Explore BrainMass

Portland Company produces parts for medical devices.

Portland Company produces parts for medical devices. These parts are made of pre-cast titanium metal and are used primarily in the construction of ventricular assist devices (VADs). The VAD is implemented alongside a patientâ??s native heart and designed to take over the pumping ability of the heartâ??s left ventricle, and assists in pumping the blood throughout the body.
Carlos Santiago, who was recently appointed general manager of Portland has just been handed the plantâ??s income statement for October. The statement is shown below:
Budget Actual
Sales (5,000 Titanium parts) $250,000 $250,000
Less: Variable Expenses
Variable Costs of Goods Sold $80,000 $94,050
Variable Selling Expenses $20,000 $20,000
Total Variable Costs $100,000 $114,050

Contribution Margin $150,000 $135,950

Less Fixed Costs
Manufacturing Overhead $60,000 $60,000
Selling and Administrative $75,000 $75,000
Total Fixed Costs $135,000 $135,000

Net Income (Loss) $15,000 $950

Mr. Santiago was shocked to see the very small amount of net income for the month, particularly since sales were exactly as budgeted. He stated, â??I sure hope this plant has a standard cost system in operations. If it doesnâ??t, I wonâ??t have the slightest idea of where to start looking for the problem. â??
The Plant does have a standard cost system, with the following standard cost per titanium part:
Standard Quantity or Hours Standard Price or Rate
Direct Material 4.0 pounds $2.50 per pound
Direct Labor 0.6 hours $9.00 per hour
Variable Manufacturing Overhead (based on machine hours) 0.3 hours $2.00

Mr. Santiago has determined that during October the plant produced 5,000 titanium parts and incurred the following costs:
a. Purchased 25,000 pounds of material at a cost of $2.95 per pound. There was no raw material inventory at the beginning of the month.
b. Used 19,800 pounds of material in production.
c. Worked 3,600 hours at a cost of $8.70 per hour
d. Incurred a total variable manufacturing overhead of $4,320 for the month. A total of 1,800 machine hours were recorded.
Required â?" On Excel:
1. Compute the following variances for October
a. Direct materials price and usage variances
b. Direct labor rate and efficiency variances
c. Variable manufacturing overhead spending and efficiency variance
Required â?" On Word:
2. In memo format: Summarize the variance that you have computed in (1.) above by showing the net overall favorable or unfavorable variance for October. What impact did this variance have on the income statement?
3. Pick out the two most significant variances that you computed in (1.) above. Explain to Mr. Santiago what some possible causes may be.
4. What ethical considerations should Mr. Santiago take into account when determining the quality of materials and the training level of the labor force? Be sure to comment on his obligation to the company, it shareholders, its customers and all other stakeholders.

Solution Preview

Requirement 2:

Dear Mr. Santiago,

The only difference between the budget amounts and the actual results for the month October is the variable cost of goods sold. The variable cost of goods sold is higher than budget by $14,050. This is made up of six variances shown below:

(see word document for better formatting)

Description of variance Dollar Amount for October
Direct material price variance $8,910 unfavorable
Direct material usage variance $500 favorable
Direct labor rate variance $1,080 favorable
Direct labor efficiency variance $5,400 unfavorable
Variable overhead spending variance $720 unfavorable
Variable overhead efficiency variance $600 unfavorable
Total net of all variances $14,050 unfavorable

Favorable variances mean that the costs incurred were less than standard allowed. Unfavorable variances mean that the costs incurred were more than standard allowed. We have some of each above, which net to the $14,050-the amount that earnings is off from budget.

3. The two most significant variances are the direct material price variance and the direct labor efficiency variance. The material price variance ...

Solution Summary

Your response 667 words plus an excel spreadsheet computing all the required standard cost variances in detail and combined to an overall that matches the budget to actual variance. The letter to Mr. Santiago shows how the variances explain the income shortfall from budget, explains the two largest variances, and discusses the ethical considerations from the view of many stakeholders.