Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. T
ID: 2565440 • 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 $210,000 $210,000 Sales (4,000 pools) Variable expenses Variable cost of goods sold 50,680 63,710 Variable selling expenses Total variable expenses Contribution margin Fixed expenses 12,000 62,680 75,710 147,320 134,290 12,000 Manufacturing overhead Selling and administrative 61,000 61,000 76,000 76,000 137.000 137.000 10,320 (2,710) Total fixed expenses Net operating income (loss) 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 Standard Price Standard or Hours 3.7 pounds 0.6 hours 0.4 hours or Rate $2.10 per pound $6.70 per hour $2.20 per hour Cost Direct materials Direct labor Variable manufacturing overhead $ 7.77 4.02 0.88 Total standard cost 12.67 *Based on machine-hours During June the plant produced 4,000 pools and incurred the following costs a. Purchased 19,800 pounds of materials at a cost of $2.55 per pound b. Used 14,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) c. Worked 3,000 direct labor-hours at a cost of $6.40 per hour d. Incurred variable manufacturing overhead cost totaling $4,940 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 favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).) Material price variance Material quantity varianceExplanation / Answer
1. Material price variance = Actual quantity (Standard price - Actual Price)
= 14600 (2.55 - 2.10) = 14600 (0.45) = 6570 F
2. Material Quantity variance = Standard rate (Standard Quantity - Actual Quantity)
= 2.55 (3.7 * 4000 - 14600) = 2.55 (200) = 510 F
3. Labour Rate variance = Actual Hour Worked (Standard rate - Actual Rate)
= 3000 (6.70 - 6.40) = 3000 (0.30) = 900 F
4. Labour Efficiency variance = Standard rate (Standard hour - Actual Hour)
= 6.70 (4000 * 0.60 - 3000) = 6.70 (600) = 4020 U
5. Variable overhead rate variance = Actual Hour (Standard rate - Actual Rate)
= 1900 (2.20 - 4940 / 1900) = 1900 (0.40) = 760 U
6. Variable overhead efficiency variance = Standard rate (Standard hour - Actual Hour)
= 2.20 (4000*0.4 - 1900) = 2.20 (300) = 660 U
Two most significant variances are
Material price variances
Labour efficiency variances
Summery of Variances Material Price variance 6570 F Material Quantity Variance 510 F Direct labour rate variance 900 F Direct labour Efficiency variance 4020 U Variable overhead rate variance 760 U Variable overhead efficiency variance 660 U Total 2540 F