Colonial Cookies, Inc., 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 Colonials normal monthly production of 200,000 pounds, is as follows.

Cost item	Quantity	Standard unit Cost	Total Cost
Direct Material:
Cookie mix	10 oz	$.02 per oz	$.20
Milk Chocolate	5 oz	.15 per oz	.75
Almonds	1 oz.	.50 per oz	.50
			1.45
Direct labor:
Mixing	1 min	14.40 per hr	$ .24
Baking	2 min	18.00 per hr	.60
			.84
Variable overhead+	3 min	32.40 per direct-labor hr	1.62
Total standard cost per pound			$3.91

*Direct labor rates include employees benefits.

+ applied on the basis of direct-labor hours

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

	Contribution report for February
	Static Budget	Actual	Variance
Units (in Pounds)	200,000	225,000	25,000 Favorable
Revenue	$1,600,000	$1,777,500	$177,500 F
Direct Material	$290,000	$432,500	$142,500 Unfavorable
Direct Labor	168,000	174,000	6,000 U
Variable overhead	324,000	375,000	51,000 U
Total variable costs	$782,000	$981,500	$199,500 U
Contribution Margin	$818,000	$796,000	$22,000 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 gather the following information to help in her analysis of the decrease.

	Usage Report For February
Cost Item	Quantity	Actual Cost
Direct materials:
Cookie mix	2,325,000 oz.	$46,500
Milk Chocolate	1,330,000 oz.	266,000
Almonds	240,000 oz	120,000
Direct Labor:
Mixing	225,000 min	54,000
Baking	400,000 min	120,000
Variable overhead		375,000
Total variable costs		$981,500

Required:

1. Prepare a new contribution report for February, in which:

• The static budget column in the contribution report is replaced with a flexible budget column.
• The variance in the contribution report are recomputed as the difference between the flexible budget and actual columns.

1. What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1)?
2. Explain (interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (10.
3. 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. (Assume that all materials are used in the month of purchases.)
   1. Direct- material price variance
   2. Direct- material quantity variance.
   3. Direct-labor rate variance.
   4. Direct-labor efficiency variance.
   5. Variable- overhead spending variance
   6. Variable-overhead efficiency variance
   7. Sales-price variance.
4. 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)?