Jimmy has just got his accounting degree and started working for Lady P. Bakery Inc., a small business that is locally known for their delicious banana pudding cups. Their best-seller is the 16 oz cup. The companys relevant range of production is between 500,000 and 800,000 cups a year. Within the relevant range, variable costs per cup and total annual fixed costs remain constant. The company has the following data from its standard cost system.

Standard Costs
Variable costs per cup:
Direct materials (2 pounds at $2.50 per pound)	$5.00
Direct labor (0.1 direct labor hour at $20 per hour)	$2.00
Variable mfg. overhead (0.1 direct labor hour at $6 per hour)	$0.60
Selling and administrative expenses	$1.20
Fixed costs per year:
Manufacturing overhead	$200,000
Selling and administrative expenses	$350,000

The planning budget income statement is based on the expectation of selling 580,000 cups of banana pudding. The budgeted selling price is $10 per cup.

For planning and control purposes, the company relies on its standard costs to derive their budgeted costs per cup of banana pudding. For example, the cost of direct materials reported on the planning budget income statement is calculated as $5.00 per cup times 580,000 cups, which is $2,900,000. Also, the denominator level of activity is calculated as 0.1 direct labor hour per cup times 580,000 cups, which is 58,000 direct labor hours.

The company actually produced and sold 660,000 cups at $11.20 per cup this year. The company does not have a beginning or ending raw materials inventory, because it uses all raw materials purchased. Also, the company does not have a beginning or ending finished goods inventory. Everything produced in the year is sold in that same year.

The actual income statement for the year is provided below.

Lady P Bakery Inc.
Actual Income Statement
Sales (660,000 cups produced and sold at $11.2 per cup)	$7,392,000
Less Variable Costs:
Direct materials (1,188,000 pounds at $2.60 per pound)	3,088,800
Direct labor (99,000 direct labor hours at $22 per hour)	2,178,000
Variable manufacturing overhead	732,600
Variable selling and administrative costs	726,000
Contribution margin	666,600
Less Fixed Costs:
Fixed manufacturing overhead costs	175,000
Fixed selling and administrative costs	320,000
Net operating income	$171,600

a. Prepare a detailed income statement variance analysis using the contribution approach income statement for the year (i.e., compare the actual income statement with the flexible budget income statement and compare the flexible budget income statement with the planning budget income statement). Show all the revenue, spending, and activity variances appearing in the income statement analysis. A template for answering this question is given below. All variances should be marked with either an F for favorable or U for unfavorable.

b. Suppose Jimmys boss Mrs. Gutfreund is in the process of evaluating how well the company performed in terms of generating revenues and controlling costs. Mrs. Gutfreund would like to compare the actual income statement with the planning budget income statement. Could you use the variance analysis from Part 1 to persuade her, who is kind of stubborn, that the company should compare the actual income statement with the flexible budget income statement instead?

c. Prepare a very detailed manufacturing cost variance analysis (e.g., calculate the material price variance and quantity variance; the labor rate variance and efficiency variance; the variable overhead rate variance and efficiency variance; and the fixed manufacturing overhead budget variance and volume variance). All variances should be marked with either an F for favorable or U for unfavorable.

d. Could you reconcile the spending variances in Part a with manufacturing cost variances in Part 3? For example, how is the amount of spending variance for direct labor in Part 1 explained by the amounts of the two direct labor variances in Part 3?

e. While the demand for their banana pudding cups is robust, Mrs. Gutfreund is really concerned about the challenging situation with ever-increasing labor costs. Could you help her evaluate the companys performance in controlling direct labor costs by interpreting relevant variances from Part 1 and Part 3? Can you offer her any suggestions to minimize the negative impact of rising labor costs on profitability?