Mr. Lorenzo was shocked to see the loss for the month, particularly because sale

Question

Mr. Lorenzo was shocked to see the loss for the month, particularly because sales were exactly as budgeted. He stated, " 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 Direct materials Direct labor Variable manufacturing overhead or Hours 3.7 pounds 0.6 hours 0.5 hours* $2.30 $7.80 per hour $3.30 per hour or Rate per pound Cost 8.51 4.68 1.65 Total standard variable cost $14.84 Based on machine-hours During October the plant produced 3,000 ingots and incurred the following costs a. Purchased 16,100 pounds of materials at a cost of $2.75 per pound. There were no raw materials in inventory at the beginning of the month. b. Used 10,900 pounds of materials in production. Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 2,400 direct labor-hours at a cost of $7.50 per hour d. Incurred a total variable manufacturing overhead cost of $6,660 for the month. A total of 1,800 machine- hours was recorded

Explanation / Answer

1a.

Materials price variance = AQ x (AR - SR) = 16100 x ($2.75 - $2.30) = 16100 x $0.45 = $7245 U

Materials quantity variance = SR x (AQ - SQ) = $2.30 x (10900 - 11100) = $2.30 x 200 = $460 F

SQ = 3000 ingots x 3.7 pounds = 11100 pounds

b.

Labor rate variance = AH x (AR - SR) = 2400 x ($7.50 - $7.80) = 2400 x $0.30 = $720 F

Labor efficiency variance = SR x (AH - SH) = $7.80 x (2400 - 1800) = $7.80 x 600 = $4680 U

SH = 3000 ingots x 0.6 hours = 1800 hours

c.

Variable overhead rate variance = (AH x AR) - (AH x SR) = $6660 - (1800 x $3.30) = $6660 - $5940 = $720 U

Variable overhead efficiency variance = SR x (AH - SH) = $3.30 x (1800 - 1500) = $3.30 x 300 = $990 U

SH = 3000 ingots x 0.5 hours = 1500 hours

2.

Materials price variance $7245 U Materials quantity variance $460 F

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