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
Total Standard cost per pound
3 min
32.40 per hr
$ 1.62
$ 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
Units (in pounds)
400,000
Actual
Variance
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:
Cookie mix
4,650,000 oz
$93,000
Milk chocolate
2,660,000 oz
532,000
480,000 oz
240,000
Mixing
450,000 min
108,000
Baking
800,000 min
240,000
Almonds
Direct Labor:
Variable Overhead
Total Varaible Costs
750,000
$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
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 bases for applying
overhead.
b. How might activity base costing (ABC) described in the SAL requirement (5) .