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:

	Budgeted		Actual
Sales (4,000 pools)	$	239,000	$	239,000
Variable expenses:
Variable cost of goods sold*		57,680		70,390
Variable selling expenses		16,000		16,000
Total variable expenses		73,680		86,390
Contribution margin		165,320		152,610
Fixed expenses:
Manufacturing overhead		72,000		72,000
Selling and administrative		82,000		82,000
Total fixed expenses		154,000		154,000
Net operating income (loss)	$	11,320	$	(1,390)

*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	3.2 pounds	$	2.70 per pound	$	8.64
Direct labor	0.6 hours	$	7.30 per hour		4.38
Variable manufacturing overhead	0.5 hours*	$	2.80 per hour		1.40
Total standard cost				$	14.42

*Based on machine-hours.

     During June the plant produced 4,000 pools and incurred the following costs:

a.	Purchased 17,800 pounds of materials at a cost of $3.15 per pound.
b.	Used 12,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c.	Worked 3,000 direct labor-hours at a cost of $7.00 per hour.
d.	Incurred variable manufacturing overhead cost totaling $7,360 for the month. A total of 2,300 machine-hours was recorded.

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

Materials price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

b.	Labor rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

           

c.	Variable overhead rate and efficiency variances. (Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

           

2.	Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. (Input all values as positive amounts. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

       

3.

Pick out the two most significant variances that you computed in (1) above. (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Materials price variance
	Labor efficiency variance
	Variable overhead efficiency variance
	Labor rate variance
	Variable overhead rate variance
	Materials quantity variance

Answer 1

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Standard Cost	SQ	SR	Standard Unit Cost	Total Standard Quantity 4000*SQ
Direct Material	3.2	2.7	8.64	12800
Direct Labor	0.6	7.3	4.38	2400
Variable OVH	0.5	2.8	1.4	2000
Total Standard Cost			14.42
Actual: Unit produced and sold 4000
Direct Material Used	12600	3.15	39690
Direct Material Purchased	17800	3.15	56070
Direct Labor	3000	7.00	21000
Variable OVH	2300	3.20	7360
Direct Material Variance:
Material Efficiency Variance	(AQ-SQ)*SR	(12600-12800)*2.7	540 F
Material Price Variance	(AP-SP)*AQ	(3.15-2.7)*12600	5670 U
Direct Labor Variance:
Labor Efficiency Variance	(AQ-SQ)*SR	(3000-2400)*7.3	4380 U
Labor Price Variance	(AR-SR)*AQ	(7-7.3)*3000	900 F
Variable OVH Variance:
Labor Efficiency Variance	(AQ-SQ)*SR	(2300-2000)*2.8	840 U
Labor Price Variance	(AR-SR)*AQ	(3.2-2.8)*2300	920 U
Summarize
Direct Material Variance:
Material Efficiency Variance	540 F
Material Price Variance	5670 U
Direct Labor Variance:
Labor Efficiency Variance	4380 U
Labor Price Variance	900 F
Variable OVH Variance:
Labor Efficiency Variance	840 U
Labor Price Variance	920 U
Net Variance	10370 U
Most Significant Variance
Material Price Variance	5670 U
Labor Efficiency Variance	4380 U