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 (6,000 pools)	$	273,000		$	273,000
Variable expenses:
Variable cost of goods sold*		83,460			102,050
Variable selling expenses		24,000			24,000
Total variable expenses		107,460			126,050
Contribution margin		165,540			146,950
Fixed expenses:
Manufacturing overhead		65,000			65,000
Selling and administrative		90,000			90,000
Total fixed expenses		155,000			155,000
Net operating income (loss)	$	10,540		$	(8,050	)

*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	4.0 pounds	$	2.60	per pound	$	10.40
Direct labor	0.3 hours	$	8.10	per hour		2.43
Variable manufacturing overhead	0.3 hours*	$	3.60	per hour		1.08
Total standard cost per unit					$	13.91

*Based on machine-hours.

During June, the plant produced 6,000 pools and incurred the following costs:

1. Purchased 29,000 pounds of materials at a cost of $3.05 per pound.

2. Used 23,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)

3. Worked 2,400 direct labor-hours at a cost of $7.80 per hour.

4. Incurred variable manufacturing overhead cost totaling $8,400 for the month. A total of 2,100 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

Answer:

Answer-1(a):
Direct material price variance =	(SP-AP) × AQ purchased
	($2.60 - $3.05) × 29,000
	13,050 Unfavorable
Direct material Quantity variance =	(SQ - AQ used ) × SP
	[(4 × 6,000) - 23,800 ) × $2.60]
	520 Favorable
Answer-1(b):
Direct labor rate variance =	(SR -AR) *AH
	($8.10 - $7.80) × 2,400
	720 Favorable
Direct labor efficiency variance =	(SH - AH) × SR
	[6,000 × 0.3) - 2,400] × $8.10
	4,860 Unfavorable
Answer-1(c):
Variable overhead rate variance =	(SR-AR) × actual machine hours used
	($3.60 - $8.400/2,100) × 2,100
	8,400 Unfavorable
Variable overhead efficiency variance =	(SH -AH) × SR
	[(6,000 × 0.3) - 2,100] × $3.60
	1,080 Unfavorable

Answer-2:
Direct material price variance	13,050	U
Direct material Quantity variance	520	F
Direct labor rate variance	720	F
Direct labor efficiency variance	4,860	U
Variable overhead rate variance	8,400	U
Variable overhead efficiency variance	1,080	U
Net Variance	26,150	U