Question

*Problem 6-30 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 270 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. Variance Actual Budget 270 Favorable Cases produced and sold 10,250 9,980 Sales revenue $1,943,600 $1,866,300 $77,300 Favorable Less variable expenses Direct material 559,878 10,978 Unfavorable 548,900 Direct labor 267,115 259,480 7,635 Unfavorable Variable manufacturing overhead 279,440 5,002 Unfavorable 284,442 Variable selling expenses 92,944 89,820 3,124 Unfavorable Variable administrative expenses 41,657 39,920 1,737 Unfavorable Total variable expense 1,246,036 1,217,560 28,476 Unfavorable Contribution margin 697,564 48,824 Favorable 648,740 Less fixed expenses Fixed manufacturing overhead 998 Unfavorable 110,778 109,780 Fixed selling expenses 69,860 (499 Favorable) 69,361 Fixed administrative expenses 129,540 129,740 (200 Favorable) Total fixed expense 309,679 309,380 299 Unfavorable $387,885 $339,360 $48,525 Favorable Operating income 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: 101,796 pounds at a total of $559,878 Direct materials used: 101,796 pounds Direct labor hours worked: 26,447 at a total cost of $267,115 Machine hours used: 40,868

Answer 1

a	Direct material price variance =	(SP-AP) * AQ
		($5.5 - $559878/101796) * 101796
		($5.5 - $5.5) * 101796
		$0 Not applicable
b	Direct material Quantity variance =	(SQ - AQ used ) *SP
		(10*10250 - 101796) * $5.5
		$3872 favorable
c	Direct labor rate variance =	(SR -AR) *AH
		($10 - 267115/26447) * 26447
		($10 - $10.10) * 26447
		.10 * 26447
		$2645 Unfavorable
d	Direct labor efficiency variance =	(SH - AH) * SR
		(2.59*10250 - 26447) * 10
		$1005 Favorable
e	Variable overhead spending variance =	(SR-AR) * actual machine hours worked
		($7 - $284442/40868) * 40868
		$1634 favorable
f	Variable overhead efficiency variance =	(SH -AH) * SR
		(4*10250-40868) * 7
		$924 Favorable
g	Fixed overhead spending variance =	Budgeted overhead - Fixed overhead
		$109780 - $110778
		$998 Unfavorable
	Performance Report
		Price/Rate/Spending Variance	Quantity/ Efficiency Variance
	Direct Material	$0 Not Applicable	$3872 favorable
	Direct Labor	$2645 Unfavorable	$1005 Favorable
	Variable Overhead	$1634 favorable	$924 Favorable
	Fixed overhead	$998 Unfavorable	$0 Not Applicable
	Total	$2009 Unfavorable	$5801 Favorable
	Yes, Lexi did a good job of controlling production expenses during the month