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 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 Sales revenue Less variable expenses 10,250 $1,947,500 10,000 250 Favorable $1,870,000 $77,500 Favorable Direct material Direct labor Variable manufacturing overhead Variable selling expenses Variable administrative expenses 561,000 267,650 285,012 93,130 41,740 1,248,532 698,968 550,000 260,000 280,000 90,000 40,000 1,220,000 650,000 11,000 Unfavorable 7.650 Unfavorable 5.012 Unfavorable 3.130 Unfavorable 1,740 Unfavorable 28,532 Unfavorable Total variable expense Contribution margin Less fixed expenses 48,968 Favorable Fixed manufacturing overhead Fixed selling expenses Fixed administrative expenses 111,000 69,500 129,800 310,300 $388,668 110,000 70,000 130,000 310,000 $340,000 1,000 Unfavorable (500 Favorable) 200 Favorable) 300 Unfavorable Total fixed expense Operating income $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 $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 $5.50 per pound $10 per DLH $7 per MH $2.75 per MH Standard Quantity 10 pounds 2.60 DLH 4 MH 4 MH Standard Cost Direct materials Direct labor Variable overhead Fixed overhead Total standard cost per case $55 26.00 28.00 11.00 $120.00

Explanation / Answer

a.

Direct material price variance = (SP - AP) x AQ purchased

= [$5.50 - ($561000/102000)] x 102000

= $0 Not Applicable

b.

Direct material quantity variance = (SQ - AQ used) x SP

= [(10 x 10250) - 102000] x $5.50

= $2750 Favorable

c.

Direct labor rate variance = (SR - AR) x AH

= [$10 - ($267650/26500)] x 26500

= $2650 Unfavorable

d.

Direct labor efficiency variance = (SH - AH) x SR

= [(2.60 x 10250) - 26500] x $10.00

= $1500 Favorable

e.

Variable overhead spending variance = (SR - AR) x Actual machine hours worked

= [$7.00 - ($285012/ 40950)] x 40950

= [$7.00 - $6.96] x 40950

= $1638 Favorable

Variable overhead efficiency variance = (SH - AH) x SR

= [(4 x 10250) - 40950] x $7.00

= $350 Favorable

g.

Fixed overhead spending variance = Budgeted overheads - Actual overheads

= $110000 - $111000

= $1000 Unfavorable

Performance report

Yes.

Lexi did a good job.

Price/Rate/Spending variance Quantity/Efficiency variance Direct materials $0 Not Applicable $2750 Favorable Direct labor $2650 Unfavorable $1500 Favorable Variable overhead $1638 Favorable $350 Favorable Fixed overhead $1000 Unfavorable $0 Not Applicable Total $2012 Unfavorable $4600 Favorable

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