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Tutorial 18378

Portland Company's Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who was recently appointed general manager of the Ironto...

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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)                                       $175,000              $175,000  

  Variable expenses:                                                        

     Variable cost of goods sold*                 24,300                    58,310  

     Variable selling expenses                       10,000                    10,000  

  Total variable expenses                             34,300                    68,310  

      Contribution margin                                140,700                  106,690  

  Fixed expenses:                                                              

     Manufacturing overhead                       50,000                    50,000  

     Selling and administrative                      65,000                    65,000 

  Total fixed expenses                                   115,000                  115,000  

  Net operating income (loss)                      $25,700                 $(8,310)

*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                                                 3.0 pounds                       $2.00 per pound               $6.00  

  Direct labor                                                          0.3 hours                          $6.00 per hour                   1.80  

  Variable manufacturing overhead             0.2 hours*                        $1.50 per hour                   0.30  

      Total standard variable cost                                                                                                                  $8.10  


*Based on machine-hours.

During October the plant produced 3,000 ingots and incurred the following costs:

a.            Purchased 23,000 pounds of materials at a cost of $3.20 per pound. There were no raw materials in inventory at the beginning of the month.

b.            Used 8,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c.             Worked 2,000 direct labor-hours at a cost of $5.70 per hour.

d.            Incurred a total variable manufacturing overhead cost of $1,710 for the month. A total of 900 machine-hours was recorded.

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


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. (You may select more than one answer.