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 machinehours. 
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 laborhours at a cost of $8.00 per hour. 
d. 
Incurred a total variable manufacturing overhead cost of $7,560 for the month. A total of 1,800 machinehours 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). Omit the "$" sign in your response.)

Materials price variance  $  U 
Materials quantity variance  $  F 

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). Omit the "$" sign in your response.)

Labor rate variance  $  F 
Labor efficiency variance  $  U 

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). Omit the "$" sign in your response.)

Variable overhead rate variance  $  U 
Variable overhead efficiency variance  $  U 

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 each variance by
selecting "F" for favorable, "U" for unfavorable, and "None" for no
effect (i.e., zero variance). Omit the "$" sign in your response.)

Net variance  $  U 
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.)
 

Explanation:
1.
a.
1.
b.
1.
c.
2.
Summary of variances:
3.
a.
Standard Quantity Allowed for Actual Output, at Standard Price  Actual Quantity of Input, at Standard Price  Actual Quantity of Input, at Actual Price  
(SQ × SP)  (AQ × SP)  (AQ × AP)  
12,600 pounds* × $2.80 per pound  12,400 pounds × $2.80 per pound  17,600 pounds × $3.25 per pound  
= $35,280  = $34,720  = $57,200  
Materials quantity
  
variance = $560 F
  
17,600 pounds ×   
$2.80 per pound   
= $49,280   
Materials price variance
= $7,920 U 
*3,000 ingots × 4.2 pounds per ingot = 12,600 pounds 
1.
b.
Standard Hours Allowed for Actual Output, at Standard Rate  Actual Hours of Input, at Standard Rate  Actual Hours of Input, at Actual Rate  
(SH × SR)  (AH × SR)  (AH × AR)  
1,500 hours* × $8.30 per hour  2,100 hours × $8.30 per hour  2,100 hours × $8.00 per hour  
= $12,450  = $17,430  = $16,800  
Labor efficiency variance
= $4,980 U 
Labor rate variance
= $630 F  

Spending Variance = $4,350 U
 
*3,000 ingots × 0.5 hour per ingot = 1,500 hours 
1.
c.
Standard Hours Allowed for Actual Output, at Standard Rate  Actual Hours of Input, at Standard Rate  Actual Hours of Input, at Actual Rate  
(SH × SR)  (AH × SR)  (AH × AR)  
1,500 hours* × $3.80 per hour  1,800 hours × $3.80 per hour  
= $5,700  = $6,840  $7,560  
Variable overhead
efficiency variance = $1,140 U 
Variable overhead
rate variance = $720 U  

Spending variance = $1,860 U
 
*3,000 ingots × 0.5 hours per ingot = 1,500 hours 
2.
Summary of variances:
Material quantity variance  $  560  F 
Material price variance  7,920  U  
Labor efficiency variance  4,980  U  
Labor rate variance  630  F  
Variable overhead efficiency variance  1,140  U  
Variable overhead rate variance  720  U  
   
Net variance  $  13,570  U 
   

The
net unfavorable variance of $13,570 for the month caused the plant’s
variable cost of goods sold to increase from the budgeted level of
$53,430 to $67,000 :

Budgeted cost of goods sold at $17.81 per ingot  $  53,430 
Add the net unfavorable variance (as above)  13,570  
  
Actual cost of goods sold  $  67,000 
  

This
$13,570 net unfavorable variance also accounts for the difference
between the budgeted net operating income and the actual net loss for
the month.

Budgeted net operating income  $  11,570  
Deduct the net unfavorable variance added to cost of goods sold for the month  13,570  
   
Net operating loss  $  (2,000  ) 
   

3.
The
two most significant variances are the materials price variance and the
labor efficiency variance. Possible causes of the variances include:

Materials price variance: 
Outdated standards, uneconomical quantity purchased, higher quality materials, highcost method of transport.

Labor efficiency variance: 
Poorly trained workers, poor quality materials, faulty equipment, work interruptions, inaccurate standards, insufficient demand.
