Portland Company\'s Ironton Plant produces precast ingots for industrial use. Ca
ID: 2373805 • Letter: P
Question
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:
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."
The plant does use a standard cost system, with the following standard variable cost per ingot:
Purchased 29,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month.
Used 23,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Incurred a total variable manufacturing overhead cost of $8,100 for the month. A total of 2,700 machine-hours was recorded.
Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
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). Omit the "$" sign in your response.)
Variable overhead rate and efficiency variances. (Input all amounts as positive values. Do not round your intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
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 each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
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.)
Budgeted Actual Sales (8,000 ingots) $ 265,000 $ 265,000 Variable expenses: Variable cost of goods sold* 88,960 106,490 Variable selling expenses 16,000 16,000 Total variable expenses 104,960 122,490 Contribution margin 160,040 142,510 Fixed expenses: Manufacturing overhead 65,000 65,000 Selling and administrative 80,000 80,000 Total fixed expenses 145,000 145,000 Net operating income (loss) $ 15,040 $ (2,490)Explanation / Answer
Materials Price Variance (MPV) = (Actual quantity purchased × Actual price) - (Actual quantity purchased × Standard price) ie MPV = (29000*$2.95 - 29000*$2.50) = $13050 = 13050U Materials quantity variance (MQV) = (Actual quantity used × Standard price) - (Standard quantity allowed × Standard Price) ie MQV = (23800*$2.50 - 8000*3.0*$2.50) = -500 = 500F Labor rate variance (LRV) = (Actual hours worked × Actual rate) - (Actual hours worked × Standard rate) ie LRV = (3800*$6.80 - 3800*$7.10) = -1140 = 1140F Labor efficiency variance (LEV) = (Actual hours worked × Standard rate) - (Standard hours allowed × Standard rate) ie LEV = (3800*$7.10 - 8000*0.4*$7.10) = 4260 = 4260U Variable-overhead Rate var (VOH_SV) = actual variable overhead – (Actual Hr × Std Var Rate) VOH_SV = $8100 - (2700*$2.60) = $1080 = 1080U Variable-overhead efficiency variance (VOH_EV) = Std Var Rate(Actual Hrs – Std Hrs) ie VOH_EV = $2.60*(2700- 0.3*8000) =$ 780 = 780U 3. From above table ,we can see that two most Unfavorable variance are a. Materials price variance b. Labor efficiency variance