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 Actual Budget $225,000 $225,000 Sales (3,000 pools) Variable expenses: Variable cost of goods sold* Variable selling expenses Total variable expenses Contribution margin 44,520 56,975 21,000 65,520 21,000 77,975 159,480 147,025 Fixed expenses: Manufacturing overhead Selling and administrative Total fixed expenses 62,000 87,000 62,000 87,000 149,000 149,000 $ 10,480 $ (1,975) Net operating income (loss) 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 Standard Price Standard Quantity or Cost or Rate Hours $ 2.30 per pound $ 7.80 per hour $ 3.30 per hour $ 8.51 Direct materials Direct labor 3.7 pounds 0.6 hours 4.68 Variable manufacturing overhead 0.5 hours* 1.65 Total standard cost per unit $14.84 *Based on machine-hours. During June, the plant produced 3,000 pools and incurred the following costs: a. Purchased 16,100 pounds of materials at a cost of $2.75 per pound. b. Used 10,900 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 2,400 direct labor-hours at a cost of $7.50 per hour. d. Incurred variable manufacturing overhead cost totaling $6,660 for the month. A total of 1,800 machine-hours was recorded. It is the company's policy to close all variances to cost of goods sold on a monthly basis.

Answer 1

1a.	Material price variance=Actual material used*(Standard rate of material-Actual rate of material)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Actual material used=10900 pounds
	Standard rate of material=$2.30 per pound
	Actual rate of material=$ 2.75 per pound
	Material price variance=10900*(2.30-2.75)=-4905=$ 4905 (Unfavorable)
	Material quantity variance=Standard rate of material*(Standard quantity -Actual material used)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Standard rate of material=$2.30 per pound
	Standard quantity=Actual units produced*Standard pounds per pool=3000*3.7=11100 pounds
	Actual material used=10900 pounds
	Material quantity variance=2.30*(11100-10900)=460=$ 460 (Favorable)
1b.	Labor rate variance=Actual hours worked*(Standard rate of labor-Actual rate of labor)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Actual hours worked=2400 hours
	Standard rate of labor=$ 7.80 per hour
	Actual rate of labor=$ 7.50 per hour
	Labor rate variance=2400*(7.80-7.50)=720=$ 720 (Favorable)
	Labor efficiency variance=Standard rate of labor*(Standard hours-Actual hours worked)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Standard rate of labor=$ 7.80 per hour
	Standard hours=Actual units produced*Standard hour per pool=3000*0.6=1800 hours
	Actual hours worked=2400 hours
	Labor efficiency variance=7.80*(1800-2400)=-4680=$ 4680 (Unfavorable)
1c.	Variable overhead rate variance=Actual hours worked*(Standard overhead rate-Actual overhead rate)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Actual hours worked=2400 hours
	Actual overhead rate=Actual variable overhead/Actual hours worked=6660/2400=$2.775
	Standard overhead rate=$3.30
	Variable overhead spending variance=2400*(3.30-2.775)=1260=$ 1260 (Favorable)
	Variable overhead efficiency variance=Standard overhead rate*(Standard hours-Actual hours worked)
	If the answer is positive variance is favorable.Otherwise unfavorable.
	Standard overhead rate=$3.30
	Actual hours worked=2400 hours
	Standard hours=Actual units produced*Standard hour per pool=3000*0.5=1500 hours
	Variable overhead efficiency variance=3.30*(1500-2400)=-2970=$ 2970 (Unfavorable)
2					$	$
	Material price variance				4905 F
	Material quantity variance				460 F
	Material variance					4445 F
	Labor rate variance				720 F
	Labor efficiency variance				4680 U
	Labor variance					3960 U
	Variable overhead rate variance				1260 F
	Variable overhead efficiency variance				2970 U
	Variable overhead variance					1710 U
	Net variance					1225 U