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Question(s) / Instruction(s):

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 (8,000 ingots)                       $290,000                              $290,000  

 Variable expenses:                                                         

 Variable cost of goods sold*      104,400                                124,770  

 Variable selling expenses            20,000                                  20,000  

  Total variable expenses              124,400                                144,770  

  Contribution margin                    165,600                                 145,230  

   Fixed expenses:                                                             

  Manufacturing overhead           68,000                                  68,000  

  Selling and administrative          86,000                                  86,000  

  Total fixed expenses                   154,000                                 154,000  

  Net operating income (loss)      $11,600                                 $(8,770) 

  *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 Priceor Rate                Standard Cost

  Direct materials                 3.6 pounds                                       $2.20 per pound                              $7.92  

  Direct labor                         0.5 hours                                           $7.70 per hour                                    3.85    Variable manufacturing overhead

                                 0.4 hours*                                          $3.20 per hour                                   1.28              Total standard variable cost                                                                                                                  $13.05  

 *Based on machine-hours.

During October the plant produced 8,000 ingots and incurred the following costs:

a.Purchased 33,800 pounds of materials at a cost of $2.65 per pound. There were no raw materials in inventory at the beginning of the month.

b.Used 28,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c.Worked 4,600 direct labor-hours at a cost of $7.40 per hour.

d.Incurred a total variable manufacturing overhead cost of $12,600 for the month. A total of 3,500 machine-hours was recorded.

It is the company’s policy to close all variances to cost of goods sold on a monthly basis.Required:

Required:

 

1.

Compute the following variances for October:

 

a.

Direct materials price and quantity variances. 

 

     
     
     
 

 

b.

Direct labor rate and efficiency variances. 

 

c.

Variable overhead rate and efficiency variances. (

 

2a.

Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. 

 

     

 

3.

Pick out the two most significant variances that you computed in (1) above. 

 

 

 

 

Materials price variance

 

Labor efficiency variance

 

Variable overhead efficiency variance

 

Labor rate variance

 

Variable overhead rate variance

 

Materials quantity variance

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