Question

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Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant has been...

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.

Solutions

Expert Solution

(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)


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