Question

Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been experiencing problems as shown by its June contribution format income statement below:

	Flexible Budget		Actual
Sales (8,000 pools)	$	290,000		$	290,000
Variable expenses:
Variable cost of goods sold*		104,400			124,770
Variable selling expenses		20,000			20,000
Total variable expenses		124,400			144,770
Contribution margin		165,600			145,230
Fixed expenses:
Manufacturing overhead		68,000			68,000
Selling and administrative		86,000			86,000
Total fixed expenses		154,000			154,000
Net operating income (loss)	$	11,600		$	(8,770	)

*Contains direct materials, direct labor, and variable manufacturing overhead.

Janet Dunn, who has just been appointed general manager of the Westwood Plant, has been given instructions to “get things under control.” Upon reviewing the plant’s income statement, Ms. Dunn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard cost per swimming pool:

	Standard Quantity or Hours	Standard Price or Rate			Standard Cost
Direct materials	3.6 pounds	$	2.20	per pound	$	7.92
Direct labor	0.5 hours	$	7.70	per hour		3.85
Variable manufacturing overhead	0.4 hours*	$	3.20	per hour		1.28
Total standard cost per unit					$	13.05

*Based on machine-hours.

During June, the plant produced 8,000 pools and incurred the following costs:

Purchased 33,800 pounds of materials at a cost of $2.65 per pound.

Used 28,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

Worked 4,600 direct labor-hours at a cost of $7.40 per hour.

Incurred variable manufacturing overhead cost totaling $12,600 for the month. A total of 3,500 machine-hours was recorded.

It is the company’s policy to close all variances to cost of goods sold on a monthly basis.

Required:

1. Compute the following variances for June:

a. Materials price and quantity variances.

b. Labor rate and efficiency variances.

c. Variable overhead rate and efficiency variances.

2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.

Answer 1

1. a. Materials price variance = ( Standard price per pound - Actual price per pound) x Actual quantity purchased = $ ( 2.20 - 2.65) x 33,800 = $ 15,210 U

Materials quantity variance = ( Standard quantity for actual output - Actual quantity used ) x Standard price per pound = ( 8,000 x 3.60 pounds - 28,600) x $ 2.20 = $ 440 F

2. Labor rate variance = ( Standard hourly rate - Actual rate per hour) x Actual hours worked = $ ( 7.70 - 7.40 ) x 4,600 hours = $ 1,380 F

Labor efficiency variance = ( Standard hours allowed for actual output - Actual hours used ) x Standard hourly rate = ( 8,000 x 0.50 - 4,600) x $ 7.70 = $ 4,620 U

c. Variable overhead rate variance = $ ( 3.20 - 3.60) x 3,500 machine hours = $ 1,400 U

Variable overhead efficiency variance = ( 8,000 x 0.40 - 3,500) x $ 3.20 = $ 960 U

2. Summary of the variances:

Materials Price Variance	$ 15,210 U
Materials Quantity Variance	440 F
Labor Rate Variance	1,380 F
Labor Efficiency Variance	4,620 U
Variable Overhead Rate Variance	1,400 U
Variable Overhead Efficiency Variance	960 U
Net Overall Unfavorable Variance for June	$ 20,370 U