Aunt Molly's Old Fashion Cookies bakes cookies for retail stores. The company's best-selling cookie is chocolate nut supreme, which is marked as a gourmet cookie and regularly sells for $8.00 per pound. The standard cost per pound of chocolate nut supreme, based on Aunt Molly's normal monthly production of 400,000 pounds, is as follows:

Cost Item	Quantity	Standard Unit Cost	Total Cost
Direct Materials: Cookie mix Milk Chocolate Almonds	10 oz. 5 oz. 1 oz.	$0.02 per oz. 0.15 per oz. 0.75 per oz.	$0.20 0.75 0.75
			$1.70
Direct Labor*: Mixing Baking	1 min. 2 min.	14.40 per hour 18.00 per hour	$0.24 0.60
			$0.84
Variable Overhead**	3 min.	32.40 per hour	1.62
Total Standard Cost per Pound			$4.16

*Direct Labor Rate include employee benefits

**Applied on the basis of direct-labor hours

Aunt Molly's management accountant, Haley Dunphy, prepares monthly budget reports based on these standard costs. April's contribution margin report, which compares budgeted and actual performance, is shown in the following schedule.

Contribution Report for the Month of April
	Static Budget	Actual	Variance
Units (in pounds)	400,000	450,000	50,000 F
Revenue	$3,200,000	$3,555,000	$355,000 F
Direct Material	680,000	985,000	305,000 U
Direct Labor	336,000	360,000	24,000 U
Variable Overhead	648,000	750,000	102,000 U
Contribution Margin	1,536,000	1,460,000	76,000 U

Claire Dunphy, president of the company, is disappointed with the results. Despite a sizable increase in the number of cookies sold, the product's expected contribution to the overall profitability of the firm decreased. Claire has asked Haley to identify the reason why the contribution margin decreased. Haley has gathered the following information to help in her analysis of the decrease.

Usage Report for April
Cost Item	Quantity	Actual Cost
Direct Materials: Cookie mix Milk Chocolate Almonds	4,650,000 oz. 2,660,000 oz. 480,000 oz.	$93,000 532,000 360,000
Direct Labor*: Mixing Baking	450,000 min. 840,000 min.	108,000 252,000
Variable Overhead	1,290,000 min.	750,000
Total Variable Costs		$2.095,000

REQUIRED:

1. What is the total contribution margin in the flexible budget (level 2). (5 points)

2. What is the total variance between the flexible budget contribution margin and the actual contribution margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variances and provide analysis for each variance (Assume all materials are used in the month of purchase)

a. Direct-material price variance

b. Direct-material efficiency variance

c. Direct-labor rate variance

d. Direct-labor efficiency variance

e. Variable-overhead spending variance

f. Variable overhead efficiency variance

g. Sales-price variance

(2 points each variance, and 10 points for the explanation, 24 points total)

3.

3. Explain the problems that might arise in using direct-labor hours as the basis for applying overhead. (6 points)

4. How might Activity-Based Costing (ABC) solve the problems described in requirement (5)? (5 points)