Question

Problem:

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 (15,000 pools)	$	675,000		$	675,000
Variable expenses:
Variable cost of goods sold*		435,000			461,890
Variable selling expenses		20,000			20,000
Total variable expenses		455,000			481,890
Contribution margin		220,000			193,110
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 (loss)	$	6,000		$	(20,890	)

*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	$	5.00	per pound	$	15.00
Direct labor	0.8 hours	$	16.00	per hour		12.80
Variable manufacturing overhead	0.4 hours*	$	3.00	per hour		1.20
Total standard cost per unit					$	29.00

*Based on machine-hours.

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

1. Purchased 60,000 pounds of materials at a cost of $4.95 per pound.
2. Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
3. Worked 11,800 direct labor-hours at a cost of $17.00 per hour.
4. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 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. What impact did this figure have on the company’s income statement? Show computations.

3. Pick out the two most significant variances that you computed in (1) above. Explain to Ms. Dunn possible causes of these variances.

Answer 1

Solution

1-a)	Material price variance
	(Actual price - standard price )* AQ purchased
	(4.95-5)*60000
	3000	F
	Materials Quantity variance
	(AQ used - SQ allowed)*Standard price
	(49200 - 15000*3)*5
	21000	U
1-b)	Labor rate variance
	(Actual rate - standard rate)*Actual hours
	(17-16)*11800
	11800	U
	Labor Efficiency variance
	(Actual hours - standard hours allowed)* Std rate
	(11800 -15000*.8)*16
	3200	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	26,890	U
	Material price variance		3,000	F
	Material quantity variance		21000	U
	labor rate variance			11800	U
	labor efficiecny variance		3200	F
	variable overhead rate variance		590	U
	variable overhead efficiency variance	300	F
	net variance			26,890	U

The net unfavorable variance of $26,890 for the month caused the plant's variable cost of goods sold to increase from the budgeted level of $435,000 to $461,890:

Budgeted cost of goods sold at $29 per pool$435,000Add the net unfavorable variance, as above 26,890Actual cost of goods sold$461,890

This $26,890 net unfavorable variance also accounts for the difference between the budgeted net operating income and the actual net operating loss for the month.

Budgeted net operating income$6,000 Deduct the net unfavorable variance added to cost of goods sold for the month 26,890 Net operating loss$(20,890)

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