Question

Problem 9-18 Comprehensive Variance Analysis [LO9-4, LO9-5, LO9-6]

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 (8,000 pools)	$	240,000		$	240,000
Variable expenses:
Variable cost of goods sold*		94,000			112,470
Variable selling expenses		10,000			10,000
Total variable expenses		104,000			122,470
Contribution margin		136,000			117,530
Fixed expenses:
Manufacturing overhead		55,000			55,000
Selling and administrative		70,000			70,000
Total fixed expenses		125,000			125,000
Net operating income (loss)	$	11,000		$	(7,470	)

*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	3.5 pounds	$	2.50	per pound	$	8.75
Direct labor	0.4 hours	$	6.50	per hour		2.60
Variable manufacturing overhead	0.2 hours*	$	2.00	per hour		0.40
Total standard cost per unit					$	11.75

*Based on machine-hours.

During June the plant produced 8,000 pools and incurred the following costs:

1. Purchased 33,000 pounds of materials at a cost of $2.95 per pound.

2. Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 3,800 direct labor-hours at a cost of $6.20 per hour.

4. Incurred variable manufacturing overhead cost totaling $4,560 for the month. A total of 1,900 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

1.

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

Material price variance = ($2.95 - $2.50) * 33,000 = $14,850 Unfavorable

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

Material quantity variance = (8,000*3.5 - 27,800) * $2.50

Material quantity variance = (28,000 - 27,800) * $2.50 = $500 Favorable

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

Labor rate variance = ($6.20 - $6.50) * 3,800 = $1,140 Favorable

Labor efficiency variance = (Standard hours - Actual hours) * Standard rate

Labor efficiency variance = (8,000*0.4 - 3,800) * $6.50

Labor efficiency variance = (3,200 - 3,800) * $6.50 = $3,900 Unfavorable

Variable overhead rate variance = (Actual rate - Standard rate) * Actual hours

Variable overhead rate variance = ($4,560/1,900 - $2) * 1,900

Variable overhead rate variance = ($2.4 - $2) * 1,900 = $760 Unfavorable

Variable overhead efficiency variance = (Standard hours - Actual hours) * Standard rate

Variable overhead efficiency variance = (8,000*0.2 - 1,900) * $2

Variable overhead efficiency variance = (1,600 - 1,900) * $2 = $600 Unfavorable

2.

Material price variance	$14,850	U
Material quantity variance	500	F
Labor rate variance	1,140	F
Labor efficiency variance	3,900	U
Variable overhead rate variance	760	U
Variable overhead efficiency variance	600	U
Net overall variance	$18,470	U