Problem 8-18A Comprehensive Variance Analysis [LO4, LO5,LO6]
Portland Company's Ironton Plant produces precast ingots forindustrial use. Carlos Santiago, who was recently appointed generalmanager of the Ironton Plant, has just been handed the plantâscontribution format income statement for October. The statement isshown below:
Budgeted Actual Sales (4,000 ingots) $ 210,000 $ 210,000 Variable expenses: Variable cost of goods sold* 50,680 63,710 Variable selling expenses 12,000 12,000 Total variable expenses 62,680 75,710 Contribution margin 147,320 134,290 Fixed expenses: Manufacturing overhead 61,000 61,000 Selling and administrative 76,000 76,000 Total fixed expenses 137,000 137,000 Netoperating income (loss) $ 10,320 $ (2,710)
*Contains directmaterials, direct labor, and variable manufacturing overhead.
Mr. Santiago was shocked to seethe loss for the month, particularly because sales were exactly asbudgeted. He stated, "I sure hope the plant has a standard costsystem in operation. If it doesn't, I won't have the slightest ideaof where to start looking for the problem."
The plant does use a standard costsystem, with the following standard variable cost per ingot:
StandardQuantity or Hours Standard Price
or Rate Standard Cost Direct materials 3.7 pounds $ 2.10 perpound $ 7.77 Direct labor 0.6 hours $ 6.70 perhour 4.02 Variable manufacturing overhead 0.4 hours* $ 2.20 perhour 0.88 Total standard variable cost $ 12.67
*Based onmachine-hours.
During Octoberthe plant produced 4,000 ingots and incurred the followingcosts:
a. Purchased 19,800 pounds of materials at a cost of $2.55 perpound. There were no raw materials in inventory at the beginning ofthe month.
b. Used 14,600 pounds of materials in production. (Finished goodsand work in process inventories are insignificant and can beignored.)
c. Worked 3,000direct labor-hours at a cost of $6.40 per hour. d. Incurred total variable manufacturing overhead cost of $4,940for the month. A total of 1,900 machine-hours was recorded.
It is thecompanyâs policy to close all variances to cost of goods sold on amonthly basis.
Required:
1. Compute thefollowing variances for October:
a. Direct materials price and quantity variances. (Inputall amounts as positive values. Leave no cells blank - be certainto enter "0" wherever required. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance.)
Materials price variance $ (Click to select)FUNone Materials quantity variance $ (Click to select)NoneFU
b. Direct labor rate and efficiency variances. (Input allamounts as positive values. Leave no cells blank - be certain toenter "0" wherever required. Indicate the effect of each varianceby selecting "F" for favorable, "U" for unfavorable, and "None" forno effect (i.e., zero variance.)
Labor rate variance $ (Click to select)NoneUF Labor efficiency variance $ (Click to select)FNoneU
c. Variable overhead rate and efficiency variances. (Inputall amounts as positive values. Do not round your intermediatecalculations. Leave no cells blank - be certain to enter "0"wherever required. Indicate the effect of each variance byselecting "F" for favorable, "U" for unfavorable, and "None" for noeffect (i.e., zero variance.)
Variable overhead rate variance $ (Click to select)UFNone Variable overhead efficiency variance $ (Click to select)UNoneF
2a. Summarize the variances that you computed in (1) above byshowing the net overall favorable or unfavorable variance forOctober. (Input the amount as a positive value. Leave nocells blank - be certain to enter "0" wherever required. Indicatethe effect of variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance.)
Netvariance $ (Click to select)FNoneU
3. Pick out the two most significant variances that you computed in(1) above. (You may select more than oneanswer. Single click the box with the question mark to produce acheck mark for a correct answer and double click the box with thequestion mark to empty the box for a wronganswer.)
Materials price variance Labor efficiency variance Variable overhead efficiency variance Labor rate variance Variable overhead rate variance Materials quantity variance
Problem 8-18A Comprehensive Variance Analysis [LO4, LO5,LO6]
Portland Company's Ironton Plant produces precast ingots forindustrial use. Carlos Santiago, who was recently appointed generalmanager of the Ironton Plant, has just been handed the plantâscontribution format income statement for October. The statement isshown below: |
Budgeted | Actual | |||
Sales (4,000 ingots) | $ | 210,000 | $ | 210,000 |
Variable expenses: | ||||
Variable cost of goods sold* | 50,680 | 63,710 | ||
Variable selling expenses | 12,000 | 12,000 | ||
Total variable expenses | 62,680 | 75,710 | ||
Contribution margin | 147,320 | 134,290 | ||
Fixed expenses: | ||||
Manufacturing overhead | 61,000 | 61,000 | ||
Selling and administrative | 76,000 | 76,000 | ||
Total fixed expenses | 137,000 | 137,000 | ||
Netoperating income (loss) | $ | 10,320 | $ | (2,710) |
*Contains directmaterials, direct labor, and variable manufacturing overhead. |
Mr. Santiago was shocked to seethe loss for the month, particularly because sales were exactly asbudgeted. He stated, "I sure hope the plant has a standard costsystem in operation. If it doesn't, I won't have the slightest ideaof where to start looking for the problem." |
The plant does use a standard costsystem, with the following standard variable cost per ingot: |
StandardQuantity or Hours | Standard Price or Rate | Standard Cost | |||
Direct materials | 3.7 pounds | $ | 2.10 perpound | $ | 7.77 |
Direct labor | 0.6 hours | $ | 6.70 perhour | 4.02 | |
Variable manufacturing overhead | 0.4 hours* | $ | 2.20 perhour | 0.88 | |
Total standard variable cost | $ | 12.67 | |||
*Based onmachine-hours. |
During Octoberthe plant produced 4,000 ingots and incurred the followingcosts: |
a. | Purchased 19,800 pounds of materials at a cost of $2.55 perpound. There were no raw materials in inventory at the beginning ofthe month. |
b. | Used 14,600 pounds of materials in production. (Finished goodsand work in process inventories are insignificant and can beignored.) |
c. | Worked 3,000direct labor-hours at a cost of $6.40 per hour. |
d. | Incurred total variable manufacturing overhead cost of $4,940for the month. A total of 1,900 machine-hours was recorded. |
It is thecompanyâs policy to close all variances to cost of goods sold on amonthly basis. |
Required: |
1. | Compute thefollowing variances for October: |
a. | Direct materials price and quantity variances. (Inputall amounts as positive values. Leave no cells blank - be certainto enter "0" wherever required. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance.) |
Materials price variance | $ | (Click to select)FUNone |
Materials quantity variance | $ | (Click to select)NoneFU |
b. | Direct labor rate and efficiency variances. (Input allamounts as positive values. Leave no cells blank - be certain toenter "0" wherever required. Indicate the effect of each varianceby selecting "F" for favorable, "U" for unfavorable, and "None" forno effect (i.e., zero variance.) |
Labor rate variance | $ | (Click to select)NoneUF |
Labor efficiency variance | $ | (Click to select)FNoneU |
c. | Variable overhead rate and efficiency variances. (Inputall amounts as positive values. Do not round your intermediatecalculations. Leave no cells blank - be certain to enter "0"wherever required. Indicate the effect of each variance byselecting "F" for favorable, "U" for unfavorable, and "None" for noeffect (i.e., zero variance.) |
Variable overhead rate variance | $ | (Click to select)UFNone |
Variable overhead efficiency variance | $ | (Click to select)UNoneF |
2a. | Summarize the variances that you computed in (1) above byshowing the net overall favorable or unfavorable variance forOctober. (Input the amount as a positive value. Leave nocells blank - be certain to enter "0" wherever required. Indicatethe effect of variance by selecting "F" for favorable, "U" forunfavorable, and "None" for no effect (i.e., zerovariance.) |
Netvariance | $ | (Click to select)FNoneU |
3. | Pick out the two most significant variances that you computed in(1) above. (You may select more than oneanswer. Single click the box with the question mark to produce acheck mark for a correct answer and double click the box with thequestion mark to empty the box for a wronganswer.) | ||||||||||||
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