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 (3,000 pools) $ 210,000 $ 210,000 Variable expenses: Variable cost of goods sold* 38,220 49,235 Variable selling expenses 15,000 15,000 Total variable expenses 53,220 64,235 Contribution margin 156,780 145,765 Fixed expenses: Manufacturing overhead 66,000 66,000 Selling and administrative 81,000 81,000 Total fixed expenses 147,000 147,000 Net operating income (loss) $ 9,780 $ (1,235 ) *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 3.1 pounds $ 2.60 per pound $ 8.06 Direct labor 0.5 hours $ 7.20 per hour 3.60 Variable manufacturing overhead 0.4 hours* $ 2.70 per hour 1.08 Total standard cost per unit $ 12.74 *Based on machine-hours. During June, the plant produced 3,000 pools and incurred the following costs: Purchased 14,300 pounds of materials at a cost of $3.05 per pound. Used 9,100 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) Worked 2,100 direct labor-hours at a cost of $6.90 per hour. Incurred variable manufacturing overhead cost totaling $4,650 for the month. A total of 1,500 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. Material price variance= actual quantity of material purchased x (standard price of material per unit – Actual price of material per unit) = 14300 x (2.60 – 3.05) = 6435 U

Material quantity variance = standard price of material per unit x (standard quantity of material for production of actual output – Actual quantity of material used in the production of actual output) = 2.60 x [ (3000 x 3.1) – 9100] = 520 F

b. Labor rate variance = Actual labor hours worked x (standard rate per labor hour worked) – actual rate per labor hour worked) = 2100 x(7.20 – 6.90) = 630 F

Labor efficiency variance = Standard rate per labor hour x (standard labor hours worked for actual output – actual labor hours worked) = 7.20 x (3000 x 0.50 -2100) = 4320 U

c. Variable overhead rate variance = (Actual machine hours x standard rate per machine hour) – Actual variable overhead cost = (15000 x 2.70) – 4650 = 600 U

Variable overhead efficiency variance = (standard machine hours for actual output – Actual machine hours) x standard variable overhead rate per machine hour = (3000 x 0.40 -1500) x2.70 = 810 U

2. Net variance = (-)6435 + 520 +630+ (-)4320+(-)800+(-)810

= -6435 + 520+630- 4320-600-810 = -12165+ 1150 = -11015 (11015U)

Two most significant variances = material quantity variance and labor efficiency variance.

material price variance 6435 U

material quantity variance 520 F