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:

	Flexible Budget		Actual
Sales (5,000 pools)	$	272,000		$	272,000
Variable expenses:
Variable cost of goods sold*		84,250			99,765
Variable selling expenses		23,000			23,000
Total variable expenses		107,250			122,765
Contribution margin		164,750			149,235
Fixed expenses:
Manufacturing overhead		64,000			64,000
Selling and administrative		89,000			89,000
Total fixed expenses		153,000			153,000
Net operating income (loss)	$	11,750		$	(3,765	)

*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	3.9 pounds	$	2.50	per pound	$	9.75
Direct labor	0.8 hours	$	8.00	per hour		6.40
Variable manufacturing overhead	0.2 hours*	$	3.50	per hour		0.70
Total standard cost per unit					$	16.85

*Based on machine-hours.

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

1. Purchased 24,500 pounds of materials at a cost of $2.95 per pound.

2. Used 19,300 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 4,600 direct labor-hours at a cost of $7.70 per hour.

4. Incurred variable manufacturing overhead cost totaling $5,070 for the month. A total of 1,300 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

Solution:

1) Compute the following variances for June:

a) Material price and quantity variances:

Material price variance = (Standard price - Actual price) x Actual quantity consumed

                                          =($2.50 - $2.95) x 24,500

                                          =(-$0.45) x 24,500

                                          =-11,025 Unfavorable

Material quantity variance = (Standard quantity - Actual quantity ) x Standard price

                                               =(5,000 x 3.9 - 19,300)x $2.50

                                               =(19,500-19,300)x $2.50

                                               =$500 favorable

Particulars	Amount
Material price variance	$ (11,025)	U
Material quantity variance	$ 500	F

b) Compute labor rate variance:

Labor rate variance =(Standard rate - Actual rate) x Actual hours

                                    =($8.00 - $7.70)x 4,600

                                    =($0.3)x4,600

                                    =$ 1,380favorable

Compute labor efficiency variance :

Labor efficiency variance =(Standard hours - Actual hours) x standard rate

                                              =(5,000 x0.8 - 4,600 ) x $8.00

                                              =(4,000-4,600)x $8.00

=-$4,800 Unfavorable

Particulars	Amount
Labor rate variance	$ 1,380	F
Labor efficiency variance	$ (4,800)	U

C) Compute the variable overhead rate variance:

Variable overhead rate variance =(Standard rate - Actual rate) x Actual hour

                                                           =($3.50 - $5,070/1,300) x 1,300

                                                          =($3.50 - $3.9) x 1,300

                                                           = - $520 Unfavorable

Compute the variance overhead efficiency variance :

variance overhead efficiency variance = (Standard hours - actual hours) x standard rate

                                                                    =(5,000 x 0.2 - 1,300) x $3.50

                                                                    =(1,000-1,300) x $3.50

                                                                    = -$ 1,050 Unfavorable

Particulars	Amount
Variable overhead rate variance	$ (520)	U
variance overhead efficiency variance	$ (1,050)	U

2 )

Summarize the variance

Summary of variance
Material price variance	$ (11,025)
Material quantity variance	$ 500
Labor rate variance	$ 1,380
Labor efficiency variance	$ (4,800)
Labor efficiency variance	$ (520)
variance overhead efficiency variance	$ (1,050)
Net variance	$(15,515)