Paul Benny picked up the monthly report that Eve Lynch left on his desk. He was pleased to see the favorable variance for operating income. He had pushed hard to exceed budgeted monthly production by 325 units. Paul was puzzled by some of line items in the report. He wonders whether it's an error that most of the operating expenses are higher than the budget after all his hard work to manage the production line to improve efficiency and reduce costs. The report Paul reviewed is shown below:
Units produced and sold | 13,325 | | 13,000 | 325 F |
Sales revenue | $2,531,750 | | $2,431,000 | | $100,750 F |
Direct material | 729,300 | | 715,000 | | 14,300 U |
Direct labor | 347,945 | | 338,000 | | 9,945 U |
Variable manufacturing overhead | 370,516 | | 364,000 | | 6,516 U |
Variable selling expenses | 121,069 | | 117,000 | | 4,069 U |
Variable administrative expenses | 54,262 | | 52,000 | | 2,262 U |
Contribution margin | $ 908,658 | | $ 845,000 | | $ 63,658 F |
Fixed manufacturing overhead | 144,300 | | 143,000 | | 1,300 U |
Fixed selling expenses | 90,350 | | 91,000 | | 650 F |
Fixed administrative expenses | 168,740 | | 169,000 | | 260 F |
Operating income | $ 505,268 | | $ 442,000 | | $ 63,268 F |
Paul called Eve into his office to discuss all the unfavorable variances in the operating costs. Paul is very confused about how the budgeted operating income for the month is favorable, and yet there are so many unfavorable variances on the operating costs. Eve has promised Paul to investigate and report back any findings. Eve has also gathered the following additional information about the month's performance, and the standard cost card for a unit of product.
• | Direct materials purchased: 132,600 pounds at a total of $729,300 |
• | Direct materials used: 132,600 pounds |
• | Direct labor hours worked: 34,450 at a total cost of $347,945 |
• | Machine hours used: 53,235 |
The standard cost card for a unit of product.
Standard Price | Standard Quantity | Standard Cost |
Direct materials | $5.50 per pound | 10 pounds | $ 55.00 |
Direct labor | $10.00 per DLH | 2.6 DLH | 26.00 |
Variable overhead | $7.00 per MH | 4 MH | 28.00 |
Fixed overhead | $3.58 per MH | 4 MH | 14.32 |
Total standard cost per unit | $123.32 |
Required:
a. | Calculate the direct material price variance for the month. |
b. | Calculate the direct material quantity variance for the month. |
c. | Calculate the direct labor rate variance for the month. |
d. | Calculate the direct labor efficiency variance for the month. |
e. | Calculate the variable overhead spending variance for the month. |
f. | Calculate the variable overhead efficiency variance for the month. |
g. | Calculate the fixed overhead spending variance for the month. |
h. | Prepare a performance report that will assist Paul in evaluating his efforts to control |
production costs.
i. | Based on your review of the performance report you prepared, do you think Paul did |
a good job of controlling production expenses during the month? Why or why not?