The Wood River Refinery is an oil refinery located in Roxana, Illinois, about 15 miles north of St. Louis. Wood River is the largest refinery operated by Phillips 66, and is capable of refining 10 million barrels of crude oil per month.

The refinery uses a standard costing system with absorption costing. All over/under applied costs are closed to cost of goods sold at the end of each month. Wood River refines crude oil, measured in barrels into gasoline, measured in gallons. During late December, 2022, the refinery was shut down for routine maintenance, and so at the start of January, 2023, has no inventory of any kind. All budgets are all based on having no inventory of any type in the plant at month end.

Wood River has two direct materials: crude oil, which is added at the start of the process, and additives, which are added at the end of the process. All overhead, which includes labor, is considered a fixed cost, and is added evenly during the process. Overhead is allocated based on machine hours.

Wood Rivers monthly budget, set in late 2022, calls for the refinery to convert 9 million barrels of crude oil into 12 million gallons of gasoline each month. Doing so should require 120,000 machine hours, and 48 million grams of additive. The budget assumes that crude oil costs $100 per barrel and additives cost $5 per gram. The total static budget cost to produce 12 million gallons of gasoline is $1,740 million.

During January, 2023, Wood River actually spent the following amounts:

8.8 million barrels of crude oil $ 422,400,000

51 million grams of additive $ 306,000,000

Fixed overhead (*) $ 624,000,000

Total expenditures $1,352,400,000

(*) During the month, Wood River actually produced 90 gallons of gasoline per machine hour.

At the end of the day on January 31, 2023, Wood River had the following inventory:

Raw materials inventory of 5.1 million grams of additive

Work-in-process inventory of 800,000 gallons of gasoline, 75% through production

Finished goods inventory of 1.3 million gallons of gasoline

In addition, Wood River completed and sold 8.9 million gallons of gasoline during the month.

1. Compute the variance which best captures the effect on the total cost of crude oil used in production of the change in the price per barrel of crude oil (i.e., a crude oil price variance). (10 points) __________

2. Compute the variance which best captures the effect on the total cost of the additive used in production of the change in the amount of additive used per gallon of gasoline produced (i.e., an additive efficiency variance). (10 points) __________

3. Compute the variance which best captures the effect on fixed overhead of the change in output produced (i.e., a fixed overhead volume variance). (10 points) __________

4. How much will be recorded as total inventory on the refinerys balance sheet as of January 31, 2023? (15 points) __________

5. What will be the total over/under applied cost recorded in Wood Rivers income statement for the month ended January 31, 2023? Your answer should include both a number and a direction (i.e., over or under). (10 points) __________

6. Note that the sum of the variances computed in the first three parts of this question does NOT add up to the total flexible budget variance for the refinery for the month of January, 2023. Briefly explain why not (2-3 sentences should be sufficient). It is sufficient to point out which variances should be added to or subtracted from the first three parts of this question in order to arrive at the flexible budget variance. (15 points)

7. An employee in the refinerys budget group notes that in November, 2022, (i.e., several months before the analysis above), the actual fixed overhead costs were exactly as budgeted, so the fixed overhead budget variance was zero. Nevertheless, the department had significant under-applied fixed overhead which had to be closed to CoGS at the end of the month. How is this possible? Be as specific as possible in describing the circumstances which can lead to this result, but note that no computations are necessary. (10 points)