Portland Company’s Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who was recently appointed general manager of the Ironton Plant, has just been handed the plant s contribution format income statement for October. The statement is shown below:
|
|
Budgeted |
Actual |
Sales (7,000 ingots) |
$ |
265,000 |
$ |
265,000 |
|
|
|
|
|
Variable expenses: |
|
|
|
|
Variable cost of goods sold* |
|
79,240 |
|
97,525 |
Variable selling expenses |
|
19,000 |
|
19,000 |
|
|
|
|
|
Total variable expenses |
|
98,240 |
|
116,525 |
|
|
|
|
|
Contribution margin |
|
166,760 |
|
148,475 |
|
|
|
|
|
Fixed expenses: |
|
|
|
|
Manufacturing overhead |
|
67,000 |
|
67,000 |
Selling and administrative |
|
85,000 |
|
85,000 |
|
|
|
|
|
Total fixed expenses |
|
152,000 |
|
152,000 |
|
|
|
|
|
Net operating income (loss) |
$ |
14,760 |
$ |
(3,525) |
|
|
|
|
|
|
*Contains direct materials, direct labor, and variable manufacturing overhead. |
Mr. Santiago was shocked to see the loss for the month, particularly because sales were exactly as budgeted. He stated, “I sure hope the plant has a standard cost system in operation. If it doesn’t, I won’t have the slightest idea of where to start looking for the problem.”
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The plant does use a standard cost system, with the following standard variable cost per ingot:
|
|
Standard Quantity or Hours |
Standard Price or Rate |
Standard Cost |
Direct materials |
3.5 pounds |
$ |
2.10 per pound |
$ |
7.35 |
Direct labor |
0.4 hours |
$ |
7.60 per hour |
|
3.04 |
Variable manufacturing overhead |
0.3 hours* |
$ |
3.10 per hour |
|
0.93 |
|
|
|
|
|
|
Total standard variable cost |
|
|
|
$ |
11.32 |
|
|
|
|
|
|
|
During October the plant produced 7,000 ingots and incurred the following costs: |
a. |
Purchased 29,500 pounds of materials at a cost of $2.55 per pound. There were no raw materials in inventory at the beginning of the month.
|
b. |
Used 24,300 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
|
c. |
Worked 3,400 direct labor-hours at a cost of $7.30 per hour. |
d. |
Incurred total variable manufacturing overhead cost of $8,400 for the month. A total of 2,400 machine-hours was recorded.
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It is the company s policy to close all variances to cost of goods sold on a monthly basis. |
1. |
Compute the following variances for October: |
a. |
Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank – be certain to enter “0” wherever required. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance.)
|
|
|
|
Materials price variance |
$ |
(Click to select)UFNone |
Materials quantity variance |
$ |
(Click to select)NoneFU |
|
b. |
Direct labor rate and efficiency variances. (Input all amounts as positive values. Leave no cells blank – be certain to enter “0” wherever required. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance.)
|
|
|
|
Labor rate variance |
$ |
(Click to select)NoneFU |
Labor efficiency variance |
$ |
(Click to select)NoneFU |
|
c. |
Variable overhead rate and efficiency variances. (Input all amounts as positive values. Do not round your intermediate calculations. Leave no cells blank – be certain to enter “0” wherever required. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance.)
|
|
|
|
Variable overhead rate variance |
$ |
(Click to select)FUNone |
Variable overhead efficiency variance |
$ |
(Click to select)FNoneU |
|
2a. |
Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. (Input the amount as a positive value. Leave no cells blank – be certain to enter “0” wherever required. Indicate the effect of variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance.)
|
Net variance |
$ |
(Click to select)UFNone |
3. |
Pick out the two most significant variances that you computed in (1) above. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
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|
|
|
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Materials price variance |
|
Labor efficiency variance |
|
Variable overhead efficiency variance |
|
Labor rate variance |
|
Variable overhead rate variance |
|
Materials quantity variance |
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