Question

ance Analysis (20 points) Henry Hawkins Industries (HHI) manufactures a plastic swimming pool at its Batavia plant. The plant has been experiencing problems as shown by its October contribution format income statement below: Budgeted Actual Sales (7,000 pools) Variable expenses: S255,000 255,000 Cost of goods sold Selling expenses 85,4 15,000 104,590 15,000 Total variable expenses Contribution margin Fixed expenses: 154,600 135,410 64,000 Manufacturing overhead Selling and administration79,000 64,000 79 Total fixed expenses Net operating income (loss) $11,600 Contains direct materials, direct labor, and variable manufacturing overhead As you can imagine, the general manager was a little shocked to see the loss for the month, particularly because sales were exactly as budgeted. HHI uses a standard cost system. Here are the standards for one swimming pool: Standard Quantity or Hours Standard Price or Rate S2.40 per pound Direct materials Direct labor Variable manufacturing overhead 0.2 hors (based on 4.0 pounds 0.3 hours $2.50 per hour machine-hours) During October, the plant produced 7,000 pools and incurred the following costs: Purchased 33,000 pounds of materials at a cost of $2.85 per pound. There was no raw materials in inventory at the beginning of the month. Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) Worked 2,700 direct labor-hours at a cost of $6.70 per hour. Incurred a total variable manufacturing cost of $4,930 for the month. A total of 1,700 machine-hours was recorded. a. b. c. d. Required: 1. Compute the following variances for October Direct materials price and quantity variances. a. PAGE 1SI7 b. Direct labor rate and efficiency variances Variable overhead rate and efficiency variances. c. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for October. Use the chart below: 2. Variance Amount U or F? Direct materials price variance Direct materials quantity variance Direct labor rate variance Direct labor efficiency variance Variable overhead rate variance Variable overhead efficiency variance Total variances Difference between budgeted and actual COGS $19,190 3. What are the two most significant variances? Give at least two examples each as to the possible causes of these two variances. Give me two examples OTHER THAN "he standards were outdated."

Answer 1

1.

1a.	Direct materials price variance
	AQP x (AR - SR) = 33000 x ($2.85 - $2.40) = $14850 Unfavorable
b.	Direct materials quantity variance
	SR x (AQ - SQ) = $2.40 x (27800 - 28000) = $480 Favorable
	SQ = 7000 pools x 4.0 pounds = 28000 pounds
2a.	Direct labor rate variance
	AH x (AR - SR) = 2700 x ($6.70 - $7.00) = $810 Favorable
b.	Direct labor efficiency variance
	SR x (AH - SH) = $7.00 x (2700 - 2100) = $4200 Unfavorable
	SH = 7000 pools x 0.3 hours = 2100 hours
3a.	Variable overhead rate variance
	AH x (AR - SR) = 1700 x ($2.90 - $2.50) = $680 Unfavorable
	AR = $4930/1700 = $2.90 per machine hour
b.	Variable overhead efficiency variance
	SR x (AH - SH) = $2.50 x (1700 - 1400) = $750 Unfavorable
	SH = 7000 pools x 0.2 hours = 1400 hours

2.

Variance	Amount	U or F?
Direct materials price variance	$       14,850	U
Direct materials quantity variance	$             480	F
Direct labor rate variance	$             810	F
Direct labor efficiency variance	$         4,200	U
Variable overhead rate variance	$             680	U
Variable overhead efficiency variance	$             750	U
Total variances	$       19,190	U
Difference between budgeted and actual COGS	$       19,190	U

3. The two most significant variances are the direct materials price variance and the direct labor efficiency variance.

Reasons for unfavorable direct materials price variance:

i. The incidental costs of purchasing such as freight, duties, etc. may have increased resulting in a higher actual rate and hence an unfavorable direct materials price variance.

ii. The material purchased may be of a better quality due to which the actual rate is higher than the standard rate resulting in an unfavorable variance.

Reasons for unfavorable direct labor efficiency variance:

i. The labor mix of skilled and unskilled employees may have changed with more unskilled employees being hired due to which the actual time required may be more than the standard time resulting in an unfavorable direct labor efficiency variance.

ii. The standard time required may be based on the assumption that the employees are provided with defined hours of training however, the same amount of training has not been provided due to which the actual time required may be more than the standard time resulting in an unfavorable direct labor efficiency variance.