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Lupton Company
Author(s):
Reece, James S.
Functional Area(s):
   Management Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 3
Teaching Note: Available. 
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First Page and the Assignment Questions:

Lupton Company manufactured two products, for simplicity called here A and B. Lupton used a standard cost system. Thus, the price and usage components of the raw materials variance were captured in the accounts. However, decomposing the labor and production overhead variances required “outside-the-accounts” calculations, which Lupton’s management performed on an ad hoc basis rather than routinely. Standards were used without change for the entire calendar year. All monthly variances were closed to the monthly income statement.

The company had hired a student majoring in business administration as a summer employee. In early June, when the May income statement became available, the production manager asked this student to make a detailed analysis of the April and May results (see Exhibit 1). As guidance to the student, as well as to calibrate the student’s accounting expertise, the production manager had prepared a list of questions to answer:

  1. In April and May, did we spend more for our production operations than would be expected, assuming our standard costs represent reasonable expectations? (Answer without considering the supplementary data in Exhibit 1.)
  2. If actual production overhead costs were the same for both months, what could have caused the decrease in unfavorable overhead variance for May?
  3. Was April’s production level above or below standard volume (which is $123,000 direct labor dollars per month for every month)? (Answer without considering the supplementary data in Exhibit 1.)
  4. Was May’s production level higher or lower than April’s? Was it above or below standard volume? (Answer without considering the supplementary data in Exhibit 1.)
  5. The percentage decrease in total standard gross margin from April to May was less than the percentage decrease in total sales revenues. What could account for this?
  6. In May, the actual purchase price per pound of one of our raw materials decreased. In view of this, how could there have been an increase in the unfavorable materials price variance?
  7. Some of this lower-priced raw material was put into production in May. What items on the May gross margin statement were affected by this?
  8. Some of this lower-priced raw material was included in products that were sold in May. How did this affect amounts on the May gross margin statement?
  9. Although our standard volume is expressed in terms of direct labor dollars per month, I can’t remember whether we absorb overhead on the basis of direct labor dollars or material dollars. Can you figure out which basis we use?
  10. What is the standard direct labor cost per unit of Product A? . . .

Assignment

  1. Answer, with complete yet concise responses, the production manager’s 17 questions.