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 (8,000 pools) $ 265,000 $ 265,000 Variable expenses: Variable cost of goods sold* 88,960 106,490 Variable selling expenses 16,000 16,000 Total variable expenses 104,960 122,490 Contribution margin 160,040 142,510 Fixed expenses: Manufacturing overhead 65,000 65,000 Selling and administrative 80,000 80,000 Total fixed expenses 145,000 145,000 Net operating income (loss) $ 15,040 $ (2,490 ) *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 $ 2.50 per pound $ 7.50 Direct labor 0.4 hours $ 7.10 per hour 2.84 Variable manufacturing overhead 0.3 hours* $ 2.60 per hour 0.78 Total standard cost per unit $ 11.12 *Based on machine-hours. During June, the plant produced 8,000 pools and incurred the following costs: Purchased 29,000 pounds of materials at a cost of $2.95 per pound. Used 23,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) Worked 3,800 direct labor-hours at a cost of $6.80 per hour. Incurred variable manufacturing overhead cost totaling $8,100 for the month. A total of 2,700 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

Std quantity allowed for actual output (8000 units @ 3 pounds): 24000 punds
Std price per pound: $ 2.50 per pound
Actual Quantity used: 23800 used
Actual price per pound: $ 2.95 pere pound
Material price variance: Actual Quantity used (Std price - Actual price )
		23800 (3.00-2.95) = $ 1190 F
Material Quauntity variance: Std price (Std quantity -Actual quantity)
		3.00 (24000 -23800 ) = $ 600 F
Std labour hours for actual output (8000 units @ 0.4 hour): 3200 hours
Std rate per hour: $ 7.10 per hour
Actual hours used: 3800 DLH
Actual rate per hour: 6.80 per houor
labour rate variance: Actual labour hours (Std rate- Actual rate)
		3800 (7.10 -6.80)= $1140 F
Labour Efficiency variance= Std rate per hour (Std labour hours- Actual labour hours)
		7.10 (3200 hrs - 3800 hrs) = $4260 U
Std machine hours for actual output (8000 units @ 0.30): 2400 MH
Std variable OH rate per MH: $2.60 per MH
Actual Machine hours: 2700 MH
Actual Variable OH rate per MH: (8100/2700): $ 3.00 per MH
Variable OH rate variance: Actual machine hours (Std rater per hour - Aactual rate)
		2700 (2.60 -3.00) = $ 1080 U
Variable OH effciency variance: Std rate per hour (Std MH- Actual MH)
			2.60 (2400-2700) = $ 780 U
Summary showing overalal net effect:
material price variance				1190	F
material efficiency variance				600	F
Labour rate variance				1140	F
labouor efficiency variance				4260	U
Variable OH rate variance				1080	U
Variable OH efficiency variance				780	U
NET EFFECT				3190	U