Lexi Belcher picked up the monthly report that Irvin Santamaria
left on her desk. She smiled as her eyes went straight to the
bottom line of the report and saw the favorable variance for
operating income, confirming her decision to push the workers to
get those last 250 cases off the production line before the end of
the month.
But as she glanced over the rest of numbers, Lexi couldn’t help but
wonder if there were errors in some of the line items. She was
puzzled at how most of the operating expenses could be higher than
the budget since she had worked hard to manage the production line
to improve efficiency and reduce costs. Yet the report, shown
below, showed a different story.
|
|
Actual |
|
Budget |
|
Variance |
|
| Cases produced and sold |
|
10,250 |
|
|
10,000 |
|
|
250 |
Favorable |
|
| Sales revenue |
|
$1,947,500 |
|
|
$1,870,000 |
|
|
$77,500 |
Favorable |
|
| Less variable expenses |
|
|
|
|
|
|
|
|
|
|
| Direct material |
|
561,000 |
|
|
550,000 |
|
|
11,000 |
Unfavorable |
|
| Direct labor |
|
267,650 |
|
|
260,000 |
|
|
7,650 |
Unfavorable |
|
| Variable manufacturing overhead |
|
285,012 |
|
|
280,000 |
|
|
5,012 |
Unfavorable |
|
| Variable selling expenses |
|
93,130 |
|
|
90,000 |
|
|
3,130 |
Unfavorable |
|
| Variable administrative expenses |
|
41,740 |
|
|
40,000 |
|
|
1,740 |
Unfavorable |
|
| Total variable expense |
|
1,248,532 |
|
|
1,220,000 |
|
|
28,532 |
Unfavorable |
|
| Contribution margin |
|
698,968 |
|
|
650,000 |
|
|
48,968 |
Favorable |
|
| Less fixed expenses |
|
|
|
|
|
|
|
|
|
|
| Fixed manufacturing overhead |
|
111,000 |
|
|
110,000 |
|
|
1,000 |
Unfavorable |
|
| Fixed selling expenses |
|
69,500 |
|
|
70,000 |
|
|
(500 |
Favorable) |
|
| Fixed administrative expenses |
|
129,800 |
|
|
130,000 |
|
|
(200 |
Favorable) |
|
| Total fixed expense |
|
310,300 |
|
|
310,000 |
|
|
300 |
Unfavorable |
|
| Operating income |
|
$388,668 |
|
|
$340,000 |
|
|
$48,668 |
Favorable |
|
Lexi picked up the phone and called Irvin. “Irvin, I don’t get it.
We beat the budgeted operating income for the month, but look at
all the unfavorable variances on the operating costs. Can you help
me understand what’s going on?” “Let me look into it and I’ll get
back to you,” Irvin replied.
Irvin gathered the following additional information about the
month’s performance.
| ● |
|
Direct materials purchased: 102,000 pounds at a total of
$561,000 |
|
| ● |
|
Direct materials used: 102,000 pounds |
|
| ● |
|
Direct labor hours worked: 26,500 at a total cost of
$267,650 |
|
| ● |
|
Machine hours used: 40,950 |
|
Irvin also found the standard cost card for a case of
product.
|
|
Standard
Price |
|
Standard
Quantity |
|
Standard
Cost |
|
| Direct materials |
|
$5.50 per pound |
|
10 pounds |
|
$55 |
|
|
| Direct labor |
|
$10 per DLH |
|
2.60 DLH |
|
26.00 |
|
|
| Variable overhead |
|
$7 per MH |
|
4 MH |
|
28.00 |
|
|
| Fixed overhead |
|
$2.75 per MH |
|
4 MH |
|
11.00 |
|
|
| Total standard cost per case |
|
|
|
|
|
$120.00
|
(e-f) Calculate the variable overhead spending
variance and variable overhead efficiency variance for the month.
(If variance is zero, select "Not Applicable" and enter
0 for the amounts.)
| Variable overhead spending
variance |
|
$ |
FavorableUnfavorableNot Applicable
|
|
| Variable overhead efficiency
variance |
|
$ |
Not ApplicableFavorableUnfavorable
|
|
(g) Calculate the fixed overhead spending variance
for the month. (If variance is zero, select "Not
Applicable" and enter 0 for the amounts.)
| Fixed overhead spending
variance |
|
$ |
FavorableUnfavorableNot Applicable
|
|
|
|
|
|
|
|
|
Your answer is incorrect. Try
again. |
|
|
Prepare a performance report that will assist Lexi in evaluating
her efforts to control production costs. (If variance
is zero, select "Not Applicable" and enter 0 for the
amounts.)
|
|
Price/Rate/Spending Variance |
|
Quantity/Efficiency Variance |
|
| Direct materials |
|
$ |
UnfavorableNot ApplicableFavorable
|
|
$ |
FavorableUnfavorableNot Applicable
|
|
| Direct labor |
|
|
UnfavorableNot ApplicableFavorable
|
|
|
FavorableNot ApplicableUnfavorable
|
|
| Variable overhead |
|
|
UnfavorableNot ApplicableFavorable
|
|
|
UnfavorableNot ApplicableFavorable
|
|
| Fixed overhead |
|
|
FavorableNot ApplicableUnfavorable
|
|
|
FavorableUnfavorableNot Applicable
|
|
| Total |
|
$ |
FavorableNot ApplicableUnfavorable
|
|
$ |
UnfavorableNot ApplicableFavorable
|
|
|
|
|