In: Accounting
Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The standard cost for one pool is as follows: |
Standard Quantity or Hours | Standard Price or Rate |
Standard Cost |
|||||
Direct materials | 1.20 | kilograms | $4.00 | per kilogram | $ | 4.80 | |
Direct labour | 0.80 | hours | $6.00 | per hour | 4.80 | ||
Variable manufacturing overhead | 0.40 | machine-hours | $4.00 | per machine-hour | 1.60 | ||
Total standard cost | $ | 11.20 | |||||
The plant has been experiencing problems for some time, as is shown by its June income statement when it made and sold 15,200 pools; the normal volume is 15,350 pools per month. Fixed costs are allocated using machine-hours. |
Flexible Budgeted | Actual | |||
Sales (15,200 pools) | $ | 456,000 | $ | 456,000 |
Less: Variable expenses: | ||||
Variable cost of goods sold* | 170,240 | 195,002 | ||
Variable selling expenses | 20,300 | 20,300 | ||
Total variable expenses | 190,540 | 215,302 | ||
Contribution margin | 265,460 | 240,698 | ||
Less: Fixed expenses: | ||||
Manufacturing overhead | 132,000 | 132,000 | ||
Selling and administrative | 85,120 | 85,120 | ||
Total fixed expenses | 217,120 | 217,120 | ||
Net income | $ | 48,340 | $ | 23,578 |
*Contains direct materials, direct labour, and variable manufacturing overhead. |
Janet Dunn, the general manager of the Westwood Plant, wants to get things under control. She needs information about the operations in June since the income statement signalled that the problem could be due to the variable cost of goods sold. Dunn learns the following about operations and costs in June: |
a. | 30,700 kilograms of materials were purchased at a cost of $3.70 per kilogram. |
b. |
24,600 kilograms of materials were used in production. (Finished goods and work-in-process inventories are insignificant and can be ignored.) |
c. | 11,600 direct labour-hours were worked at a cost of $7 per hour. |
d. |
Variable manufacturing overhead cost totalling $24,612 for the month was incurred. A total of 5,860 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. |
Direct materials price and quantity variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).) |
Material price variance ______ F
Material quantity variance $25,440 U
4. |
Compute the fixed overhead cost variances. (Round intermediate calculation to 2 decimal places. Indicate the effect of variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).) |
|
1)
a)Material price variance = AQ purchased [AP-SP]
= 30700 [3.70 - 4]
= 30700 * -.30
= - 9210 F (enter as 9210 F is needs to be entered as positive value]
Material quantity variance = SR[AQ used-SQ allowed for actual production]
= 4[24600- (15200*1.2)]
= 4[24600-18240]
= 4*6360
= 25440 U
4)
Fixed overhead budget variance = Actual fixed overhead- Budgeted fixed overhead
= 132000 - 132000
= 0 None
Fixed overhead volume variance = Budgeted fixed overhead -standard fixed overhead applied
= 132000- (6080*21.50)
= 132000 - 130720
= 1280 U
working:
Budgeted machine hours= normal volume *standard machine hours
= 15350 * .40
= 6140 MH
Budgeted fixed overhead rate per MH= 132000/6140 = $ 21.50 Per MH
Standard machine hours allowed for actual production= actual pools*standard MH hours
= 15200 *.4
= 6080