Thursday, August 15, 2013

Portland Company's Ironton Plant produces precast ingots for industrial use

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 (5,000 ingots)

$

250,000

$

250,000



Variable expenses:









Variable cost of goods sold*



80,000



96,390

Variable selling expenses



20,000



20,000



Total variable expenses



100,000



116,390



Contribution margin



150,000



133,610



Fixed expenses:









Manufacturing overhead



60,000



60,000

Selling and administrative



75,000



75,000



Total fixed expenses



135,000



135,000



Net operating income (loss)

$

15,000

$

(1,390)





*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 Price or Rate

Standard Cost

Direct materials

4.0 pounds

$

2.50 per pound

$

10.00

Direct labor

0.6 hours

$

9.00 per hour



5.40

Variable manufacturing overhead

0.3 hours*

$

2.00 per hour



0.60









Total standard variable cost







$

16.00











*Based on machine-hours.



During October the plant produced 5,000 ingots and incurred the following costs:



a.

Purchased 25,000 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 19,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c.

Worked 3,600 direct labor-hours at a cost of $8.70 per hour.

d.

Incurred a total variable manufacturing overhead cost of $4,320 for the month. A total of 1,800 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.

Compute the following variances for October:



a.

Direct materials price and quantity variances. (Input all amounts as positive values. Leave no cells blank - be certain to enter \"0\" wherever required. Indicate the effect of each variance by selecting \"F\" for favorable, \"U\" for unfavorable, and \"None\" for no effect (i.e., zero variance). Omit the \"$\" sign in your response.)

b.

Direct labor rate and efficiency variances. (Input all amounts as positive values. Leave no cells blank - be certain to enter \"0\" wherever required. Indicate the effect of each variance by selecting \"F\" for favorable, \"U\" for unfavorable, and \"None\" for no effect (i.e., zero variance). Omit the \"$\" sign in your response.)

c.

Variable overhead rate and efficiency variances. (Input all amounts as positive values. Leave no cells blank - be certain to enter \"0\" wherever required. Indicate the effect of each variance by selecting \"F\" for favorable, \"U\" for unfavorable, and \"None\" for no effect (i.e., zero variance). Omit the \"$\" sign in your response.)

2a.

Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. (Input the amount as a positive value. Leave no cells blank - be certain to enter \"0\" wherever required. Indicate the effect of each variance by selecting \"F\" for favorable, \"U\" for unfavorable, and \"None\" for no effect (i.e., zero variance). Omit the \"$\" sign in your response.)

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.)

Click here for the SOLUTION

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