6.30 (LO 1, 2, 3, 4, 5, 6, 7, 8) Comprehensive flexible budgets and variance analysis Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk. She smiled as her eyes went straight to the bottom line of the report and saw the favorable variance for operating income, confirming her decision to push the workers to get those last 300 cases off the production line before the end of the month.

But as she glanced over the rest of numbers, Lexi couldnt help but wonder if there were errors in some of the line items. She was puzzled at how most of the operating expenses could be higher than the budget since she had worked hard to manage the production line to improve efficiency and reduce costs. Yet the report, shown below, showed a different story.

Actual Budget Variance

Cases produced and sold 10,300 10,000 300 F

Sales revenue $2,080,600 $2,000,000 $80,600 F

Less variable expenses

Direct material 593,160 575,000 18,160 U

Direct labor 290,310 280,000 10,310 U

Variable manufacturing overhead 231,450 225,000 6,450 U

Variable selling expenses 112,340 110,000 2,340 U

Variable administrative expenses 43,285 42,000 1,285 U

Total variable expenses 1,270,545 1,232,000 38,545 U

Contribution margin 810,055 768,000 42,055 F

Less fixed expenses

Fixed manufacturing overhead 122,000 125,000 3,000 F

Fixed selling expenses 86,280 85,000 1,280 U

Fixed administrative expenses 149,000 148,000 1,000 U

Total fixed expenses 357,280 358,000 (720) F

Operating income $452,775 $410,000 $42,775 F

Lexi picked up the phone and called Irvin. Irvin, I dont get it. We beat the budgeted operating income for the month, but look at all the unfavorable variances on the operating costs. Can you help me understand whats going on? Let me look into it and Ill get back to you, Irvin replied.

Irvin gathered the following additional information about the months performance.

Direct materials purchased: 55,000 pounds at a total of $632,500

Direct materials used: 51,200 pounds

Direct labor hours worked: 26,500 at a total cost of $290,310

Machine hours used: 52,200

Irvin also found the standard cost card for a case of product.

Standard Price Standard Quantity Standard Cost

Direct materials $11.50 per pound 5 pounds $57.50

Direct labor $11.20 per DLH 2.5 DLH 28.00

Variable overhead $4.50 per MH 5 MH 22.50

Fixed overhead $2.50 per MH 5 MH 12.50

Total standard cost per case $120.50

Required

a. Calculate the direct materials price variance for the month.

b. Calculate the direct materials quantity variance for the month.

c. Calculate the direct labor rate variance for the month.

d. Calculate the direct labor efficiency variance for the month.

e. Calculate the variable overhead spending variance for the month.

f. Calculate the variable overhead efficiency variance for the month.

g. Calculate the fixed overhead spending variance for the month.

h. Prepare a performance report that will assist Lexi in evaluating her efforts to control production costs.

i. Based on your review of the performance report you prepared, do you think Lexi did a good job of controlling production expenses during the month? Why or why not?