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 (3,000 pools)	$	175,000		$	175,000
Variable expenses:
Variable cost of goods sold*		24,300			58,310
Variable selling expenses		10,000			10,000
Total variable expenses		34,300			68,310
Contribution margin		140,700			106,690
Fixed expenses:
Manufacturing overhead		50,000			50,000
Selling and administrative		65,000			65,000
Total fixed expenses		115,000			115,000
Net operating income (loss)	$	25,700		$	(8,310	)

*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	3.0 pounds	$	2.00	per pound	$	6.00
Direct labor	0.3 hours	$	6.00	per hour		1.80
Variable manufacturing overhead	0.2 hours*	$	1.50	per hour		0.30
Total standard cost per unit					$	8.10

*Based on machine-hours.

During June the plant produced 3,000 pools and incurred the following costs:

1. Purchased 23,000 pounds of materials at a cost of $3.20 per pound.

2. Used 8,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 2,000 direct labor-hours at a cost of $5.70 per hour.

4. Incurred variable manufacturing overhead cost totaling $1,710 for the month. A total of 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

Ans:

1.A) Material Price Variance= Standard Price - Actual Price)*Actual Quantity

Material Price Variance= (2.00-3.20)*23,000

= (-1.20*23,000)

= -27,600 unfavorable

Material Quantity Variance= Standard quantity- Actual Quantity)*Standard Price)

={(3000*3)-8,800}*2.00

={9000-8800}*2.00

= 400 Favorable.

B). Labor rate variance= (Standard rate per hour- Actual rate per hour)*Actual hours

= (6.00-5.70)*2,000

= 0.30*2,000

= 600 Favorable

Labor efficiency Variance= Standard hours- Actual Hours)*Standard Rate

= {(3,000*0.30)-2,000}* 6.00

=(900-2,000)*6.00

= -1,100)*6.00

=-6,600 Unfavorable.

C).Variable overhead Variance= Standard rate- Actual Rate)* Actual hours

= (1.50-1,710/900)*900

= (1.50-1.90)*900

=(-0.40*900)

= -360 Unfavorable

Variable Efficiency Variance= Standard hours- Actual Hours)*Standard rate

= (3,000*0.20)-900)*1.50

= 600-900)*1.50

=-300*1.50

= -450 Unfavorable

2. Summarization of variances to find net favorable;

Particulars	Amount($)
Material price variance	-27,600
Material quantity Variance	400
Labor rate variance	600
Labor quantity Variance	-6,600
Variable overhead rate variance	-360
Variable Overhead Efficiency Variance	-450
Net Variance	-34,010

Therefore net variance is -34,010 Unfavorable