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 (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.

Answer 1

(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)