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 (3,000 pools)	$	179,000		$	179,000
Variable expenses:
Variable cost of goods sold*		33,390			44,540
Variable selling expenses		11,000			11,000
Total variable expenses		44,390			55,540
Contribution margin		134,610			123,460
Fixed expenses:
Manufacturing overhead		50,000			50,000
Selling and administrative		75,000			75,000
Total fixed expenses		125,000			125,000
Net operating income (loss)	$	9,610		$	(1,540	)

*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	3.6 pounds	$	2.00	per pound	$	7.20
Direct labor	0.5 hours	$	6.60	per hour		3.30
Variable manufacturing overhead	0.3 hours*	$	2.10	per hour		0.63
Total standard cost per unit					$	11.13

*Based on machine-hours.

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

Purchased 15,800 pounds of materials at a cost of $2.45 per pound.

Used 10,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

Worked 2,100 direct labor-hours at a cost of $6.30 per hour.

Incurred variable manufacturing overhead cost totaling $3,000 for the month. A total of 1,200 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-a)	Material price variance
	(Actual price - standard price )* AQ purchased
	(2.45-2)*15800
	7110	U
	Materials Quantity variance
	(AQ used - SQ allowed)*Standard price
	(10600 - 3000*3.6)*2
	400	F
1-b)	Labor rate variance
	(Actual rate - standard rate)*Actual hours
	(6.30 - 6.6)*2100
	630	F
	Labor Efficiency variance
	(Actual hours - standard hours allowed)* Std rate
	(2100 - 3000*.5)*6.6
	3960	U
1-c)	Variable overhead rate variance
	(Actual rate - standard rate)*Actual machinehours
	(3000 - 2.10*1200)
	480	U
	Variable overhead Efficiency variance
	(Actual hours - standard hours allowed)* Std rate
	(1200 - 3000*.3)*2.10
	630	U
2)	Net Variance		11,150	U
	Material price variance				7,110	U
	Material quantity variance				400	F
	labor rate variance				630	F
	labor efficiecny variance				3960	U
	variable overhead rate variance				480	U
	variable overhead efficiency variance				630	U
	net variance				11,150	U
3)	material price variance
	labor effiency variance