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.

1a. Compute the following variances for June, materials price and quantity variances.

1b. Compute the following variances for June, labor rate and efficiency variances.

1c. Compute the following variances for June, variable overhead rate and efficiency variances.

(Do not round your intermediate calculations. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

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	1a. Material price variance Material quantity variance 1b. Labor rate variance Labor efficiency variance 1c. Variable overhead rate variance Variable overhead efficiency variance

Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

	Net variance

Answer 1

Std material qty for actual output (5000*3.8): 19000 pounds
Std price per pound: $2.20 per pound
Actual Quantity used: 18800 pounds
Aactual price per pound: $ 2.65
Materal price variance = Actual Qty (Std price-Actual price)
		18800 pounds (2.20 - 2.65 ) = 8460 U
Material Quantity Variance: Std price - (Std quantity -Actual Quantity)
		2.20 (19000-18800) =440 F
Std labour hours for actual output(5000*0.7) : 3500 hours
Actual hours: 4100 hours
Std rate per hour: $ 6.80 per hour
Actual rate per hour: $ 6.50 per hour
Labour rate variance: Actual hours (Std rate-Actual rate)
		4100 ( 6.80-6.50 ) = 1230 F
Llabour Efficiency Variance = Std rate (Std hours-Actual Hours)
		6.80 ( 3500-4100) = 4080 U
Std variable OH rate per hour: 2.30 per hour
Std MH allowed: 2500 MH
Actual MH hours used: 2800 MH
Actual OH rate per hour (7560/2800) = 2.70 per hour
Variable OH rate variance: Actual MH (Std rate-Actual rate)
		2800 ( 2.30-2.70) = 1120 U
Variable OH Efficiency Variance = Std rate (Std Hours-Actual Hhours)
		2.30 (2500-2800) = 690 U
Material Price variance			-8460	U
Material Qty variance			440	F
Labour rate variance			1230	F
Labour Efficiency Variance			-4080	U
Variable OH rate variance			-1120	U
variable OH efficiency Variance			-690	U
Net variance			-12680	U