59. Variable Production Cost Variance Analysis and Performance Evaluation. Deerfield Plastics, Inc., produces plastic snow shovels. Variable overhead is applied to products based on machine hours. The company uses a just-in-time production system and thus has insignif- icant inventory levels at the end of each month. The income statement for the month of January comparing actual results with the flexible budget is shown below based on actual sales of 10,000 units: Sales Variable cost of goods sold Variable selling and administrative expenses Contribution margin Fixed cost of goods sold Fixed selling and administrative expenses Net profit $ Deerfield Plastics, Inc. Income Statement (budget versus actual) Actual 305,000 $ 108,700 76,000 120,300 53,000 38,000 29,300 $ Budget 300,000 $ 100,000 70,000 130,000 55,000 35,000 40,000 $ Variance Direct materials (12 pounds per unit at $0.50 per pound) Direct labor (0.20 hours at $15 per hour) Variable overhead (0.10 machine hours at $10 per hour) (5,000) Favorable 8,700 Unfavorable 6,000 Unfavorable 9,700 Unfavorable (2,000) Favorable 3,000 Unfavorable 10,700 Unfavorable Deerfield Plastics, Inc., is disappointed with the actual results and has hired you as a con- sultant to provide further information as to why the company has been struggling to meet budgeted net income. Your review of the previously presented budget versus actual analysis identifies variable cost of goods sold as the main culprit. The unfavorable variance for this line item is $8,700. After further research, you are able to track down the standard cost information for variable production costs: Standard Cost per Unit 6 3 1 Actual production information related to variable cost of goods sold for the month of January is as follows: 10,000 units were produced and sold. 150,000 pounds of material was purchased and used at a total cost of $67,500. 1,900 direct labor hours were used during the month at a total cost of $30,400. 1,200 machine hours were used during the month. Variable overhead costs totaled $10,800. Required: a. Calculate the materials price variance and materials quantity variance using the format shown in Figure 10.2. Clearly label each variance as favorable or unfavorable. b. Calculate the labor rate variance and labor efficiency variance using the format shown in Figure 10.3. Clearly label each variance as favorable or unfavorable. c. Calculate the variable overhead spending variance and variable overhead efficiency vari- ance using the format shown in Figure 10.4. Clearly label each variance as favorable or unfavorable. d. List each of the six variances calculated in requirements a, b, and c, and total the variances to show one net variance. Clearly label the net variance as favorable or unfavor- able. Explain how this net variance relates to variable cost of goods sold on the income statement. e. Identify the highest favorable variance and highest unfavorable variance from the six listed in requirement d, and provide one possible cause of each variance. f. Jan Phalen, the manager at Deerfield Plastics, Inc., reviewed the company's variance analysis report for the month of January. The materials price variance of $(7,500) was the most significant favorable variance for the month, and the materials quantity vari- ance of $15,000 was the most significant unfavorable variance. Jan would like to reward the company's purchasing agent for achieving such substantial savings by giving him a $2,000 bonus while not providing any bonus for the production manager. 1. Do you agree with Jan's approach to awarding bonuses? Explain. 2. What circumstances might lead to the conclusion that the purchasing agent should not receive a bonus for the month of January?