Portland Company\'s Ironton Plant produces precast ingots for industrial use. Ca
ID: 2374957 • 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%u2019s 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 15,800 pounds of materials at a cost of $2.45 per pound. There were no raw materials in inventory at the beginning of the month.
Used 10,600 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 $3,000 for the month. A total of 1,200 machine-hours was recorded.
Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" 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.)
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%u2019s contribution format income statement for October. The statement is shown below:
Explanation / Answer
Hi,
Please find the answer as follows:
1
a)
Material Quantity Variance = Standard Rate*(Actual Quantity Used - Standard Quantity) = 2*(10600 - 3.6*3000) = 400 (Favorable)
Material Price Variance = Actual Quantity of Material Purchased*(Actual Rate - Standard Rate) = 15800*(2.45 - 2) = 7110 (Unfavorable)
b)
Labor Efficiency Variance = Standard Rate*(Actual Hours - Standard Hours) = 6.6*(2100 - .5*3000) = 3960 (Unfavorable)
Labor Rate Variance = Actual Hours*(Actual Rate - Standard Rate) = 2100*(6.3 - 6.6) = 630 (Favorable)
c)
Variable Overhead Efficiency Variance = Standard Rate*(Actual Hours - Standard Hours) = 2.1*(1200 - .3*3000) = 630 (Unfavorable)
Variable Overhead Rate Variance = Actual Hours*(Actual Rate - Standard Rate) = 1200*(3000/1200 - 2.1) = 480 (Unfavorable)
2a)
3)
Material Price Variance and Labor Efficiency Variance are the two most significant variances.
Answer is 11150 (Unfavorable)