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 (6,000 pools)	$	273,000	$	273,000
Variable expenses:
Variable cost of goods sold*		83,460		102,050
Variable selling expenses		24,000		24,000
Total variable expenses		107,460		126,050
Contribution margin		165,540		146,950
Fixed expenses:
Manufacturing overhead		65,000		65,000
Selling and administrative		90,000		90,000
Total fixed expenses		155,000		155,000
Net operating income	$	10,540	$	(8,050)

*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	4.0 pounds	$	2.60 per pound	$	10.40
Direct labor	0.3 hours	$	8.10 per hour		2.43
Variable manufacturing overhead	0.3 hours*	$	3.60 per hour		1.08
Total standard cost				$	13.91

*Based on machine-hours.

During June the plant produced 6,000 pools and incurred the following costs:

a. Purchased 29,000 pounds of materials at a cost of $3.05 per pound.

b. Used 23,800 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 $7.80 per hour.

d. Incurred variable manufacturing overhead cost totaling $8,400 for the month. A total of 2,100 machine-hours was recorded.

It is the company’s policy to close all variances to cost of goods sold on a monthly basis.

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).)

Answer 1

Ans:

1)Direct Material Efficiency Variance=Standard Rate*(Standard Quantity-Actual Quantity)

2.6$*(24,000-23,800)=520$ Favourable

Standard quantity=Actual production*standard quantity per unit

6,000units*4pounds=24,000pounds

2)Direct Material Price Variance=Actual Quantity*(Standard Rate-Actual Rate)

23,800pounds*(2.6$-3.05$)=10,170$ unfavourable

3)Direct Labor Efficiency Variance= Standard Rate*(Standard Hours-Actual Hours)

8.1$*(1,800-2,400)=4,860$ unfavourable

Standard labor hours=Actual production*standard hours per unit

6,000units*0.3labor hours=1,800hours

4)Direct Labor Rate Variance=Actual Hours*(Standard Rate-Actual Rate)

      2,400hours*(8.1$-7.8$)=720$ favourable

5)Variable overhead Efficiency Variance= Standard Rate*(Standard Hours-Actual Hours)

3.6$*(1,800-2,100)=1080$ unfavourable

Standard labor hours=Actual production*standard hours per unit

6,000units*0.3 machine hours=1,800hours

6)Variable overhead Rate Variance=Actual Hours*(Standard Rate-Actual Rate)

2,100hours*3.6$-8,400$=840$ unfavourable