Variable Production Cost Variance Analysis Iron Products Inc. produces prefabricated iron fencing used in commercial construction. Variable overhead is applied to products based on direct labor hours. The company uses a just-in-time production system and thus has insignificant inventory levels at the end of each month.

The company's income statement for the month of November comparing actual results with the flexible budget based on actual sales of 2,000 units is shown below.

	Actual	Budget	Variance
Sales	$1,805,000	$1, 800 ,000	$(5,000 )	Favorable
Variable cost of goods sold	867,4 00	800 ,000	67,4 00	Unfavorable
Variable selling and administrative expenses	250,000	240,000	10,000	Unfavorable
Contribution margin	687,600	760,000	72,400	Unfavorable
Fixed cost of goods sold Fixed selling	575,000	580,000	(5,000)	Favorable
administrative expenses	117,000	120,000	(3000)	Favorable
Net Profit	(4,400)	60,000	64,000	Unfavorable

Iron Products is disappointed with the actual results and has hired you as a consultant to provide further information as to why the company has been struggling to meet budgeted net profit. Your review of the above budget versus actual analysis identifies variable cost of goods sold as the main culprit. The unfavorable variance for this line item is $67,400.

After further research, you are able to track down the following standard cost information for variable production costs:

Direct materials (50 pounds per unit at $5 per pound) $250

Direct labor (3 hours at $20 per hour) 60

Variable overhead (3 direct labor hours at $30 per hour) 90

Standard variable production cost per unit $400

Actual production information related to variable cost of goods sold for the month of November is as follows:

• 2,000 units were produced and sold.

• 110,000 pounds of material were purchased and used at a total cost of $528,000.

• 5,600 direct labor hours were used during the month at a total cost of $134,400.

• Variable overhead costs totaled $205,000.

Required

a. Calculate the material s price variance and materials quantity variance. Clearly label each variance as favorable or unfavorable.

b. Identify the highest favorable variance and highest Calculate the labor rate variance and labor efficiency variance. Clearly label each variance as favorable or

unfavorable.

c. Calculate the variable overhead spending variance and variable overhead efficiency variance. 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 unfavorable. 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.

Answer rating: 100% (QA)

Part 1 Calculation of Material Price Variance and Material Quantity Variance Particulars Flexible Budget Actual Data Units 2000 2000 Pound of Material 100000 pound 502000 110000 Give Rate Per Pound 5 ... View the full answer