Question

Problem 11-15 Comprehensive Variance Analysis

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:

	Budgeted	Actual
Sales (15,000 pools) ……………………………………………	$450,000	$450,000
Variable expenses:
Variable costs of goods sold* ……………………………..	180,000	196,290
Variable selling expenses ……………………………………	20,000	20,000
Total variable expenses ………………………………………	200,000	216,290
Contribution margin ……………………………………………	250,000	233,710
Fixed expenses:
Manufacturing overhead ……………………………………...	130,000	130,000
Selling and administrative …………………………………….	84,000	84,000
Total fixed expenses ……………………………………………..	214,000	214,000
Net operating income …………………………………………..	$36,000	$19,710
*The revenue variance is labelled favourable (unfavourable) when the revenue is the flexible budget is greater than (less than) the planning budget. The expense variances are labelled favourable (unfavourable) when the expense in the flexible budget is less than (greater than) the planning budget.

Janet Dumn, 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. Dumn has concluded that the major problem lies in the variable cost of goods sold. She has been provided with the following standard 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 …………………………………………….	0.8 hours	$6.00 per hour	4.80
Variable manufacturing overhead …………..	0.4 hours*	$3.00 per hour	1.20
Total standard cost …………………………………			$12.00
*The revenue variance is labelled favourable (unfavourable) when the actual revenue is greater than (less than) the flexible budget. The expense variances are labelled favourable (unfavourable) when the actual expense is less than (greater than) the flexible budget.

During June the plant produced 15,000 pools and incurred the following costs:

Purchased 60,000 pounds of materials at a cost of $1.95 per pound.

Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

Worked 11,800 direct labor-hours at a cost of $7.00 per hour.

Incurred variable manufacturing overhead cost totalling $18,290 for the month. A total of 5,900 machine-hours we recorded.

It is the company’s policy to close all variances to cost goods sold on a monthly basis.

Required;

Compute the following variances for June:

Materials price and quantity variances.

Labor rate and efficiency variances.

Variable overhead rate and efficiency variances.

Summarize the variances that you computed in requirement 1 by showing the net overall favourable or unfavourable variance for the month. What impact did this figure have on the company’s income statement? Sow computations.

Pick out the two most significant variances that you compute that you computed in requirement 1. Explain to Ms. Dumn possible causes of these variances.

Answer 1

	1-a)	Material price variance
		(Actual price - standard price )* AQ purchased
		(1.95 - 2)*60000
		3000	F
		Materials Quantity variance
		(AQ used - SQ allowed)*Standard price
		(49200 - 15000*3)*2
		8400	U
	1-b)	Labor rate variance
		(Actual rate - standard rate)*Actual hours
		(7-6)*11800
		11800	U
		Labor Efficiency variance
		(Actual hours - standard hours allowed)* Std rate
		(11800 - 15000*.8)*6
		1200	F
	1-c)	Variable overhead rate variance
		(Actual rate - standard rate)*Actual machinehours
		(18,290 - 5900*3)
		590	U
		Variable overhead Efficiency variance
		(Actual hours - standard hours allowed)* Std rate
		(5900 -15000*.4)*3
		300	F
	2)	Net Variance		16,290	U
		Material price variance				3,000	F
		Material quantity variance				8400	U
		labor rate variance				11800	U
		labor efficiecny variance				1200	F
		variable overhead rate variance				590	U
		variable overhead efficiency variance				300	F
		net variance				16,290	U
	3)	material price variance
		labor effiency variance