Parrish Company’s operating budget for October had anticipated pretax operating income of $60,000. Drew Mackenzie, Parrish’s general manager, was therefore very disappointed when, in early November, his controller gave him a report showing only $1,000 of operating income for October (see Exhibit 1). Mr. Mackenzie requested that the controller prepare an analysis of the $59,000 unfavorable operating income variance as soon as possible.

The October budget had incorporated the standards and budgets that are given below along with actual data.

Marketing. Budgeted sales were 200,000 units (10% market share) at a unit margin of $0.50. Actual sales were 190,000 units (9.25 percent market share) at a unit margin of $0.70. Selling expenses had been budgeted at $10,000 fixed costs for the month; $12,000 was actually incurred.

Production. The standard production volume used for overhead absorption purposes was 200,000 units per month. October’s budgeted production volume used in developing the annual operating budget bad been 205,000 units, but actual October production volume turned out to be only 180,000 units. Parrish’s only product had a standard unit cost of $3.50, comprised of $0.40 direct material cost (4 pounds at $0.10 per pound), $2.10 direct labor cost (0.3 hour at $7.00 per hour), and $1.00 overhead ($0.50 of which was budgeted variable overhead). In October, 700,000 pounds of material were purchased for $84,000 and used in production; 56,944 direct labor-hours costing $410,000 were used; and overhead costs of $218,000 were incurred.

Assignment

1. Prepare as detailed an explanation as possible of the October $59,000 unfavorable operating income variance.