Question

In: Accounting

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 (7,000 pools) $ 235,000 $ 235,000
Variable expenses:
Variable cost of goods sold* 78,540 96,420
Variable selling expenses

18,000

18,000
Total variable expenses

96,540

114,420
Contribution margin

138,460

120,580
Fixed expenses:
Manufacturing overhead 54,000 54,000
Selling and administrative 69,000 69,000
Total fixed expenses

123,000

123,000
Net operating income (loss) $ 15,460 $

(2,420

)

*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 3.4 pounds $

2.40

per pound $ 8.16
Direct labor 0.3 hours $

6.40

per hour 1.92
Variable manufacturing overhead 0.6 hours* $

1.90

per hour

1.14

Total standard cost per unit $ 11.22

*Based on machine-hours.

During June the plant produced 7,000 pools and incurred the following costs:

Purchased 28,800 pounds of materials at a cost of $2.85 per pound.

Used 23,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

Worked 2,700 direct labor-hours at a cost of $6.10 per hour.

Incurred variable manufacturing overhead cost totaling $10,350 for the month. A total of 4,500 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

1-a) Material price variance
(Actual price - standard price )* AQ purchased
(2.85-2.40)*28,800
12960 U
Materials Quantity variance
(AQ used - SQ allowed)*Standard price
(23600-7000*3.4)*2.4
480 F
1-b) Labor rate variance
(Actual rate - standard rate)*Actual hours
(6.10-6.40)*2700
810 F
Labor Efficiency variance
(Actual hours - standard hours allowed)* Std rate
(2700 - 7000*.3)*6.4
3840 U
1-c) Variable overhead rate variance
(Actual rate - standard rate)*Actual machinehours
(10,350 - 4500*1.9)
1800 U
Variable overhead Efficiency variance
(Actual hours - standard hours allowed)* Std rate
(4500 - 7000*.6)*1.9
570 U
2) Net Variance 17,880 U
Material price variance 12,960 U
Material quantity variance 480 F
labor rate variance 810 F
labor efficiecny variance 3840 U
variable overhead rate variance 1800 U
variable overhead efficiency variance 570 U
net variance 17,880 U
3) material price variance
labor effiency variance

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