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 140,000 liters at a budgeted price of $375 per liter this year. The standard direct cost sheet for one liter of the preservative follows.
Direct materials (2 pounds @ $24) $48
Direct labor (0.5 hours @ $64) 32
Variable overhead is applied based on direct labor hours. The variable overhead rate is $220 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $110 per unit. All non-manufacturing costs are fixed and are budgeted at $3.2 million for the coming year.
At the end of the year, the costs analyst reported that the sales activity variance for the year was $1,110,000 unfavorable.
The following is the actual income statement (in thousands of dollars) for the year.
Sales revenue $50,638
Less variable costs
Direct materials 5,268
Direct labor 1,210
Variable overhead 1,130
Total variable costs $7,608
Contribution margin $43,030
Less fixed costs
Fixed manufacturing overhead 1,250
Non-manufacturing costs 1,430
Total fixed costs $2,680
Operating profit $40,350
Required:
Construct a profit variance analysis.
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