Question

Problem 8-18B Comprehensive Variance Analysis [LO8-4, LO8-5, LO8-6] Michiana Company's Benton Harbor Plant produces precast ingots for industrial use. Angelo Lorenzo, who was recently appointed general manager of the Benton Harbor Plant, has just been handed the plant’s contribution format income statement for October. The statement is shown below: Budgeted Actual Sales (5,000 ingots) $ 235,000 $ 235,000 Variable expenses: Variable cost of goods sold* 71,350 86,370 Variable selling expenses 13,000 13,000 Total variable expenses 84,350 99,370 Contribution margin 150,650 135,630 Fixed expenses: Manufacturing overhead 62,000 62,000 Selling and administrative 77,000 77,000 Total fixed expenses 139,000 139,000 Net operating income (loss) $ 11,650 $ (3,370) *Contains direct materials, direct labor, and variable manufacturing overhead. Mr. Lorenzo 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 3.8 pounds $ 2.20 per pound $ 8.36 Direct labor 0.7 hours $ 6.80 per hour 4.76 Variable manufacturing overhead 0.5 hours* $ 2.30 per hour 1.15 Total standard variable cost $ 14.27 *Based on machine-hours. During October the plant produced 5,000 ingots and incurred the following costs: a. Purchased 24,000 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 18,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 4,100 direct labor-hours at a cost of $6.50 per hour. d. Incurred a total variable manufacturing overhead cost of $7,560 for the month. A total of 2,800 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. Assume that the company recognizes price variances when materials are purchased. Compute the following variances for October: a. Direct materials price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) b. Direct labor rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) c. Variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) 2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. (Input all amounts as positive values. Indicate the effect of variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero 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 Materials quantity variance Variable overhead efficiency variance Labor rate variance Variable overhead rate variance Labor efficiency variance

Answer 1

Standard material quantity allowed (5000*3.8)					19000
Standard price per pound					2.2
Actual quantity used					18800
Actual price per unit					2.65
Standard price variance = Actual quantity (std price- Actual prie)
		18800 (2.20 -2.65) = $8460 U
Material Quantity Variance: Std price (Std quantity -A ctaul quantity)
		2.20 (19000-18800)= $ 440 F
Std labour hours (5000*0.7)			3500 houurs
Std rate per hour			6.80 per hour
Actual labour hours			4100 hours
Actual rate per hour			6.50 per hour
labour rate variance: Actual hours (Std rate -Actual rate)
		4100 (6.80 -6.50) = $ 1230 F
Labour efficiency variance: Std rate (Std hours-Actual hours)
		6.80 (3500-4100) = $4080 U
Std machine hours (5000*0.5)			2500 MH
Std oh rate per MH			2.30 per MH
Actual MH			2800 MH
Actual OH rate peer MH			2.70 per MH
Variable Oh spending variance = Actual hours (Std rate -Actual rate)
			2800 (2.30-2.70) = $1120 U
Variable Oh efficiency variance = Std Oh rate (Std hours - Actual hours)
			2.30 (2500 -2800) = $690 U
Req 2
OVERALL NET EFFECT
Material price variance			-8460	U
material quantity variance			440	F
labouor rate variance			1230	F
labour efficiency variance			-4080	U
OH spending variance			-1120	U
Oh efficiency variance			-690	U
Net EFFECT			-12680	U
Req 3:
material Price Variance
Labour efficiency variance