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:
Sales (3,000 ingots) $175,000 $175,000
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
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.