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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 Total Unit cost Cost Direct materials: Cookie mix……...... 10 oz. $.02 per oz. $.20 Milk chocolate……….. 5 oz. .15 per oz. .75 Almonds……………… 1 oz. .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 lb. 3 min. 32.40 per hr. $1.62 $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 50,000F

Revenue……………………………………… $3,200,000 $3,555,000 $355,000F Direct material………………………………. $580,000 $865,000 $285,000U Direct labor………………………………….. 336,000 348,000 12,000U Variable overhead…………………………… 648,000 750,000 102,000U Total variable costs………………………... $1,564,000 $1,963,000 $399,000U Contribution margin…………………………. $1,636,000 $1,592,000 $44,000U

Justine Madison, president of the company, is disappointed with the results. Despite a sizable increase in the number of cookies sold, the product’s 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 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

1. What is the Direct-material quantity variance? 2. What is the Direct-labor rate variance? 3. What is the direct-labor efficiency variance? 4. What is the variable-overhead efficiency variable? 5. What is the sales-price variance? 6. Explain the problems that might arise in using direct-labor hours as the basis for applying overhead. 7. How might activity-based costing (ABC) solve the problems described in 6?