COMPREHENSIVE VARIANCE ANALYSIS

Portland Company's Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who

was recently appointed general manager of the Ironton Plant, has just been handed the plant's contibution

format income statement for Ocotber. The statement is shown below:

Budgeted Actual

Sales(5,000 ingots) $250,000 $250,000

Variable expenses:

Variable cost of goods sold* 80,000 96,390

Variable selling expenses 20,000 20,000

Total variable expenses 100,000 116,390

Contribution margin 150,000 133,610

Fixed expenses:

Manufacturing overhead 60,000 60,000

Selling and administrative 75,000 75,000

Total fixed expenses 135,000 135,000

Net operating income (loss) $15,000 ($1,390)

Mr. Santiago was shocked to see the loss for the month, particularly because 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 the following standard varibale cot per ignod:

Standard quantity of hours standard price rate Standard cost

Direct Materials 4.0 pounds $2.50 per pound $10.00

Direct Labor 0.6 hours $9.00 per hour 5.40

Variable manufacturing overhead 0.3 hours* $2.00 per hour 0.60

Total standard variable cost $15.00

During October the plant produces 5,000 ingots and incurred the following costs:

a. Purchased 25,000 pounds of material at a cost of $2.95 per pound. There were o raw materials in

inventory at the beginning of the month.

b. Used 19,800 pounds of materials in production. (Finished goods and work in process inventories

are insignificant and can be ignored.)

c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour.

d. Inccured a total variable manufacturing overhead cost of $4,320 for the month. A total of 1,800

machine hours was recorded. It is the company's policy to close all variances to cost of goods sold

on a monthly basis.

Required:

1. PREPARE journal entries record the incurrence of costs and the variances in October from a to d
2. present the analysis of the following variances for October:

a.Direct materials price quantity variances

b. Direct labor rate and efficiency variances.

c. Variable manufacturing overhead spending and efficiency variances.

3. Indicate whether the variance is favorable or unfavorable

4. pick out two most significant variances that you have computed. Explain to MR. Santiago possible causes of these variances.