Problem 8-18B Comprehensive Variance Analysis [LO8-4, LO8-5, LO8-6]

Michiana Companys 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 plants contribution format income statement for October. The statement is shown below:

	Budgeted		Actual
Sales (8,000 ingots)	$	240,000	$	240,000
Variable expenses:
Variable cost of goods sold*		94,000		112,470
Variable selling expenses		10,000		10,000
Total variable expenses		104,000		122,470
Contribution margin		136,000		117,530
Fixed expenses:
Manufacturing overhead		55,000		55,000
Selling and administrative		70,000		70,000
Total fixed expenses		125,000		125,000
Net operating income (loss)	$	11,000	$	(7,470)

*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 wont 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	3.5 pounds	$	2.50 per pound	$	8.75
Direct labor	0.4 hours	$	6.50 per hour		2.60
Variable manufacturing overhead	0.2 hours*	$	2.00 per hour		0.40
Total standard variable cost				$	11.75

*Based on machine-hours.

During October the plant produced 8,000 ingots and incurred the following costs:

a.	Purchased 33,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month.
b.	Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c.	Worked 3,800 direct labor-hours at a cost of $6.20 per hour.
d.	Incurred a total variable manufacturing overhead cost of $4,560 for the month. A total of 1,900 machine-hours was recorded.

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

8. value: 12.50 points 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: Sales (8,000 ingots) Budgeted Actual $ 240,000 $ 240,000 Variable expenses Variable cost of goods sold* Variable selling expenses 94,000 10,000 112,470 10,000 Total variable expenses 104,000 122,470 Contribution margin 136,000 117,530 Fixed expenses Manufacturing overhead Selling and administrative 55,000 70,000 55,000 70,000 Total fixed expenses 125,000 125,000 Net operating income (loss) $ 11,000 $ (7,470) *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 Standard Price Standard or Hours or Rate Cost Direct materials 3.5 pounds $2.50 per pound S 8.75 Direct labor 0.4 hours $6.50 per hour 2.60 Variable manufacturing overhead 0.2 hours* $2.00 per hour 0.40 Total standard variable cost S 11.75 *Based on machine-hours. During October the plant produced 8,000 ingots and incurred the following costs: a. Purchased 33,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month. b. Used 21,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 3,800 direct labor-hours at a cost of $6.20 per hour. d. Incurred a total variable manufacturing overhead cost of $4,560 for the month. A total of 1,900 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.)) Materials price variance Materials quantity 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.)) Labor rate variance Labor efficiency 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 (ie., zero variance.)) Variable overhead rate variance Variable overhead efficiency 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.)) Net variance 3. Pick out the two most significant variances that you computed in (1) above. (Select all that apply.) Materials price variance Materials quantity variance Variable overhead efficiency variance Labor rate variance Variable overhead rate variance Labor efficiency variance