Question
Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company
Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 108,000 liters at a budgeted price of $135 per liter this year. The standard direct cost sheet for one liter of the preservative follows. Direct materials (2 pounds @ $8) $ 16 Direct labor (0.5 hours @ $32) 16 Variable overhead is applied based on direct labor hours. The variable overhead rate is $60 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $30 per unit. All non-manufacturing costs are fixed and are budgeted at $1.6 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $438,000 unfavorable. The following is the actual income statement (in thousands of dollars) for the year. Sales revenue $ 13,998 Less variable costs Direct materials 1,528 Direct labor 1,610 Variable overhead 2,930 Total variable costs $ 6,068 Contribution margin $ 7,930 Less fixed costs Fixed manufacturing overhead 1,090 Non-manufacturing costs 1,270 Total fixed costs $ 2,360 Operating profit $ 5,570 During the year, the company purchased 184,000 pounds of material and employed 44,400 hours of direct labor. Required: a. Compute the direct material price and efficiency variances. b. Compute the direct labor price and efficiency variances. c. Compute the variable overhead price and efficiency variances.
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