Portland Company\'s Ironton Plant produces precast ingots for industrial use. Ca
ID: 2462370 • 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 $ 235,000 $235,000 Sales (7,000 ingots) Variable expenses: Variable cost of goods sold* Variable selling expenses 78,540 18,000 96,420 18,000 96,540114,420 138,460 120,580 Total variable expenses Contribution margin Fixed expenses. Manufacturing overhead Selling and administrative 54,000 69,000 54,000 69,000 123,000 123,000 $ 15,460 $ (2,420) 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, "l 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 Price or Rate $2.40 per pound $6.40 per hour $1.90 per hour Standard Quantity Standard Cost $8.16 1.92 1.14 or Hours 3.4 pounds Direct materials Direct labor Variable manufacturing overhead 0.3 hours 6 hours* Total standard variable cost $11.22 *Based on machine-hours During October the plant produced 7,000 ingots and incurred the following costs: a. Purchased 28,800 pounds of materials at a cost of $2.85 per pound. There were no raw materials in inventory at the beginning of the month. b. Used 23,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 2,700 direct labor-hours at a cost of $6.10 per hour. d. Incurred total variable manufacturing overhead cost of $10,350 for the month. A total of 4,500 machine- hours was recorded It is the company's policy to close all variances to cost of goods sold on a monthly basis.Explanation / Answer
SQ / SH SR AQ /AH AR Direct materials 23800 $2.40 23600 2.85 (3.40 pounds X 7000 Units) Direct Labor 2100 $6.40 2700 $6.10 (0.30 hrs X 7000 Units) Variable Overhead 4200 $1.90 4500 $2.30 (0.60 hrs X 7000 Units) ($10350/4500 Hrs) Answer 1. Material Price Variance = (SR - AR) X AQ Material Price Variance = ($2.40 - $2.85) X 23600 Material Price Variance = $10620 (U) Material quantity Variance = (SQ - AQ) X SR Material quantity Variance = (23800 - 23600) X 2.40 Material quantity Variance = $480(F) Answer 2. Labour Rate Variance = (SR - AR) X AH Labour Rate Variance = ($6.40 - $6.10) X 2700 DLH Labour Rate Variance = $810 (F) Labour Efficiency Variance = (SH - AH) X SR Labour Efficiency Variance = (2100-2700) X $6.40 Labour Efficiency Variance = $3840 (U) Answer 3. Variable Overhead Rate Variance = (SR - AR) X AH Variable Overhead Rate Variance = ($1.90 - $2.30) X 4500 Mach Hrs Variable Overhead Rate Variance = $1800 (U) Variable Overhead Efficiency Variance = (SH - AH) X SR Variable Overhead Efficiency Variance = (4200 - 4500) X $1.90 Variable Overhead Efficiency Variance = $570 (U) Answer 4. Material Price Variance $10,620 U Material quantity Variance $480 F Labour Rate Variance $810 F Labour Efficiency Variance $3,840 U Variable Overhead Rate Variance $1,800 U Variable Overhead Efficiency Variance $570 U Net Variance $15,540 U