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 (8,000 pools)	$	265,000		$	265,000
Variable expenses:
Variable cost of goods sold*		88,960			106,490
Variable selling expenses		16,000			16,000
Total variable expenses		104,960			122,490
Contribution margin		160,040			142,510
Fixed expenses:
Manufacturing overhead		65,000			65,000
Selling and administrative		80,000			80,000
Total fixed expenses		145,000			145,000
Net operating income (loss)	$	15,040		$	(2,490	)

*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	$	2.50	per pound	$	7.50
Direct labor	0.4 hours	$	7.10	per hour		2.84
Variable manufacturing overhead	0.3 hours*	$	2.60	per hour		0.78
Total standard cost per unit					$	11.12

*Based on machine-hours.

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

1. Purchased 29,000 pounds of materials at a cost of $2.95 per pound.

2. Used 23,800 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 $6.80 per hour.

4. Incurred variable manufacturing overhead cost totaling $8,100 for the month. A total of 2,700 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

Answer:

Standard data
	Standard quantity or hours	Standard price or rate	Standard cost
Direct matrerials	3.0 pounds	2.50 per pound	7.5
Direct labor	0.4 hours	7.10 per hour	2.84
Variable manufacturing overhead	0.3 hours	2.60 per hour	0.78
Total standard cost			11.12

Total Production 8000 units

Actual Data
	Actual quantity or hours	Actual price or rate	Actual cost
Direct Material	23800 pours	2.95 per pound	70210
Direct labor	3800 hours	6.80 per hours	25840
Variable manufacturing overhead	2700 hours	3 per hours	8100
Total Actual cost			104150

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

= 23800 (2.50 - 2.95) = 10710 (U)

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

= 2.50 (3* 8000 - 23800)

= 2.50 (24000 - 23800) = 500 (F)

Labour Rate Variance = Actual hours (Standard rate - Actual rate)

= 3800 (7.10- 6.80) = 1140 (F)

Labour efficiancy variance = Standard rate (Standard hours - Actual hours)

= 7.10 (8000 * 0.4 - 3800 )

= 7.10 (3200 - 3800 ) = 4260 (U)

Variable overhead rate variace = Actual hour workes (Standard rate - Actual rate)

= 2700 (2.60 - 3) = 1080 (U)

Variable overhead efficiancy variance = Standard rate (Standard hour - Actual hours)

= 2.60 (8000 * 0.3 - 2700)

= 2.60 (2400 - 2700) = 780 (U)