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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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Solution Summary

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

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Mass production of childrens chairs: Calculate costs, variances, control, best options

Mass production of chairs for children are purchased in a variety of colors but with one basic design. Design is the key to the company's success following data:

Plastic...........................10 lbs at $4.50 per pound
Molding..........................3 ft at $3.00 per foot
Direct Labor....................4 hours at 6.00 per hr
Variable overhead.............$3.00 per direct labor hr
Fixed overhead.................$55,000 per period
Purchased plastic at $4.45 per pound & issued 185,000 pounds to production
Purchased molding at $3.10 per ft issued 50,000 to production
Direct labor payroll $435,000 for 72,500
Total overhead cost $275,000 including $221.125 variable overhead
Produced 18,000 chairs during the month

Required:

a. calculate material, labor, variable overhead and fixed overhead variances
b. Interpret the material and labor variances. indicate about company performance
c. based on response to b. what areas need to be investigated
d. company control or better manage its operations
e. what are the best options? Why?

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