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 (4,000 pools)	$	210,000		$	210,000
Variable expenses:
Variable cost of goods sold*		50,680			63,710
Variable selling expenses		12,000			12,000
Total variable expenses		62,680			75,710
Contribution margin		147,320			134,290
Fixed expenses:
Manufacturing overhead		61,000			61,000
Selling and administrative		76,000			76,000
Total fixed expenses		137,000			137,000
Net operating income (loss)	$	10,320		$	(2,710	)

*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	3.7 pounds	$	2.10	per pound	$	7.77
Direct labor	0.6 hours	$	6.70	per hour		4.02
Variable manufacturing overhead	0.4 hours*	$	2.20	per hour		0.88
Total standard cost per unit					$	12.67

*Based on machine-hours.

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

1. Purchased 19,800 pounds of materials at a cost of $2.55 per pound.

2. Used 14,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 3,000 direct labor-hours at a cost of $6.40 per hour.

4. Incurred variable manufacturing overhead cost totaling $4,940 for the month. A total of 1,900 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.

1a. Compute the following variances for June, materials price and quantity variances.

1b. Compute the following variances for June, labor rate and efficiency variances.

1c. Compute the following variances for June, 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). Input all amounts as positive values.)

2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.

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

Answer 1

1.Material Price Variance = (Standard Price – Actual Price)*Actual Quantity Purchased

= (2.10-2.55)*19,800

= $8,910 U

Material Quantity Variance = (Standard Quantity – Actual Quantity Used)*Standard Price

= (4,000*3.7 –14,600)*2.1

= $420 F

2.a. Labor Rate variance = (Standard Rate – Actual Rate)*Actual Hours

= (6.70-6.40)*3,000

= $900 F

Labor Efficiency Variance = (Standard Hours – Actual Hours)*Standard Rate

= (4,000*0.6 -3,000)*6.70

= $4,020 U

3-a Overhead Rate Variance = (Standard Rate – Actual Rate)*Actual Hours

= (2.20-Actual Rate)*1,900

= 2.20*1900-4940      

= $760 U

Overhead Efficiency Variance = (Standard Hours – Actual Hours)*Standard Rate

= (4000*0.4-1900)*2.2

= $660 U

Net overall variance = 13,030 U