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 (6,000 pools)	$	265,000		$	265,000
Variable expenses:
Variable cost of goods sold*		95,580			112,700
Variable selling expenses		14,000			14,000
Total variable expenses		109,580			126,700
Contribution margin		155,420			138,300
Fixed expenses:
Manufacturing overhead		63,000			63,000
Selling and administrative		78,000			78,000
Total fixed expenses		141,000			141,000
Net operating income (loss)	$	14,420		$	(2,700	)

*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	3.9 pounds	$	2.30	per pound	$	8.97
Direct labor	0.8 hours	$	6.90	per hour		5.52
Variable manufacturing overhead	0.6 hours*	$	2.40	per hour		1.44
Total standard cost per unit					$	15.93

*Based on machine-hours.

During June, the plant produced 6,000 pools and incurred the following costs:

1. Purchased 28,400 pounds of materials at a cost of $2.75 per pound.

2. Used 23,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 5,400 direct labor-hours at a cost of $6.60 per hour.

4. Incurred variable manufacturing overhead cost totaling $10,920 for the month. A total of 3,900 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 price - standard price )* AQ purchased
	(2.75-2.30)*28400
	12780	U
	Materials Quantity variance
	(AQ used - SQ allowed)*Standard price
	(23200-6000*3.9)*2.3
	460	F
1-b)	Labor rate variance
	(Actual rate - standard rate)*Actual hours
	(6.60 - 6.90)*5400
	1620	F
	Labor Efficiency variance
	(Actual hours - standard hours allowed)* Std rate
	(5400 -6000*.8)*6.9
	4140	U
1-c)	Variable overhead rate variance
	(Actual rate - standard rate)*Actual machinehours
	(10920 - 3900*2.4)
	1560	U
	Variable overhead Efficiency variance
	(Actual hours - standard hours allowed)* Std rate
	(3900 -6000*.6)*2.4
	720	U
2)	Net Variance		17,120	U
	Material price variance				12,780	U
	Material quantity variance				460	F
	labor rate variance				1620	F
	labor efficiecny variance				4140	U
	variable overhead rate variance				1560	U
	variable overhead efficiency variance				720	U
	net variance				17,120	U