In: Accounting
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:
- Purchased 60,000 pounds of materials at a cost of $4.95 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 $17.00 per hour.
- 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.
(a) Material Price & Quantity Variance :-
Material Price Variance = (Std Price – Actual Price) * Actual Qty
Std Price = $ 5 per pound
Actual Price = $4.95 per pound
Actual Qty used = 49200 pound
=(5 – 4.95) * 49200 = 2460(F)
Material Qty Variance = (Std Qty – Actual Qty) * Std Price
Std Qty = Actual output * Std qty per output
= 15000 * 3 = 45000 pound
=(45000 – 49200) * 5 = 21000(U)
(b) Labour Rate & Efficiency Variance :-
Labour Rate Variance = (SR – AR) * Actual Hrs
SR = 16 per hr
AR = 17 per hr
Actual Hrs = 11800
=(16 – 17) * 11800 = 11800(U)
Labour Efficiency Variance = (SH – AH) * SR
SH = 15000 * 0.8 = 12000 hrs
=(12000 – 11800) * 16 = 3200(F)
(c) Variable O/H Rate & Efficiency Variance:-
Variable O/H Rate Variance = (SR – AR) * Actual machine Hrs
SR = 3 per hr
AR = 18290/5900 = 3.1C
Actual machine Hrs = 5900
= (3 – 3.1) * 5900 = 590(U)
Variable O/H Efficiency Variance = (Std Machine hrs – Actual machine hrs) * SR
Std machine hrs = 15000 * 0.4 =6000
=(6000 – 5900) * 3 = 300(F)
(2)
Material Price Variance |
2460(F) |
(+) Material Qty Variance |
21000(U) |
Total Material Cost Variance (A) |
18540(U) |
Labour Rate Variance |
11800(U) |
(+) Labour efficiency Variance |
3200(F) |
Total Labour Cost Variance (B) |
8600(U) |
Variable O/H Rate Variance |
590(U) |
(+) Varaible O/H Efficiency Varaince |
300(F) |
Total V. O/H Cost Varaince (C) |
290(U) |
Overall Varaince (A+B +C) |
27430(U) |