Question

Problem 9-18 Comprehensive Variance Analysis [LO9-4, LO9-5, LO9-6]

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 (7,000 pools)	$	310,000		$	310,000
Variable expenses:
Variable cost of goods sold*		110,810			131,685
Variable selling expenses		25,000			25,000
Total variable expenses		135,810			156,685
Contribution margin		174,190			153,315
Fixed expenses:
Manufacturing overhead		66,000			66,000
Selling and administrative		91,000			91,000
Total fixed expenses		157,000			157,000
Net operating income (loss)	$	17,190		$	(3,685	)

*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	4.1 pounds	$	2.70	per pound	$	11.07
Direct labor	0.4 hours	$	8.20	per hour		3.28
Variable manufacturing overhead	0.4 hours*	$	3.70	per hour		1.48
Total standard cost per unit					$	15.83

*Based on machine-hours.

During June the plant produced 7,000 pools and incurred the following costs:

1. Purchased 33,700 pounds of materials at a cost of $3.15 per pound.

2. Used 28,500 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 3,400 direct labor-hours at a cost of $7.90 per hour.

4. Incurred variable manufacturing overhead cost totaling $12,710 for the month. A total of 3,100 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

! (@) Computatan q material prile and quantilig varlane material price variance AQ (AP-SP) = 28500 (3.15-2.70 = $12825 untavamable material quantity variance = SR (AQ-SO) = 2.7 (28506—(7000 84.0)) = 2.7 (28500 – 28700) = 2.7 (-200) = -540 = -540 favourable b) Computation of Labour rate and effi'uiny varánce Labour rate variance AH (4R-SR) - 3400 (7.9-862) - -1020 favourable Labour effiuency variance - sR (AH-SH) = 8.2 (3400-67000x•4)) = 8.2 (3400 - 2800) = 8.2(600) = 4920 unfavourable. (6) Computation & variable averhead rate and efficieny vorine Variable overhead rate variance = Actual cost - (AMH XSR) = 12710 - (3100X 3.7) = 12710 - 114.70 = 1240 un favourable = SR (actual machine Hr - Stand machine br) = 3:7(3100-(7000x 0-4)) = 3.7 ( 3100 - 2800) 2 3:7(300) 1110 unkavourable - 3400 x 0.3 Efficiency vanane

(2) Computation g net overall variance 12825 V - 540 F - 1020 F + 49200 +1240 V FILLOU 18535 un favourrable