Managerial Accounting: Case 11-55 Aunt Molly's Old Fashioned Cookies bakes cookies for retail stores

Managerial Accounting  
Case 11-55 Cost and Variance Measures
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  10   oz.   0.02  per oz.  0.20 
     Milk chocolate  5   oz.   0.15  per oz.  0.75 
     Almonds  1   oz.   0.50  per oz.  0.50 
 1.45 
  Direct labor:*
     Mixing  1   min   14.40  per hr.  0.24 
     Baking  2   min.   18.00  per hr.  0.60 
 0.84 
  
  Variable overhead†  3   min   32.40  per hr.  1.62 
     Total standard cost per pound  3.91 
 
*Direct-labor rates include employee benefits.
†Applied on the basis of direct-labor hours.
  
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   355,000   F 
  Direct material  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 sizable increase in the number of cookies sold, the products expected contribution to the overall profitability of the firm decreased. Madison asked Blair to identify the reason why the contribution margin decreased. Blair has gathered the following information to help in his analysis of the decrease.
Usage Report for April
  Cost Item  Quantity   Actual Cost 
  Direct materials:
     Cookie mix  4,650,000   oz.   93,000 
     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 
  Variable overhead  750,000 
     Total variable costs  1,963,000 
 
Required:
1.   Prepare a new contribution report for April, in which:
a. The static budget column in the contribution report is replaced with a flexible budget column.
b. 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 (i.e., 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 variances. (Assume that 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. 
e. Variable-overhead spending variance. 
f. Variable-overhead efficiency variance. 
g. Sales-price variance. 
5.  a. Explain the problems that might arise in using direct-labor hours as the basis for applying overhead. 
b. How might activity-based costing (ABC) solve the problems described in requirement (5a)?
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