Question

Problem 10-15 Comprehensive Variance Analysis [LO10-1, LO10-2, LO10-3]

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:

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

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

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

4. 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.

1a. Compute the following variances for June, materials price and quantity variances.

1b. Compute the following variances for June, labor rate and efficiency variances.

1c. Compute the following variances for June, variable overhead rate and efficiency variances.

(Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

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	1a. Material price variance Material quantity variance 1b. Labor rate variance Labor efficiency variance 1c. Variable overhead rate variance Variable overhead efficiency variance

• Required 2

Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Net variance

Answer 1

Solution :

Requirement 1:

1a	Material Price Variance	$ 7,110	U
	Material Quantiry Variance	$ 400	F
1b	Labor Rate Variance	$ 630	F
	Labor Efficiency Variance	$ 3,960	U
1c	Variable Overhead Rate Variance	$ 480	U
	Variale Overhead Efficiency Variance	$ 630	U

Requirement 2:

Net Variance

$ 11,150

U

Working :

1a.

Material Price Variance :

Material Price Variance = (SR - AR) * Material Purchases

= ($ 2.00 - $ 2.45) * 15,800

= $ 7,110 Unfavorable

Material Quantity Variance :

Material Quantity Variace = (SQ - AQ used) * SR

= [(3,000 * 3.60) - 10,600] * $ 2.00

= [ 10,800 - 10,600] * $ 2.00

= $ 400 Favorable

1b.

Labor Rate Variance :

Labor Rate Variance = (SR - AR) * AHW

= ($ 6.60 - $ 6.30) * 2,100

= $ 630 Favorable

Labor Efficiency Variance :

Labor Efficiency Variance = (SH - AH) * SR

= [(3,000 * 0.50) - 2,100] * $ 6.60

= [1,500 - 2,100] * $ 6.60

= $ 3,960 Unfavorable

1c.

Variable Overhead Rate Variance :

Variable Overhead Rate Variance = (SR - AR) * Actual Hour

= [$ 2.10 - ($ 3,000 / 1,200)] * 1,200

= [$ 2.10 - $ 2.50] * 1,200

= $ 480 Unfavorable

Variable Overhead Efficiency Variance :

Variable Overhead Efficiency Variance = (SH - AH) * SR

= [(3,000 * 0.30) - 1,200] * $ 2.10

= [9,00 - 1,200] * $ 2.10

= $ 630 Unfavorable

(2) Net Variance :  

Material Price Variance	$ 7,110	U
Material Quantiry Variance	$ 400	F
Labor Rate Variance	$ 630	F
Labor Efficiency Variance	$ 3,960	U
Variable Overhead Rate Variance	$ 480	U
Variable Overhead Efficiency Variance	$ 630	U
Net Variance	$ 11,150	U