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 plant%u2019scontribution format income statement for October. The statement isshown below:
Budgeted Actual Sales (3,000 ingots) $ 179,000 $ 179,000
Variable expenses: Variable cost of goods sold* 33,390 44,540 Variable selling expenses 11,000 11,000
Total variable expenses 44,390 55,540
Contribution margin 134,610 123,460
Fixed expenses: Manufacturing overhead 50,000 50,000 Selling and administrative 75,000 75,000
Total fixed expenses 125,000 125,000
Net operating income (loss) $ 9,610 $ (1,540)
*Contains direct materials, direct labor, and variablemanufacturing overhead.
Mr. Santiago was shocked to see theloss 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:
Standard Quantity or Hours Standard Price
or Rate Standard Cost Direct materials 3.6 pounds $ 2.00 per pound $ 7.20 Direct labor 0.5 hours $ 6.60 per hour 3.30 Variable manufacturing overhead 0.3 hours* $ 2.10 per hour 0.63
Total standard variable cost $ 11.13
*Based on machine-hours.
During October the plant produced 3,000 ingots and incurred thefollowing costs:
a. Purchased 15,800 pounds of materials at a cost of $2.45 per pound.There were no raw materials in inventory at the beginning of themonth.
b. Used 10,600 pounds of materials in production. (Finished goods andwork in process inventories are insignificant and can beignored.)
c. Worked 2,100 direct labor-hours at a cost of $6.30 per hour. d. Incurred a total variable manufacturing overhead cost of $3,000 forthe month. A total of 1,200 machine-hours was recorded.
It is the company%u2019s policy to close all variances to cost ofgoods sold on a monthly basis.
Required:
1. Compute the following variances for October:
a. Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank - becertain to enter "0" wherever required. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance). Omit the "$" sign inyour response.)
Materials price variance $ (Click to select)FNoneU Materials quantity variance $ (Click to select)UFNone
b. Direct labor rate and efficiency variances. (Input all amounts as positive values. Leave no cells blank - becertain to 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). Omit the "$" sign inyour response.)
Labor rate variance $ (Click to select)NoneUF Labor efficiency variance $ (Click to select)UFNone
c. Variable overhead rate and efficiency variances. (Input all amounts as positive values. Do not round yourintermediate calculations. 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). Omit the "$" sign in yourresponse.)
Variable overhead rate variance $ (Click to select)UFNone Variable overhead efficiency variance $ (Click to select)UFNone
2a. Summarize the variances that you computed in (1) above by showingthe net overall favorable or unfavorable variance for October.(Input the amount as a positive value. Leave no cells blank - becertain to 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). Omit the "$" sign inyour response.)
Net variance $ (Click to select)NoneFU
3. Pick out the two most significant variances that you computed in(1) above. (Youmay select more than one answer. Single click the box with thequestion mark to produce a check mark for a correct answer anddouble click the box with the question mark to empty the box for awrong answer.)
Materials price variance Labor efficiency variance Variable overhead efficiency variance Labor rate variance Variable overhead rate variance Materials quantity variance
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 plant%u2019scontribution format income statement for October. The statement isshown below: |
Budgeted | Actual | |||
Sales (3,000 ingots) | $ | 179,000 | $ | 179,000 |
Variable expenses: | ||||
Variable cost of goods sold* | 33,390 | 44,540 | ||
Variable selling expenses | 11,000 | 11,000 | ||
Total variable expenses | 44,390 | 55,540 | ||
Contribution margin | 134,610 | 123,460 | ||
Fixed expenses: | ||||
Manufacturing overhead | 50,000 | 50,000 | ||
Selling and administrative | 75,000 | 75,000 | ||
Total fixed expenses | 125,000 | 125,000 | ||
Net operating income (loss) | $ | 9,610 | $ | (1,540) |
| | | | |
*Contains direct materials, direct labor, and variablemanufacturing overhead. |
Mr. Santiago was shocked to see theloss 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: |
Standard Quantity or Hours | Standard Price or Rate | Standard Cost | |||
Direct materials | 3.6 pounds | $ | 2.00 per pound | $ | 7.20 |
Direct labor | 0.5 hours | $ | 6.60 per hour | 3.30 | |
Variable manufacturing overhead | 0.3 hours* | $ | 2.10 per hour | 0.63 | |
Total standard variable cost | $ | 11.13 | |||
| | ||||
*Based on machine-hours. |
During October the plant produced 3,000 ingots and incurred thefollowing costs: |
a. | Purchased 15,800 pounds of materials at a cost of $2.45 per pound.There were no raw materials in inventory at the beginning of themonth. |
b. | Used 10,600 pounds of materials in production. (Finished goods andwork in process inventories are insignificant and can beignored.) |
c. | Worked 2,100 direct labor-hours at a cost of $6.30 per hour. |
d. | Incurred a total variable manufacturing overhead cost of $3,000 forthe month. A total of 1,200 machine-hours was recorded. |
It is the company%u2019s policy to close all variances to cost ofgoods sold on a monthly basis. |
Required: |
1. | Compute the following variances for October: |
a. | Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank - becertain to enter "0" wherever required. Indicate the effect of eachvariance by selecting "F" for favorable, "U" for unfavorable, and"None" for no effect (i.e., zero variance). Omit the "$" sign inyour response.) |
Materials price variance | $ | (Click to select)FNoneU |
Materials quantity variance | $ | (Click to select)UFNone |
b. | Direct labor rate and efficiency variances. (Input all amounts as positive values. Leave no cells blank - becertain to 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). Omit the "$" sign inyour response.) |
Labor rate variance | $ | (Click to select)NoneUF |
Labor efficiency variance | $ | (Click to select)UFNone |
c. | Variable overhead rate and efficiency variances. (Input all amounts as positive values. Do not round yourintermediate calculations. 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). Omit the "$" sign in yourresponse.) |
Variable overhead rate variance | $ | (Click to select)UFNone |
Variable overhead efficiency variance | $ | (Click to select)UFNone |
2a. | Summarize the variances that you computed in (1) above by showingthe net overall favorable or unfavorable variance for October.(Input the amount as a positive value. Leave no cells blank - becertain to 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). Omit the "$" sign inyour response.) |
Net variance | $ | (Click to select)NoneFU |
3. | Pick out the two most significant variances that you computed in(1) above. (Youmay select more than one answer. Single click the box with thequestion mark to produce a check mark for a correct answer anddouble click the box with the question mark to empty the box for awrong answer.) | ||||||||||||
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