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    Calculating Cost Variances

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    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 (3,000 ingots) $ 250,000 $ 250,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Variable expenses:
    Variable cost of goods sold* 53,430 67,000
    Variable selling expenses 26,000 26,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Total variable expenses 79,430 93,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Contribution margin 170,570 157,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Fixed expenses:
    Manufacturing overhead 67,000 67,000
    Selling and administrative 92,000 92,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Total fixed expenses 159,000 159,000
    ________________________________________ ________________________________________ ________________________________________ ________________________________________
    Net operating income (loss) $ 11,570 $ (2,000)
    ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
    ________________________________________
    *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 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 Quantity or Hours Standard Price
    or Rate Standard Cost
    Direct materials 4.2 pounds $ 2.80 per pound $ 11.76
    Direct labor 0.5 hours $ 8.30 per hour 4.15
    Variable manufacturing overhead 0.5 hours* $ 3.80 per hour 1.90
    ________________________________________ ________________________________________
    Total standard variable cost $ 17.81
    ________________________________________________________________________________ ________________________________________________________________________________
    ________________________________________
    *Based on machine-hours.

    During October the plant produced 3,000 ingots and incurred the following costs:
    a. Purchased 17,600 pounds of materials at a cost of $3.25 per pound. There were no raw materials in inventory at the beginning of the month.
    b. Used 12,400 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
    c. Worked 2,100 direct labor-hours at a cost of $8.00 per hour.
    d. Incurred total variable manufacturing overhead cost of $7,560 for the month. A total of 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.

    Required:
    1. Compute the following variances for October:

    a. 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.)

    Materials price variance $

    Materials quantity variance $

    ________________________________________

    b. 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.)

    Labor rate variance $

    Labor efficiency variance $

    ________________________________________

    c. 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.)

    Variable overhead rate variance $

    Variable overhead efficiency variance $

    ________________________________________

    2a. 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 variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.)

    Net variance $

    3. 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.)

    Materials price variance
    Labor efficiency variance
    Variable overhead efficiency variance
    Labor rate variance
    Variable overhead rate variance
    Materials quantity variance

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    https://brainmass.com/math/fractions-and-percentages/calculating-cost-variances-548073

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    Solution Summary

    The expert calculates the cost variances for the materials price variances. Labor efficiency variances are determined.

    $2.19