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:

	Budgeted		Actual
Sales (5,000 pools)	$	235,000	$	235,000
Variable expenses:
Variable cost of goods sold*		71,350		86,370
Variable selling expenses		13,000		13,000
Total variable expenses		84,350		99,370
Contribution margin		150,650		135,630
Fixed expenses:
Manufacturing overhead		62,000		62,000
Selling and administrative		77,000		77,000
Total fixed expenses		139,000		139,000
Net operating income (loss)	$	11,650	$	(3,370)

*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	3.8 pounds	$	2.20 per pound	$	8.36
Direct labor	0.7 hours	$	6.80 per hour		4.76
Variable manufacturing overhead	0.5 hours*	$	2.30 per hour		1.15
Total standard cost				$	14.27

*Based on machine-hours.

During June the plant produced 5,000 pools and incurred the following costs:

a.	Purchased 24,000 pounds of materials at a cost of $2.65 per pound.
b.	Used 18,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c.	Worked 4,100 direct labor-hours at a cost of $6.50 per hour.
d.	Incurred variable manufacturing overhead cost totaling $7,560 for the month. A total of 2,800 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. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
b.	Labor rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
c.	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).)
2.	Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. (Input all values as positive amounts. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
3.	Pick out the two most significant variances that you computed in (1) above. (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

Answer 1

a.1	Direct material price variance	(Actual rate - Standard rate) * actual quantity
		(2.2-2.65)*24000
		10800	Unfavorable
a.2	Direct material quantity variance	(Standard material for actual production - Actual material) *Standard rate
						(5000*3.8-18800)*2.2
		440	Favorable
b.1	Labor rate variance =	(Standard rate - Actual rate) * actual Hours
		(6.8-6.5)*4100
		1230	Favorable
b.2	Labor effiency variance	(Actual hours - Standard hours for actual production) *Standard rate
						(5000*0.7-4100)*6.8
		4080	Unfavorable
c.1	Variable expense rate variance	(actual rate - standard rate) * actual Hours
		(2800-5000*0.5)*2.3
		690	Unfavorable
c.2	Variable OH effiency variance	(Actual hours - Standard hours for actual production) *Standard rate
						7560-2800*2.3
		1120	Unfavorable