In: Accounting
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 (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:
Used 23,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Worked 3,800 direct labor-hours at a cost of $6.80 per hour.
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.
REQUIRED 1A:
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.)
REQUIRED 2B:
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 | ? | ? |
Given information
Standard cost per swimming pool:
Standard Quantity or Hours | Standard Price or Rate | Standard Cost | |
Direct materials | 3.0 pounds | $2.50 | $7.50 |
Direct labor | 0.4 hours | $7.10 | $2.84 |
Variable manufacturing overhead | 0.3 hours | $2.60 | $0.78 |
Total standard cost per unit | $11.12 |
Data for Direct materials Variances:
Actual Pools produced during June = 8,000 pools
Actual Quantity of materials purchased = 29,000 pounds
Actual Quantity of materials used in the production = 23,800 pounds
Actual Price per pound of materials = $2.95 per pound
Standard Quantity of materials allowed for production = 8,000 x 3 = 24,000 pounds
Standard Price per pound of materials = $2.50 per pound
Data for Direct labor Variances:
Actual Direct labor hours worked in the production = 3,800 Direct labor hours
Standard Direct labor hours allowed = 8,000 x 0.40 = 3,200 Direct labor hours
Actual Rate per Direct labor hour = $6.80 per hour
Standard Rate per Direct labor hour = $7.10 per hour
Data for variable overhead variances:
Actual variable manufacturing overhead cost = $8,100
Actual machine hours recorded = 2,700 machine hours
Actual Rate per machine hour = Actual variable manufacturing overhead cost / Total machine hours recorded
= $8,100 / 2,700 = $3 per machine hour
Standard machine hours allowed = 8,000 x 0.30 = 2,400 machine hours
Standard Rate per machine hour = $2.60
Standard variable manufacturing overhead cost = Standard machine hours allowed x Standard Rate per machine hour
= 2,400 x $2.60 = $6,240
1. Computation of variances for June:
a. Materials price and quantity variances:
Materials price variances = (Standard price - Actual price) x Actual Quantity of material purchased
= ($2.50 - $2.95) x 29,000 pounds = $13,050 (U) Unfavorable
Materials quantity variances = (Standard quantity - Actual quantity) x Standard price per material
= (24,000 - 23,800) x $2.50 = $500 (F) Favorable
b. Labor rate and efficiency variances:
Labour Rate Variance = (Standard Rate - Actual Rate) x Actual Direct labour hours
= ($7.10 - $6.80) x 3,800 = $1,140 (F) Favorable
Labour Efficiency Variance = (Standard labour hours - Actual labour hours) x Standard Rate per Direct labour hour
= (3,200 - 3,800) x $7.10 = $4,260 (U) Unfavorable
c. Variable overhead rate and efficiency variances:
Variable overhead Rate Variance = (Standard Rate - Actual Rate) x Actual machine hours
= ($2.60 - $3) x 2,700 machine hours = $1,080 (U) Unfavorable
Variable overhead Efficiency Variance = (Standard machine hours - Actual machine hours) x Standard Rate per machine hour
= (2,400 - 2,700) x $2.60 = $780 (U) Unfavorable
2. Computation of Summary net overall favorable or unfavorable variance for the month:
Item | $ | Net variances ($) |
Direct materials: | ||
Materials price variances | $13,050 (U) | |
Materials quantity variances | $500 (F) | $12,550 (U) |
Direct labor: | ||
Labour Rate Variance | $1,140 (F) | |
Labour Efficiency Variance | $4,260 (U) | $3,120 (U) |
Variable manufacturing overhead: | ||
Variable overhead Rate Variance | $1,080 (U) | |
Variable overhead Efficiency Variance | $780 (U) | $1,860 (U) |
Total net variances | $17,530 (U) |
U indicated unfavorable variances
F indicates favorable variances