Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. T
ID: 2422705 • 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: Budgeted Actual Sales (8,000 pools) $ 240,000 $ 240,000 Variable expenses: Variable cost of goods sold* 94,000 112,470 Variable selling expenses 10,000 10,000 Total variable expenses 104,000 122,470 Contribution margin 136,000 117,530 Fixed expenses: Manufacturing overhead 55,000 55,000 Selling and administrative 70,000 70,000 Total fixed expenses 125,000 125,000 Net operating income (loss) $ 11,000 $ (7,470) *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 3.5 pounds $ 2.50 per pound $ 8.75 Direct labor 0.4 hours $ 6.50 per hour 2.60 Variable manufacturing overhead 0.2 hours* $ 2.00 per hour 0.40 Total standard cost $ 11.75 *Based on machine-hours. During June the plant produced 8,000 pools and incurred the following costs: a. Purchased 33,000 pounds of materials at a cost of $2.95 per pound. b. Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 3,800 direct labor-hours at a cost of $6.20 per hour. d. Incurred variable manufacturing overhead cost totaling $4,560 for the month. A total of 1,900 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. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) b. 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).) c. 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).)
2.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).)
Explanation / Answer
Budgeted
Actual
Sales
A
240000
240000
Variable cost of goods sold
B
94000
112470
Variable selling expenses
C
10000
10000
Total
D=B+C
104000
122470
Contribution
E=A-D
136000
117530
Fixed Expenses
F
125000
125000
Net operating income/(loss)
G=E-F
11000
-7470
Standard Qty for actual output
Standard Price
Standard cost for actual output
Actual Qty
Actual Price
Actual Cost
a
b
c=a*b
d
e
f=d*e
28000
2.5
70000
27800
2.95
82010
Direct Material Cost Variance = (Standard Qty for actual output * SP)-(Actual Qty *Actual Price)
=70000-82010
=12010 (U)
Direct Material Price Variance = (Sp-Ap)* Actual Qty
= (2.5-2.95)*27800
=12690(U)
Direct Material Qty Variance = (Standard qty for actual output-Actual Qty)* Sp
= (28000-27800)*2.5 =500 (f)
Standard hrs for actual output
Standard Rate
Standard cost for actual hours
Actual hours
Actual rate
Actual Cost
a
b
c=a*b
d
e
f=d*e
3200
6.5
3800
6.2
23560
Direct Labor Cost Variance = (Standard hrs for actual output * SP)-(Actual hrs *Actual Price)
=3200-4560
=1360 (U)
Direct Labor Rate Variance = (Sp-Ap)* Actual hrs
= (2-2.4)*1900
=760(u)
Direct Labor Efficiency Variance = (Standard hrs for actual output-Actual hrs)* Sp
= (1600-1900)*2 =600 (u)
Direct MAterial variance is the sum of Direct Material Price Variance and Direct Material Qty Variance
Direct Labor variance is the sum of Direct Labor Rate Variance and Direct Labor Efficiency Variance
Budgeted
Actual
Sales
A
240000
240000
Variable cost of goods sold
B
94000
112470
Variable selling expenses
C
10000
10000
Total
D=B+C
104000
122470
Contribution
E=A-D
136000
117530
Fixed Expenses
F
125000
125000
Net operating income/(loss)
G=E-F
11000
-7470