Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk

Question

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 290 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 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.

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.

Irvin also found the standard cost card for a case of product.

(h)

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.)

Actual Budget Variance Cases produced and sold 10,250 9,960 290 Favorable Sales revenue $1,939,700 $1,862,500 $77,200 Favorable Direct material 558,756 547,800 10,956 Unfavorable Direct labor 266,579 258,960 7,619 Unfavorable Variable manufacturing overhead 283,872 278,880 4,992 Unfavorable Variable selling expenses 92,757 89,640 3,117 Unfavorable Variable administrative expenses 41,573 39,840 1,733 Unfavorable Contribution margin 696,163 647,380 48,783 Favorable Fixed manufacturing overhead 110,556 109,560 996 Unfavorable Fixed selling expenses 69,222 69,720 498 Favorable Fixed administrative expenses 129,281 129,480 199 Favorable Operating income $387,104 $338,620 $48,484 Favorable

Explanation / Answer

Performance Report

Material Price Variance = (Standard Rate - Actual Rate)Actual Quantity

= (5.5 - 5.5)558756 = $0

Material Usage Variance = (Standard Qty For actual Production - Actual Quantity Used)Standard Rate

= (102500 - 101592) 5.5

= $4994

Labor Rate Variance = (Standard Rate Per DTH - Actual Rate Per DTH) Actaul DTH Used

= (10 - 10.09) 26394

= -$2639

Labor Efficiency Variance = (Standard hour for actual production - Actual hour for actual production) standard rate

= (26547.5 - 26394) 10

= $1535

Variable Overhead Spending Variance = (Standard Rate Per Machine Hour - Actual Rate Per Machine Hour)Actual Hours

= (7 - 10.25) 40786

= -$132554.5

Variable Overhead Efficiency Variance = (Standard Hours - Actual Hours ) Standard Rate

= (41000 - 40786) 7

= $1498

Fixed Overhead Spending Variance = (Actual Fixed Overhead - Budgeted Fixed Overhead)

= (309059 - 308760)

= -$299

Fixed Overhead Volume Variance = (Budgeted Overhead Rate X Units Produced) - Budgeted Fixed Overhead

= (31 X 10250) - 308760

= $8990

Price/Rate/Spending Variance Quantity/Efficiency Variance Direct materials $0 Not Applicable $4994 Favorable Direct labor $2639 Unfavorable $1535 Favorable Variable overhead $132554.5 Unfavorable $1498 Favorable Fixed overhead $299 Unfavorable $8990 Favorable Total $135492.5 Unfavorable $17017 Favorable

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