11-55

Aunt Molly’s Old Fashioned Cookies bakes cookies for retail stores. The company’s best-selling cookie is chocolate nut supreme, which is marketed as a gourmet cookie and regularly sells for \$8.00 per pound. The standard cost per pound of chocolate nut supreme, based on Aunt Molly’s normal monthly production of 400,000 pounds, is as follows:

Cost Item Quantity Standard unit cost Total Cost

Direct materials

Cookie mix 10oz \$ .02 per oz \$ .20

Milk chocolate 5oz .15 per oz .75

Almonds 1oz .50 per oz .50

\$ 1.45

Direct Labor

Mixing 1 min 14.40 per hr \$ .24

Baking 2 min 18.00 per hr .60

\$ .84

Variable Overhead 3 min 32.40 per hr \$ 1.62

Total Standard cost per pound \$ 3.91

Aunt Molly’s management accountant, Karen Blair, prepares monthly budget reports based on these standard costs. April’s contribution report, which compares budgeted and actual performance, is shown in the following schedule.

Contribution Report for April

Static budget Actual Variance

Units (in pounds) 400,000 450,000 50,000 F

Revenue \$3,200,000 \$3,555,000 \$355,000F

Direct materials \$580,000 \$865,000 \$285,000 U

Direct Labor 336,000 348,000 12,000 U

Variable Overhead 648,000 750,000 102,000 U

Total variable costs \$1,564,000 \$1,963,000 \$399,000 U

Contribution margin \$1,636,000 \$1,592,000 \$44,000 U

Justine Madison, president of the company, is disappointed with the results. Despite a sizeable increase in the number of cookies sold, the products expected contribution to the overall profitability of the firm decreased. Madison has asked Blair to identify the reason why the contribution margin decreased. Blair has gathered the following information to help in her analysis of the decrease.

Usage Report for February

Cost Item Quantity Actual cost

Direct materials:

Milk chocolate 2,660,000 oz 532,000

Almonds 480,000 oz 240,000

Direct Labor:

Mixing 450,000 min 108,000

Baking 800,000 min 240,000

Total Varaible Costs \$1,963,000

1. Prepare a new contribution report for April, in which:

The static budget column in the contribution report is placed with a flexible budget column.

The variances in the contribution report are recomputed as the difference between the flexible budget and actual columns.

2. What is the total contribution margin in the flexible budget column of the new report prepared for requirement (1)?

3. Explain (interpret) the meaning of the total contribution margin in the flexible budget column of the new report prepared for requirement (1).

4. What is the total variance between the flexible budget contribution margin and the actual contribution margin in the new report prepared for requirement (1)? Explain this total contribution margin variance by computing the following variance. (Assuming all materials are used in the month of purchase).

a. Direct-Material price variance

b. Direct material quantity variance

c. Direct labor-rate variance

d. Direct labor efficiency variance