Reference no: EM132567727

COMPREHENSIVE VARIANCE ANALYSIS

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 contibution format income statement for Ocotber. The statement is shown below:

                                                           Budgeted                              Actual

Sales(5,000 ingots)                                  $250,000                        $250,000

Variable expenses:

Variable cost of goods sold                            80,000                         96,390

Variable selling expenses                                20,000                          20,000

Total variable expenses                                  100,000                         116,390

Contribution margin                                        150,000                           133,610

Fixed expenses:

Manufacturing overhead                                   60,000                            60,000

Selling and administrative                                  75,000                           75,000

Total fixed expenses                                        135,000                            135,000

Net operating income (loss)                                 $15,000                          ($1,390)

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 varibale cot per ignod:

                                                     Standard quantity of hours                  standard price rate               Standard cost

Direct Materials                           4.0 pounds                                   $2.50 per pound                      $10.00

Direct Labor                                   0.6 hours                                   $9.00 per hour                           5.40

Variable manufacturing overhead           0.3 hours                                 $2.00 per hour                              0.60

Total standard variable cost                                                                                                            $15.00

During October the plant produces 5,000 ingots and incurred the following costs:

a. Purchased 25,000 pounds of material at a cost of $2.95 per pound. There were o raw materials in inventory at the beginning of the month.

b. Used 19,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour.

d. Inccured a total variable manufacturing overhead cost of $4,320 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:

Question 1: PREPARE journal entries record the incurrence of costs and the variances in October from a to d

Question 2: present the analysis of the following variances for October:

a.Direct materials price quantity variances

b. Direct labor rate and efficiency variances.

c. Variable manufacturing overhead spending and efficiency variances.

Question 3: Indicate whether the variance is favorable or unfavorable

Question 4: pick out two most significant variances that you have computed. Explain to MR. Santiago possible causes of these variances.