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3. The Brownton Company's Ironton Plant produces precast ingots for industrial use. Carl Brown, who was recently appointed general manager of the Ironton Plant, has
3. The Brownton Company's Ironton Plant produces precast ingots for industrial use. Carl Brown, who was recently appointed general manager of the Ironton Plant, has just been handed the plant's income statement for October 2022. The statement reports an actual loss of $1,390 compared to a budgeted profit of $15,000. Mr. Brown was shocked to see a loss for the month, particularly since sales were exactly as budgeted. He stated, "I 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 overhead applied on the basis of direct labor hours. The standard cost per ingot is as presented below: Mr. Brown has determined that during the month of October the plant produced and sold 5,500 units (1,000 units less than budgeted) and incurred the following costs: 1. Purchased 15,000 pounds of materials at a cost of $3.05 per pound (total cost of 2. Used 19,800 pounds of materials in production. (Finished goods and work in process inventories are nominal and can be ignored.) 3. Worked 3,700 direct labor-hours at a total cost of $31,450 (or $8.50 per hour) 4. Incurred total variable overhead costs for the month of $8,420. 5. Incurred total fixed overhead costs for the month of $40,500. It is the company's policy to isolate the materials price variance upon purchase of raw materials. Variances are closed to cost of goods sold at the end of the fiscal year (January 31 of each year). Required: (20 points) A) Compute the following variances for the month of October 2022 i) Direct materials price ii) Direct labor efficiency iii) Variable overhead spending iv) Fixed overhead volume B) Identify the most significant variance that you computed in A) above. Explain to Mr. Brown the possible causes of this variance, so that he will know where to concentrate his and his subordinates' time. 3. The Brownton Company's Ironton Plant produces precast ingots for industrial use. Carl Brown, who was recently appointed general manager of the Ironton Plant, has just been handed the plant's income statement for October 2022. The statement reports an actual loss of $1,390 compared to a budgeted profit of $15,000. Mr. Brown was shocked to see a loss for the month, particularly since sales were exactly as budgeted. He stated, "I 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 overhead applied on the basis of direct labor hours. The standard cost per ingot is as presented below: Mr. Brown has determined that during the month of October the plant produced and sold 5,500 units (1,000 units less than budgeted) and incurred the following costs: 1. Purchased 15,000 pounds of materials at a cost of $3.05 per pound (total cost of 2. Used 19,800 pounds of materials in production. (Finished goods and work in process inventories are nominal and can be ignored.) 3. Worked 3,700 direct labor-hours at a total cost of $31,450 (or $8.50 per hour) 4. Incurred total variable overhead costs for the month of $8,420. 5. Incurred total fixed overhead costs for the month of $40,500. It is the company's policy to isolate the materials price variance upon purchase of raw materials. Variances are closed to cost of goods sold at the end of the fiscal year (January 31 of each year). Required: (20 points) A) Compute the following variances for the month of October 2022 i) Direct materials price ii) Direct labor efficiency iii) Variable overhead spending iv) Fixed overhead volume B) Identify the most significant variance that you computed in A) above. Explain to Mr. Brown the possible causes of this variance, so that he will know where to concentrate his and his subordinates' time
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