Question

Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The standard cost for one pool is as follows:

	Standard Quantity or Hours		Standard Price or Rate			Standard Cost
Direct materials	1.60	kilograms	$5.00	per kilogram	$	8.00
Direct labour	0.90	hours	$5.00	per hour		4.50
Variable manufacturing overhead	0.40	machine-hours	$2.00	per machine-hour		0.80
Total standard cost					$	13.30

The plant has been experiencing problems for some time, as is shown by its June income statement when it made and sold 15,200 pools; the normal volume is 15,350 pools per month. Fixed costs are allocated using machine-hours.

	Flexible Budgeted		Actual
Sales (15,200 pools)	$	456,000	$	456,000
Less: Variable expenses:
Variable cost of goods sold*		202,160		203,534
Variable selling expenses		20,300		20,300
Total variable expenses		222,460		223,834
Contribution margin		233,540		232,166
Less: Fixed expenses:
Manufacturing overhead		132,000		132,000
Selling and administrative		85,120		85,120
Total fixed expenses		217,120		217,120
Net income	$	16,420	$	15,046

*Contains direct materials, direct labour, and variable manufacturing overhead.

Janet Dunn, the general manager of the Westwood Plant, wants to get things under control. She needs information about the operations in June since the income statement signalled that the problem could be due to the variable cost of goods sold. Dunn learns the following about operations and costs in June:

a.	31,500 kilograms of materials were purchased at a cost of $4.10 per kilogram.
b.	24,500 kilograms of materials were used in production. (Finished goods and work-in-process inventories are insignificant and can be ignored.)
c.	11,900 direct labour-hours were worked at a cost of $8 per hour.
d.	Variable manufacturing overhead cost totalling $14,184 for the month was incurred. A total of 5,910 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.	Direct materials price and quantity variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

b.	Direct labour rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

c.	Variable overhead spending and efficiency variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

Answer 1

	Cost card
	Particulars	Standard cost for actual production	Particulars	Actual cost
	Quantity/hour	Rate($/KG/hr)	Amount	Quantity/hour	Rate($/KG/hr)	Amount
	Direct Material	24320	5	$              121,600	Material purchased	31500	4.1	$                 129,150.00
		(15200 pools * 1.6 KG)			Material used	24500	4.1	$                 100,450.00
					Closing material	7000		$                    28,700.00
	Direct labour	13680	5	$                68,400	Direct labour	11900	8	$                    95,200.00
		(15200 pools * 0.9 hr)
	Variable overhead	6080	2	$                12,160	Variable overhead	5910	2.40	$                    14,184.00
		(15200 pools * 0.4 hr)					($ 14184/5910 hr)
	Total Standard manufacturing cost	$              202,160
1	Computation of variances for June:
a	Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase
	Material Price variance = ( 5 - 4.1 ) * 31500 = 28350 (Favorable)
	Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate
	Material efficiency variance = (24320-24500) * 5 = -900 (Unfavorable)
b	Labor Rate variance = (Standard rate - Actual rate) * Actual hours
	Labor Rate variance = ( 5-8 ) * 11900 = -35700 (Unfavorable)
	Labor efficiency variance = (Standard Hours - Actual Hours) * Standard rate
	Labor efficiency variance = (13680-11900) *5 = 8900 (Favorable)
c	Variable Overhead Rate variance = (Standard rate - Actual rate) * Actual hours
	Variable Overhead Rate variance = ( 2-2.4 ) * 5910 = -2364 (Unfavorable)
	Variable overhead efficiency variance = (Standard Hours - Actual Hours) * Standard rate
	Variable overhead efficiency variance = (6080-5910) * 2 = 340 (Favorable)
2	Variances	Favourable/(Unfavourable)
	MRV	$                      28,350.00
	MEV	$                          (900.00)
	LRV	$                    (35,700.00)
	LEV	$                         8,900.00
	VORV	$                      (2,364.00)
	VOEV	$                            340.00
	Net favourable/(unfavourable) variance	$                      (1,374.00)		$                         -
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