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Michiana Company's Benton Harbor Plant produces precast ingots for industrial use. Angelo Lorenzo, who was recently appointed general manager of the Benton Harbor Plant, has just been handed the plant's contribution format income statement for October. The statement is shown below:


 Budgeted Actual
Sales (8,000 ingots) $ 240,000 $ 240,000





Variable expenses:



Variable cost of goods sold*
94,000
112,470
Variable selling expenses
10,000
10,000





Total variable expenses
104,000
122,470





Contribution margin
136,000
117,530





Fixed expenses:



Manufacturing overhead
55,000
55,000
Selling and administrative
70,000
70,000





Total fixed expenses
125,000
125,000





Net operating income (loss) $ 11,000 $ (7,470)






*Contains direct materials, direct labor, and variable manufacturing overhead.

Mr. Lorenzo 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." 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 $ 2.50 per pound $ 8.75
Direct labor 0.4 hours $ 6.50 per hour
2.60
Variable manufacturing overhead 0.2 hours* $ 2.00 per hour
0.40






Total standard variable cost


$ 11.75







*Based on machine-hours.
During October the plant produced 8,000 ingots and incurred the following costs:
a.

Purchased 33,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month.
b.

Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c. Worked 3,800 direct labor-hours at a cost of $6.20 per hour.
d.

Incurred a total variable manufacturing overhead cost of $4,560 for the month. A total of 1,900 machine-hours was recorded.
It is the company's policy to close all variances to cost of goods sold on a monthly basis.
Required:
1.

Assume that the company recognizes price variances when materials are purchased. 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)FNoneU
Materials quantity variance $ (Click to select)NoneUF

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)NoneUF
Labor efficiency variance $ (Click to select)UNoneF

c.

Variable overhead 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.)



Variable overhead rate variance $ (Click to select)NoneFU
Variable overhead efficiency variance $ (Click to select)NoneUF

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M9954119

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