Question

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 (5,000 pools) $ 235,000 $ 235,000 Variable expenses: Variable cost of goods sold* 71,350 86,370 Variable selling expenses 13,000 13,000 Total variable expenses 84,350 99,370 Contribution margin 150,650 135,630 Fixed expenses: Manufacturing overhead 62,000 62,000 Selling and administrative 77,000 77,000 Total fixed expenses 139,000 139,000 Net operating income (loss) $ 11,650 $ (3,370 ) *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 3.8 pounds $ 2.20 per pound $ 8.36 Direct labor 0.7 hours $ 6.80 per hour 4.76 Variable manufacturing overhead 0.5 hours* $ 2.30 per hour 1.15 Total standard cost per unit $ 14.27 *Based on machine-hours. During June the plant produced 5,000 pools and incurred the following costs: Purchased 24,000 pounds of materials at a cost of $2.65 per pound. Used 18,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) Worked 4,100 direct labor-hours at a cost of $6.50 per hour. Incurred variable manufacturing overhead cost totaling $7,560 for the month. A total of 2,800 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

Requirement 1:- Compute the following variances for June:

a. Materials price and quantity variances.

Solution:- Material Price variance = Actual Quantity purchased * (Standard Price - Actual Price)

Material Price variance = 24,000 ($2.20 - $2.65)

Material Price variance = 24,000 * ($-0.45)

Material Price variance = $10,800 Unfavorable

Material Quantity Variance = Standard Price * (Standard Quantity - Actual Quantity used)

Material Quantity Variance = $2.20 * {(5,000 * 3.8) - 18,800}

Material Quantity Variance = $2.20 * (19,000 - 18,800)

Material Quantity Variance = $440 Favorable

b. Labor rate and efficiency variances.

Labor rate variance = Actual hours worked * (Standard Rate - Actual Rate)

Labor rate variance = 4,100 * ($6.80 - $6.50)

Labor rate variance = 4,100 * $0.30

Labor rate variance = $1,230 Favorable

Labor Efficiency Variance = Standard Rate * (Standard hours - Actual Hours)

Labor Efficiency Variance = $6.80 * {(5,000 * 0.7) - 4,100}

Labor Efficiency Variance = $6.80 * (3,500 - 4,100)

Labor Efficiency Variance = $4,080 Unfavorable

c. Variable overhead rate and efficiency variances.

Variable Overhead rate variance = Actual manufacturing overhead * (Standard Rate - Actual Rate)

Variable Overhead rate variance = 2,800 * {$2.3 - (7,560 / 2,800)}

Variable Overhead rate variance = 2,800 * ($2.30 - $2.70)

Variable Overhead rate variance = 2,800 * - $0.40

Variable Overhead rate variance = $1,120 Unfavorable

Variable Efficiency Variance = Standard Rate* (Standard Manufcturing Overhead - Actual Manufacturing Overhead)

Variable Efficiency Variance = $2.30 * {(5,000 * 0.5) - 2,800}

Variable Efficiency Variance = $2.30 * (2,500 - 2,800)

Variable Efficiency Variance = $690 Unfavorable

Requirement 2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month.

Summary of Variance

Material Price Variance	$10,800	Unfavorable
Material Quantity Variance	$440	Favorable
Labor Rate Variance	$1,230	Favorable
Labor Effeciency Variance	$4,080	Unfavorable
Variale Overhead Rate Variance	$1,120	Unfavorable
Variabe Overhead Efficiency Variance	$690	Unfavorable
Overall Net Variance	$15,020	Unfavorable