Business, 06.06.2020 18:59, beesbutterflyqueen
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.$1,805,000$1, 800 ,000$(5,000 )FavorableVariable cost of goods sold867,4 00800 ,00067,4 00UnfavorableVariable selling and administrative expenses250,000240,00010,000Unfavor ableContribution margin687,600760,00072,400Unfavorab leFixed cost of goods sold Fixed selling575,000580,000(5,000)Favorab leadministrative expenses117,000120,000(3000)Favorab leNet Profit(4,400)60,00064,000Unfavorabl eIron 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) $250Direct labor (3 hours at $20 per hour) 60Variable overhead (3 direct labor hours at $30 per hour) 90Standard variable production cost per unit $400Actual 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.
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