Question
Aldrin Variance Case Aldrin Inc. is a small business selling a single product, 16 oz. bags of almonds roasted with olive oil and sea salt.
Aldrin Variance Case
Aldrin Inc. is a small business selling a single product, 16 oz. bags of almonds roasted with olive oil and sea salt. Aldrins relevant range of production is between 450,000 and 650,000 bags a year. Within the relevant range, variable costs per bag remains constant and total annual fixed costs are constant, as shown in Exhibit A.
Exhibit A: Budgeted (Standard) Costs | |
Variable costs per bag: | |
Direct materials (1.2 pounds at $5 per pound of raw almonds) | $6 |
Direct labor (0.05 direct labor hour at $20 per hour) | $1 |
Variable mfg. overhead (0.05 direct labor hour at $8 per hour) | $0.40 |
Selling and administrative expenses | $0.60 |
Fixed costs per year: | |
Mfg. overhead | $800,000 |
Selling and administrative expenses | $450,000 |
Aldrin uses budgets and standards in its planning and control functions. Aldrin makes use of its standards in order to derive their budgeted costs per bag of roasted almonds. For example, when determining direct material costs for the planning budget income statement, the $6 budgeted direct material cost per bag in Exhibit A would be used in the calculation.
The planning budget income statement is based on the expectation of selling 500,000 bags of roasted almonds, resulting in a denominator level of activity of 25,000 direct labor hours. The budgeted selling price is $12 per bag.
The company actually produced and sold 540,000 bags at $11.40 per bag this year. The company never has a beginning or ending raw materials inventory, because it uses all raw materials purchased. Also, the company never has a beginning or ending finished goods inventory. Everything produced in the year is sold in that same year.
The actual income statement for the year is provided in Exhibit B.
Exhibit B: Aldrin Inc. | |
Actual Income Statement | |
Sales (540,000 bags produced and sold at $11.4 per bag) | $6,156,000 |
Less Variable Costs: | |
Direct materials (702,000 pounds at $4.3 per pound) | 3,018,600 |
Direct labor (32,400 direct labor hours at $17 per hour) | 550,800 |
Variable manufacturing overhead | 272,160 |
Variable selling and administrative costs | 270,000 |
Contribution margin | 2,044,440 |
Less Fixed Costs: | |
Fixed manufacturing overhead costs | 768,000 |
Fixed selling and administrative costs | 455,000 |
Net operating income | $821,440 |
Q) Prepare a very detailed manufacturing cost variance analysis (e.g., calculate the material price variance and quantity variance; the labor rate variance and efficiency variance; the variable overhead rate variance and efficiency variance; and the fixed manufacturing overhead budget variance and volume variance). All variances should be marked with either an F for favorable or U for unfavorable. Show your calculations.
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