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 $ 235,000 $ 235,000 Sales (7,000 pools) Variable expenses: Variable cost of goods sold* Variable selling expenses Total variable expenses Contribution margin Fixed expenses: Manufacturing overhead Selling and administrative Total fixed expenses Net operating income (loss) 78,540 18,000 96,540 138,460 96,420 18,000 114,420 120,580 54,000 69,000 123,000 15,460 $ 54,000 69,000 123,000 (2,420) $ *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 3.4 pounds 0.3 hours 0.6 hours* Direct materials Direct labor Variable manufacturing overhead Total standard cost per unit Standard Price or Rate $ 2.40 per pound $ 6.40 per hour $ 1.90 per hour Standard Cost $ 8.16 1.92 1.14 $ 11.22 *Based on machine-hours. During June the plant produced 7,000 pools and incurred the following costs: a. Purchased 28,800 pounds of materials at a cost of $2.85 per pound. b. Used 23,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 2,700 direct labor-hours at a cost of $6.10 per hour. d. Incurred variable manufacturing overhead cost totaling $10,350 for the month. A total of 4,500 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:

Answer 1

Data for Material, Labor and Variable OH variances

Standard ( per pool)

Standard ( 7000 pools)

Actual ( 7000 pools)

Particulars

Qty/ Hrs

Rate/Price

Amount

Qty/ Hrs

Rate/Price

Amount

Qty/ Hrs

Rate/Price

Amount

Material

3.4

$           2.40

$      8.16

23800

$         2.40

$    57,120.00

23600

$         2.85

$    67,260.00

Labor

0.3

$           6.40

$      1.92

2100

$         6.40

$    13,440.00

2700

$         6.10

$    16,470.00

V.OH

0.6

$           1.90

$      1.14

4200

$         1.90

$      7,980.00

4500

$         2.30

$    10,350.00

$    78,540.00

$    94,080.00

Calculation of Variances

D.Material Price Variance =

( Standard Price - Actual Price) x Actual Quantity

=

( $ 2.4 - $ 2.85) x 23600

=

$ 10,620.00

(U)

D.Material Quantity Variance =

( Standard Quantity - Actual Quantity ) x Standard Price

=

(23800 - 23600) x $2.4

=

$       480.00

(F)

D.Labor Rate variance =

(Standard rate - Actual rate) x Actual Hours

=

($ 6.4 - $ 6.1 ) x 2700

=

$       810.00

(F)

D.Labor Efficiency variance =

(Standard Hours - Actual Hours) x Standard rate

=

(2100 - 2700) x $ 6.4

=

$   3,840.00

(U)

V.OH Rate Variance =

(Standard rate - Actual rate) x Actual Hours

=

($ 1.9 - $ 2.3) x 4500

=

$   1,800.00

(U)

V.OH Efficiency Variance =

(Standard Hours - Actual Hours) x Standard rate

=

(4200 - 4500) x $ 1.9

=

$       570.00

(U)

Net Variance
Direct Material		$ 10,140.00	(U)
Direct Labor		$     3,030.00	(U)
Variable OH		$     2,370.00	(U)
		$ 15,540.00	(U)