Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. T
ID: 2421711 • 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:
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:
Purchased 17,800 pounds of materials at a cost of $3.15 per pound.
Used 12,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Incurred variable manufacturing overhead cost totaling $7,360 for the month. A total of 2,300 machine-hours was recorded.
Materials price and quantity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
Labor rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
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).)
Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. (Input all values as positive amounts. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)
Pick out the two most significant variances that you computed in (1) above. (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)
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:
Explanation / Answer
The two most significant variances are the materials price variance and the labor efficiency variance. Possible causes of the variances include:
Answer 1. a. Material Price Variance = (SR - AR) X AQ Material Price Variance = (2.70 - 3.15) X 12600 = $5670 (Unfavourable) Material quantity Variance = (SQ - AQ) X SR Material quantity Variance = (12800 - 12600) X $2.70 = $13500 (Favourable) SQ = 3.20 pounds X 4000 pools = 12800 pounds Answer 1. b. Labour Rate Variance = (SR - AR) X AH Labour Rate Variance = ($7.30 - $7) X 3000 = $900 (Favourable) Labour Efficiency Variance = (SH - AH) X SR Labour Efficiency Variance = (2400 - 3000) X $7.30 = $4380 (Unfavourable) SH = 0.6 Hrs X 4000 Pools = 2400 Hrs Answer 1. c. Variable Overhead Rate Variance = (SR - AR) X AH Variable Overhead Rate Variance = ($2.80 - $3.20) X 2300 Hrs = $920 (Unfavourable) AR = $7360 / 2300 hrs = $3.20 per Hr. Variable Overhead Efficiency Variance = (SH - AH) X SR Variable Overhead Efficiency Variance = (2000 - 2300) X $2.80 = $840 (Unfavorable) SH = 0.5 Hrs X 4000 Pools = 2000 Hrs Answer 2. Summary of Variances Material Price Variance $5,670 Unfavourable Material Qunatity Variance $13,500 Favourable Labor rate variance $900 Favourable Labor efficiency variance $4,380 Unfavourable Variable overhead rate variance $920 Unfavourable Variable overhead efficiency variance $840 Unfavourable Net Variance $2,590 Favourable Answer 3.The two most significant variances are the materials price variance and the labor efficiency variance. Possible causes of the variances include:
Materials price variance: Outdated standards, uneconomical quantity purchased, higher quality materials, high-cost method of transport. Labor efficiency variance: Poorly trained workers, poor quality materials, faulty equipment, work interruptions, inaccurate standards, insufficient demand.