Problem 6-30 (Part Level Submission) Lexi Belcher picked up the monthly report t

Question

Problem 6-30 (Part Level Submission)

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.

Required
a. Calculate the direct materials price variance for the month.
b. Calculate the direct materials 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 Lexi in evaluating her efforts to control production costs.
i. Based on your review of the performance report you prepared, do you think Lexi did a good job of controlling production expenses during the month? Why or whynot? !

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

Solution:

a)

Direct Material Price Variance = Actual Quantity Purchased (Standard Price – Actual Price)

Or

(Actual Quantity Purchased x Standard Price) – (Actual Quantity Purchased x Actual Price)

= (101,592 x $5.5) - $558,756

= $558,756 - $558,756

= 0 No Variance

b)

Direct Material Quantity Variance = Standard Price (Standard Quantity for actual production – Actual Quantity Used)

Standard Quantity for actual production = Actual Output x Standard Quantity needed for 1 unit = 10,250 x 10 = 102,500 Pounds

Material Quantity Variance = $5.5 (102,500 – 101,592)

= $4,994 Favorable

c)

Direct Labor Rate Variance = Actual Hour (Standard Rate per hour – Actual Rate Per Hour)

Or

(Actual Hour x Standard Rate per hour) – (Actual Hour x Actual Rate per hour)

= (26,394*10) – $266,579

= $263,940 - $266,579

= $2,639 Unfavorable

d)

Direct Labor Efficiency Variance = Standard Rate per hour (Standard Hours for actual production – Actual Hours)

Standard Hours for actual production = Actual Production x Standard Hours needed for 1 unit = 10,250*2.59 = 26,547.50 Hours

Direct Labor Efficiency Variance = $10 (26,547.50 – 26,394)

= $1,535 Favorable

For rest requirements --- please ask separate question

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