Question

Problem 9-18 Comprehensive Variance Analysis

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 (4,000 pools)	$	180,000		$	180,000
Variable expenses:
Variable cost of goods sold*		37,720			49,210
Variable selling expenses		15,000			15,000
Total variable expenses		52,720			64,210
Contribution margin		127,280			115,790
Fixed expenses:
Manufacturing overhead		51,000			51,000
Selling and administrative		66,000			66,000
Total fixed expenses		117,000			117,000
Net operating income (loss)	$	10,280		$	(1,210	)

*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	$	2.10	per pound	$	6.51
Direct labor	0.4 hours	$	6.10	per hour		2.44
Variable manufacturing overhead	0.3 hours*	$	1.60	per hour		0.48
Total standard cost per unit					$	9.43

*Based on machine-hours.

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

1. Purchased 17,400 pounds of materials at a cost of $2.55 per pound.
2. Used 12,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
3. Worked 2,200 direct labor-hours at a cost of $5.80 per hour.
4. Incurred variable manufacturing overhead cost totaling $3,000 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

a. Materials price and quantity variances

Material Price Variance	$7650 Favorable
Material Quantity Variance	$12180 Unfavorable

MPV = (Actual Price - Standard Price) x Actual Quantity Purchased

MPV = ($2.55 - $2.10) x 17000 pounds

MPV = $(7650) Favorable

MQV = (Actual Quantity Used - Standard Quantity Used) x Standard Price

MQV = (12,200 - 18,000) x $2.10

MQV = $12180 Unfavorable

b. Labor rate and efficiency variances

Labor Rate Variance	$8140 Unfavorable
Labor Efficiency Variance	$1,512 Favorable

LRV = (Actual Rate - Standard Rate) x Actual Labor Hours

LRV = ($5.80 - $2.10) x 2200 hours

LRV = $8140Unfavorable

LEV = (Actual Labor Hours - Standard Labor Hours) x Standard Rate

LEV = (2200 - 940) x $1.2

LEV = $(1,512) Favorable

c. Variable Overhead Rate and Efficiency Variances

Variable Overhead Rate Variance	$2250 Unfavorable
Variable Overhead Efficiency Variance	$1360 Favorable

VOHRV = (Actual VOH Rate - Standard VOH Rate) x Actual Machine Hours

VOHRV = ($3.10 - $1.6) x 1500

VOHRV = $2250 Unfavorable

VOHRV = (Actual Machine Hours - Standard Machine Hours) x Standard Rate

VOHRV = (1500 - 6,50) x $1.6

VOHRV = $1360 Favorable