Question

London Company’s Forest City Plant produces precast ingots for industrial use. Anne-Marie Gosnell, who was recently appointed general manager of the Forest City Plant, has just been handed the plant’s income statement for October. The statement is shown below. Gosnell was shocked to see the poor results for the month, particularly since sales were exactly as budgeted. She stated, “I sure hope the plant has a standard costing system in operation. If it doesn’t, I won’t have the slightest idea of where to start looking for the problem.”
The plant uses a standard costing system, with the standard variable cost per ingot details shown below:
Gosnell has determined that during October the plant produced 2,500 ingots and incurred the following costs:
a. Purchased 6,300 kilograms of materials at a cost of $1.50 per kilogram. There were no raw materials in inventory at the beginning of the month.
b. Used 4,900 kilograms of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c. Worked 1,800 direct labour-hours at a cost of $9.50 per hour.
d. Incurred a total variable manufacturing overhead cost of $1,080 for the month. A total of 900 machine-hours was recorded. It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
Required:
1. Compute the following variances for October:
a. Direct materials price and quantity variances.
b. Direct labour rate and efficiency variances.
c. Variable manufacturing overhead spending and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favourable or unfavourable variance for October. What impact did this figure have on the company’s income statement?
3. Pick out the two most significant variances that you computed in (1) above. Explain to Gosnell possible causes of these variances.


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  • CreatedJuly 08, 2015
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