Ontario Variance Case

Ontario Inc. manufactures a single product, Lonno. Ontario uses budgets and standards in its planning and control functions. Ontario makes use of its standards to derive their budgeted cost per unit. For example, Exhibit A provides information on the budgeted variable costs per unit. When determining direct material costs for the planning (master) budget income statement, the $5.44 budgeted material cost per unit of Lonno would be used in the calculation.

Exhibit A

	Budgeted (Standard) Variable Costs Per Unit of Lonno
Raw material: 3.4 pounds at $1.60 per pound	$ 5.44
Direct labor: 0.8 direct labor hours at $18.00 per hour	14.40
Variable overhead: 0.8 direct labor hours at $12.00 per hour	9.60
Total variable budgeted (standard) cost per Lonno	$29.44

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The standards for fixed manufacturing overhead costs are: 0.8 direct labor hours at $16.00 per hour. The standard fixed manufacturing overhead rate per hour is calculated based on a denominator level of activity of 32,000 direct labor hours.

The planning budget income statement is based on the expectation of selling 32,000 units of Lonno. The budgeted sales price is $62.00 per unit, and total budgeted fixed selling and administrative costs are $186,500. There are no variable selling and administrative costs in this firm.

The company actually produced and sold 28,000 units this year. 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

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Ontario Inc.

Actual Income Statement

Sales:
28,000 units at $65.00	$1,820,000
Less Variable Costs:
Direct materials	181,440
Direct labor	392,000
Variable manufacturing overhead	__281,000
Contribution margin	965,560
Less Fixed Costs:
Fixed manufacturing overhead costs	495,000
Fixed selling and administrative costs	175,000
Net operating income	$ 295,560

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Actual production data and actual costs for the year are given in Exhibit C.

Exhibit C

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Direct materials purchased and used:	100,800 pounds at $1.80 per pound
Direct labor:	19,600 direct labor hours at $20.00/hr.
Variable overhead costs:	$281,000
Fixed overhead costs:	$495,000
Production	28,000 units

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QUESTION:

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.