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 Sales (5,000 ingots) . . . . . . . . . . . . . . . . $250,000 $250,000 Variable expenses: Variable cost of goods sold* . . . . . . . . 80,000 96,390 Variable selling expenses . . . . . . . . . . 20,000 20,000 Total variable expenses . . . . . . . . . . . . . 100,000 116,390 Contribution margin . . . . . . . . . . . . . . . . 150,000 133,610 Fixed expenses: Manufacturing overhead . . . . . . . . . . . 60,000 60,000 Selling and administrative . . . . . . . . . . 75,000 75,000 Total fi xed expenses . . . . . . . . . . . . . . . . 135,000 135,00
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
Sales (5,000 ingots) . . . . . . . . . . . . . . . . $250,000 $250,000
Variable expenses:
Variable cost of goods sold* . . . . . . . . 80,000 96,390
Variable selling expenses . . . . . . . . . . 20,000 20,000
Total variable expenses . . . . . . . . . . . . . 100,000 116,390
Contribution margin . . . . . . . . . . . . . . . . 150,000 133,610
Fixed expenses:
Manufacturing overhead . . . . . . . . . . . 60,000 60,000
Selling and administrative . . . . . . . . . . 75,000 75,000
Total fi xed expenses . . . . . . . . . . . . . . . . 135,000 135,000
Net operating income (loss) . . . . . . . . . . $ 15,000 $ (1,390)
*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, “I sure hope the plant has a
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 . . . . . . . . . . . . . . . . . . . .4.0 pounds $2.50 per pound $10.00
Direct labor . . . . . . . . . . . . . . . . . . . . . . . 0.6 hours $9.00 per hour 5.40
Variable manufacturing overhead . . . . 0.3 hours* $2.00 per hour 0.60
Total standard variable cost . . . . . . . . . . $16.00
*Based on machine-hours.
During October the plant produced 5,000 ingots and incurred the following costs:
a. Purchased 25,000 pounds of materials at a cost of $2.95 per pound. There were no raw materi-
als in inventory at the beginning of the month.
b. Used 19,800 pounds of materials in production. (Finished goods and work in process invento-
ries are insignificant and can be ignored.)
c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour.
d. Incurred a total variable
1,800 machine-hours was recorded.
It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
) a) Computing the Material quantity variance and Material price variance as follows:
Material Quantity variance=== Standard price(Actual Quantity− Standard Quantity)$2.50(19,800−20,000)$500 FMaterial Quantity variance= Standard price(Actual Quantity- Standard Quantity)=$2.50(19,800-20,000)=$500 F
Material Price variance=== Actual Quantity(Actual Price− Standard Price)25,000($2.95−$2.50)$11,250 UMaterial Price variance= Actual Quantity(Actual Price- Standard Price)=25,000($2.95-$2.50)=$11,250 U
b) Computing the Labor efficiency variance and Labor rate variance as follows:
Labor efficiency variance=== Standard Rate(Actual Hours− Standard Hours)$9(3,600−3,000)$5,400 ULabor efficiency variance= Standard Rate(Actual Hours- Standard Hours)=$9(3,600-3,000)=$5,400 U
Labor rate variance=== Actual Hours (Actual Rate− Standard Rate)3,600 ($8.70−$9)$1,080 FLabor rate variance= Actual Hours (Actual Rate- Standard Rate)=3,600 ($8.70-$9)=$1,080 F
c) Computing the Variable overhead efficiency variance and Variable rate variance as follows:
Variable overhead efficiency variance=== Standard Rate(Actual Hours− Standard Hours)$2(1,800−1,500)$600 UVariable overhead efficiency variance= Standard Rate(Actual Hours- Standard Hours)=$2(1,800-1,500)=$600 U
Variable overhead efficiency variance=== Actual Hours(Actual Rate− Standard Rate)1,800(($4,320/1,800)−$2)$720 U
Required:
1. Summarize the variances that you computed in above by showing the net overall favorable or unfavorable variance for October. What impact did this figure have on the company’s income statement?
2. Pick out the two most significant variances that you computed in above. Explain to
Mr. Santiago possible causes of these variances.
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