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 (4,000 pools)	$	239,000		$	239,000
Variable expenses:
Variable cost of goods sold*		57,680			70,390
Variable selling expenses		16,000			16,000
Total variable expenses		73,680			86,390
Contribution margin		165,320			152,610
Fixed expenses:
Manufacturing overhead		72,000			72,000
Selling and administrative		82,000			82,000
Total fixed expenses		154,000			154,000
Net operating income (loss)	$	11,320		$	(1,390	)

*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	3.2 pounds	$	2.70	per pound	$	8.64
Direct labor	0.6 hours	$	7.30	per hour		4.38
Variable manufacturing overhead	0.5 hours*	$	2.80	per hour		1.40
Total standard cost per unit					$	14.42

*Based on machine-hours.

During June, the plant produced 4,000 pools and incurred the following costs:

1. Purchased 17,800 pounds of materials at a cost of $3.15 per pound.

2. Used 12,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 3,000 direct labor-hours at a cost of $7.00 per hour.

4. Incurred variable manufacturing overhead cost totaling $7,360 for the month. A total of 2,300 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

Answer:

Answer-1(a):
Direct material price variance =	(SP-AP) × AQ purchased
	($2.70 - $3.15) × 17,800
	8,010 Unfavorable
Direct material Quantity variance =	(SQ - AQ used ) × SP
	[(3.2 × 4,000) - 12,600 ) × $2.70]
	540 Favorable
Answer-1(b):
Direct labor rate variance =	(SR -AR) *AH
	($7.30 - $7.00) × 3,000
	900 Favorable
Direct labor efficiency variance =	(SH - AH) × SR
	[4,000 × 0.6) - 3,000] × $7.30
	4,380 Unfavorable
Answer-1(c):
Variable overhead rate variance =	(SR-AR) × actual machine hours used
	($2.80 - $7,360/2,300) × 2,300
	920 Unfavorable
Variable overhead efficiency variance =	(SH -AH) × SR
	[(4,000 × 0.5) - 2,300] × $2.80
	840 Unfavorable
Answer-2:
Direct material price variance	8,010	U
Direct material Quantity variance	540	F
Direct labor rate variance	900	F
Direct labor efficiency variance	4,380	U
Variable overhead rate variance	920	U
Variable overhead efficiency variance	840	U
Net Variance	12,710	U