Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. T
ID: 2391517 • Letter: M
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:
25,000
135,810
174,190
157,000
(3,685
*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:
2.70
8.20
3.70
1.48
*Based on machine-hours.
During June, the plant produced 7,000 pools and incurred the following costs:
Purchased 33,700 pounds of materials at a cost of $3.15 per pound.
Used 28,500 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Worked 3,400 direct labor-hours at a cost of $7.90 per hour.
Incurred variable manufacturing overhead cost totaling $12,710 for the month. A total of 3,100 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.
Flexible Budget Actual Sales (7,000 pools) $ 310,000 $ 310,000 Variable expenses: Variable cost of goods sold* 110,810 131,685 Variable selling expenses25,000
25,000 Total variable expenses135,810
156,685 Contribution margin174,190
153,315 Fixed expenses: Manufacturing overhead 66,000 66,000 Selling and administrative 91,000 91,000 Total fixed expenses157,000
157,000 Net operating income (loss) $ 17,190 $(3,685
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Answer 1-a. Material Price Variance = (SR - AR) X AQ Purchased Material Price Variance = ($2.70 - $3.15) X 33,700 Lbs Material Price Variance = $15,165 (U) Material Quantity Variance = (SQ - AQ) X SR SQ = 4.10 lbs X 7,000 Pools = 28,700 lbs Material Quantity Variance = (28,700 lbs - 28,500 lbs) X $2.70 Material Quantity Variance = $540 (F) Answer 1-b. Labor Rate Variance = (SR - AR) X AH Labor Rate Variance = ($8.20 - $7.90) X 3,400 dlh Labor Rate Variance = $1,020 (F) Labor Efficiency Variance = (SH - AH) X SR SH = 0.40 dlh X 7,000 Pools = 2,800 dlh Labor Efficiency Variance = (2,800 dlh - 3,400 dlh) X $8.20 Labor Efficiency Variance = $4,920 (U) Answer 1-c. Variable Overhead Rate Variance = (SR - AR) X AH AR = $12,710 / 3,100 Mach hrs = $4.10 per Mach. Hr Variable Overhead Rate Variance = ($3.70 - $4.10) X 3,100 Mach Hrs Variable Overhead Rate Variance = $1,240 (U) Variable Overhead Efficiency Variance = (SH - AH) X SR SH = 0.40 mach hrs X 7,000 Pools = 2,800 Mach Hrs Variable Overhead Efficiency Variance = (2,800 Mach hrs - 3,100 Mach Hrs) X $3.70 Variable Overhead Efficiency Variance = $1,110 (U) Answer 2. Summary of Variances Material Price Variance 15,165 (U) Material Quantity Variance 540 (F) Labor Rate Variance 1,020 (F) Labor Efficiency Variance 4,920 (U) Variable Overhead Rate Variance 1,240 (U) Variable Overhead Efficiency Variance 1,110 (U) Net Variance 20,875 (U)