Portland Company\'s Ironton Plant produces precast ingots for industrial use. Ca
ID: 2449894 • 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: Budgeted Actual $ 265,000 $ 265,000 Sales (8,000 ingots) Variable expenses Variable cost of goods sold* Variable selling expenses 88,960 106,490 16,000 16,000 104,960 122,490 160,040 142,510 Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Selling and administrative 65,000 65,000 80,000 80,000 145,000 145,000 S 15,040 $ (2,490) Total fixed expenses Net operating income (loss) Contains direct materials, direct labor, and variable manufacturing overhead Mr. Santiago was shocked to see the loss for the month, particularly because sales were exactly as budgeted. He stated, " 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 Qua Standard Cost $ 7.50 or Rate $2.50 per pound $7.10 per hour $2.60 per hour or Hours Direct materials Direct labor Variable manufacturing overhead 3.0 pounds 0.4 hours 2.84 0.78 0.3 hours* Total standard variable cost 11.12 Based on machine-hours. During October the plant produced 8,000 ingots and incurred the following costs: a. 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. b. Used 23,800 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 $6.80 per hour d. Incurred a total variable manufacturing overhead cost of $8,100 for the month. A total of 2,700 machine- hours was recorded It is the company's policy to close all variances to cost of goods sold on a monthly basisExplanation / Answer
1. a.
*8,000 ingots × 3.0 pounds per ingot = 24000 pounds
Materials quantity variance = SP (AQ – SQ)
= $2.50 per pound (23800 pounds – 24,000 pounds)
= $500 F
Materials price variance = AQ (AP – SP)
= 29000 pounds ($2.95 per pound – $2.50 per pound)
= $13050 U
1. b.
*8,000 ingots × 0.4 hour per ingot = 3200 hours
Labor efficiency variance = SR (AH – SH)
= $7.10 per hour (3800 hours – 3200 hours)
= $4260 U
Labor rate variance = AH (AR – SR)
= 3,800 hours ($6.80 per hour – $7.10 per hour)
= $1140 F
*8,000 ingots × 0.3 hours per ingot = 2400 hours
Variable overhead efficiency variance = SR (AH – SH)
= $2.6 per hour (2700 hours – 2400 hours)
= $780 U
Variable overhead rate variance = AH (AR – SR)
= 3800 hours ($3.0 per hour* – $2.60 per hour)
= $1520 U
*$8100 ÷ 2700 hours = $3.00 per hour
2)
Summary of variances:
Material quantity variance...................
500
F
Material price variance........................
13050
U
Labor efficiency variance.....................
4260
U
Labor rate variance.............................
1140
F
Variable overhead efficiency variance....
780
U
Variable overhead rate variance...........
1520
U
Net variance......................................
$17970
U
Budgeted cost of goods sold at $11.12 per ingot (11.12*8000)
$88960
(+) net unfavorable variance...........................
17970
Actual cost of goods sold.................................
$106930
Budgeted net operating income.......................
$15,000
Deduct the net unfavorable variance added to cost of goods sold for the month...................
17970
Net operating loss..........................................
$(2970)
3) i) materials price variance
ii) labor efficiency variance
Material quantity variance...................
500
F
Material price variance........................
13050
U
Labor efficiency variance.....................
4260
U
Labor rate variance.............................
1140
F
Variable overhead efficiency variance....
780
U
Variable overhead rate variance...........
1520
U
Net variance......................................
$17970
U