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ACCT 386 - Week 6 - Homework - Question 3

ACCT 386 - Week 6 - Homework - Question 3
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ACCT 386 - Week 6 - Homework - Question 3

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Question 3

Portland Company's Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who was recently appointed general manager of the Ironton Plant, has just been handed the plant’s contribution format income statement for October. The statement is shown below:

 

Budgeted

Actual

  Sales (6,000 ingots)

$

225,000   

$

225,000   

    





  Variable expenses:

 

  

 

  

     Variable cost of goods sold*

 

73,620   

 

88,700   

     Variable selling expenses

 

17,000   

 

17,000   

    





  Total variable expenses

 

90,620   

 

105,700   

    





  Contribution margin

 

134,380   

 

119,300   

    





  Fixed expenses:

 

  

 

  

     Manufacturing overhead

 

53,000   

 

53,000   

     Selling and administrative

 

68,000   

 

68,000   

    





  Total fixed expenses

 

121,000   

 

121,000   

    





  Net operating income (loss)   

$

13,380   

$

(1,700)  

    










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

     Mr. Santiago 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 doesn't, I won't 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

   3.3 pounds

$

2.30 per pound

$

7.59   

  Direct labor

   0.6 hours

$

6.30 per hour

  

3.78   

  Variable manufacturing overhead

   0.5 hours*

$

1.80 per hour

  

0.90   

    

 

 

 



  Total standard variable cost

 

 

 

$

12.27   

    

 

 

 






*Based on machine-hours.

During October the plant produced 6,000 ingots and incurred the following costs:

a.

Purchased 24,800 pounds of materials at a cost of $2.75 per pound. There were no raw materials in inventory at the beginning of the month.

b.

Used 19,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

c.

Worked 4,200 direct labor-hours at a cost of $6.00 per hour.

d.

Incurred a total variable manufacturing overhead cost of $7,260 for the month. A total of 3,300 machine-hours was recorded.

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