
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* Based on direct labor hours:
35 technicians × 160 hours per technician = 5,600 hours
** 3,750 units × 1.4 hours per unit = 5,250 hours
Alternatively:
Variable overhead spending variance = AH (AR – SR)
5,600 hours ($3.25 per hour* – $3.50 per hour) = $1,400 F
*$18,200 ÷ 5,600 hours = $3.25 per hour
Variable overhead efficiency variance = SR (AH – SH)
$3.50 per hour (5,600 hours – 5,250 hours) = $1,225 U
Both the labor efficiency variance and the variable overhead efficiency variance are computed by comparing actual labor-hours to standard labor-hours. Thus, if the labor efficiency variance is unfavorable, then the variable overhead efficiency variance will be unfavorable as well.
