Wendys Firm, the Cactus Plant produces a metal for industrial use. Ilya Goa, who was recently appointed general manager of the Cactus Plant, has just been handed the plants contribution format income statement for October. The statement is shown below:

	Budgeted	Actual
Sales (8,000 metal units).....................	$240,000	$240,00
Variable expenses:
Variable cost of goods sold* ...........	94,000	112,470
Variable selling expenses ................	10,000	10,000
Total variable expenses ..................	104,000	122,470
Contribution margin ...........................	136,000	117,530
Fixed expenses:
Manufacturing overhead .................	55,000	55,000
Selling and administrative ...............	70,000	70,000
Total fixed expenses ...........................	125,000	125,000
Net operating income (loss) ................	$ 11,000	$(7,470)

*Contains direct materials, direct labor, and variable manufacturing overhead.

Mr. Goa 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 doesnt, I wont have the slightest idea of where to start looking for the problem. The plant does use a standard cost system, with the following standard variable cost per ingot:

	Standard Quantity or Hours	Standard Price or Rate	Standard Cost
Direct materials ................................	3.5 pounds	$2.50 per pound	$ 8.75
Direct labor ......................................	0.4 hours	$6.50 per hour	2.60
Variable manufacturing overhead ......	0.2 hours*	$2.00 per hour	0.40
Total standard variable cost ..............			$11.75
*Based on machine-hours.

During October the plant produced 8,000 ingots and incurred the following costs:

a. Purchased 33,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month.

b. Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c. Worked 3,800 direct labor-hours at a cost of $6.20 per hour.

d. Incurred a total variable manufacturing overhead cost of $4,560 for the month. A total of 1,900 machine-hours was recorded.

It is the companys policy to close all variances to cost of goods sold on a monthly basis.

1. Compute the following variances for October:

a. Direct materials price and quantity variances.

b. Direct labor rate and efficiency variances.

c. Variable overhead rate and efficiency variances.

2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. What impact did this figure have on the companys income statement?

3. Pick out the two most significant variances that you computed in (1) above. Explain to Mr. Goa possible causes of these variances.