CASE 11-55 (50 MINUTES)

1. The $44,000 unfavorable variance between the budgeted and actual contribution
margin for the chocolate nut supreme cookie product line during April is explained by
the following variances:

a. Direct-material price variance:

Type of Material PQ*(AP + - SP) Variance

Cookie mix...................... 4,650,000($.02-$.02)........ $ 0
Milk chocolate.................. 2,660,000($.20-$.15)........ 133,000 U
Almonds.......................... 480,000($.50-$.50)........... 0
Total.............................................................................. $133,000 U

* PQ = AQ , because all materials were used during the month of purchase.

+
AP = actual total cost (given) ¸ actual quantity
CASE 11-55 (CONTINUED)

b. Direct-material quantity variance:

Type of Material SP(AQ - SQ*) Variance

Cookie mix...................... $.02(4,650,000-4,500,000) $ 3,000 U
Milk chocolate.................. $.15(2,660,000-2,250,000) 61,500 U
Almonds.......................... $.50(480,000-450,000)..... 15,000 U
Total.............................................................................. $79,500 U

* SQ = standard ounces of input per pound of cookies ´ actual pounds of cookies

produced.

c. Direct-labor rate variance = AH(AR - SR) = 0.

Dividing the total actual labor cost by the actual labor time used, for each type of
labor, shows that the actual rate and the standard rate are the same (i.e ., AR =
SR ). Thus, this variance is zero.

d. Direct-labor efficiency variance:

Type of Labor SR*(AH - SH +) Variance

Mixing............................. $.24(450,000-450,000)..... $ 0
Baking............................. $.30(800,000-900,000)..... 30,000 F
Total.............................................................................. $30,000 F

*Standard rate per minute = standard rate per hour ¸ 60 minutes

+
Standard minutes per unit (pound) ´ actual units (pounds) produced
 e. Variable-overhead spending variance
= actual variable overhead - ( AH ´ SVR )
= $750,000 - [(1,250,000*/60) ´ $32.40]
= $75,000 U

*Total actual minutes of direct labor.

CASE 11-55 (CONTINUED)

f. Variable-overhead efficiency variance

= SVR ( AH - SH *)
 1,250,00 3 ´ 450,000 
= $32.40  - 
 60 60 
= $54,000 F

* SH = (3 minutes per unit, or pound ´ 450,000 units, or pounds) ¸ 60 minutes

Sales-price variance =  sales price - sales price  ´ sales volume

actual exp ected actual
g.
 
= ($7.90* - $8.00) ´ 450,000
= $45,000 U

*Actual sales price = $3,555,000 ¸ 450,000 units sold

h. Sales-volume variance
=  sales volume - sales volume  ´ contributi on m arg in
actual budgeted budgeted unit
 
= (450,000 - 400,000) ´ $4.09*
= $204,500 F

*Budgeted unit contribution margin = $1,636,000 ¸ 400,000 units

CASE 11-55 (CONTINUED)

Summary of variances:

Direct-material price variance............................................... $133,000 U

Direct-material quantity variance........................................... 79,500 U
Direct-labor rate variance..................................................... 0
Direct-labor efficiency variance............................................. 30,000 F
Variable-overhead spending variance.................................... 75,000 U
Variable-overhead efficiency variance................................... 54,000 F
Sales-price variance............................................................. 45,000 U
Sales-volume variance......................................................... 204,500 F
Total.................................................................................... $ 44,000 U
2. a. One problem may be that direct labor is not an appropriate cost driver for Aunt
Molly’s Old Fashioned Cookies because it may not be the activity that drives
variable overhead. A good indication of this situation is shown in the variance
analysis. The direct-labor efficiency variance is favorable, while the variable-
overhead spending variable is unfavorable. Another problem is that baking
requires considerably more power than mixing does; this difference could distort
product costs.

b. Activity-based costing (ABC) may solve the problems described in requirement

2(a) and therefore is an alternative that Aunt Molly’s should consider. Since
direct labor does not seem to have a direct cause-and-effect relationship with
variable overhead, the company should try to identify the activity or activities
that drive variable overhead. If the same proportion of these activities is used in
all of Aunt Molly’s products, then ABC may not be beneficial. However, if the
products require a different mix of these activities, then ABC could be beneficial.