Aunt Mollys Old Fashioned Cookies bakes cookies for retail stores. The companys best-selling cookie is chocolate nut supreme, which is marketed as a gourmet cookie and regularly sells for $8.00 per pound. The standard cost per pound of chocolate nut supreme, based on Aunt Mollys normal monthly produc-tion of 400,000 pounds, is as follows:

Cost ItemQuantityStandard Unit CostTotal CostDirect materials: Cookie mix ......................................................................................................10 oz.$ .02 per oz.$ .20 Milk chocolate .................................................................................................5 oz..15 per oz..75 Almonds ..........................................................................................................1 oz..50 per oz..50$1.45Direct labor:* Mixing ..............................................................................................................1 min.$14.40 per hr.$.24 Baking .............................................................................................................2 min. 18.00 per hr..60$.84Variable overhead ...............................................................................................3 min.$32.40 per direct-labor hr.$1.62 Total standard cost per pound .......................................................................$3.91

Aunt Mollys management accountant, Karen Blair, prepares monthly budget reports based on these standard costs. Aprils contribution report, which compares budgeted and actual performance, is shown in the following schedule.

Contribution Report for AprilStatic BudgetActualVarianceUnits (in pounds) ...................................................................................................400,000450,00050,000 FRevenue ................................................................................................................$3,200,000$3,555,000$355,000 FDirect material ......................................................................................................$580,000$ 865,000$285,000 UDirect labor ...........................................................................................................336,000348,00012,000 UVariable overhead ................................................................................................648,000750,000102,000 U Total variable costs ..........................................................................................$1,564,000$1,963,000$399,000 UContribution margin .............................................................................................$1,636,000$1,592,000$44,000 U

Justine Madison, president of the company, is disappointed with the results. Despite a sizable increase in the number of cookies sold, the products expected contribution to the overall profitability of the firm decreased. Madison has asked Blair to identify the reason why the contribution margin decreased. Blair has gathered the following information to help in her analysis of the decrease.

Usage Report for AprilCost ItemQuantityActual CostDirect materials: Cookie mix .............................................................................................................................4,650,000 oz.$ 93,000 Milk chocolate ........................................................................................................................2,660,000 oz.532,000 Almonds .................................................................................................................................480,000 oz.240,000Direct labor: Mixing .....................................................................................................................................450,000 min.108,000 Baking ....................................................................................................................................800,000 min.240,000Variable overhead ......................................................................................................................750,000 Total variable costs ................................................................................................................$1,963,000

Required: 1. Prepare a new contribution report for April, in which: The static budget column in the contribution report is replaced with a flexible budget column. The variances in the contribution report are recomputed as the difference between the flexible budget and actual columns. 2. What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1)? 3. Explain (i.e., interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (1). 4. What is the total variance between the flexible budget contribution margin and the actual contribu-tion margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variances. (Assume that all materials are used in the month of purchase.) a. Direct-material price variance. b. Direct-material quantity 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. 5. a. Explain the problems that might arise in using direct-labor hours as the basis for applying overhead. b. How might activity-based costing (ABC) solve the problems described in requirement (5a)?