Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. T
ID: 2570645 • 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:
10,000
104,000
136,000
125,000
(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:
2.50
6.50
2.00
0.40
*Based on machine-hours.
During June, the plant produced 8,000 pools and incurred the following costs:
Purchased 33,000 pounds of materials at a cost of $2.95 per pound.
Used 27,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Worked 3,800 direct labor-hours at a cost of $6.20 per hour.
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.
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 (8,000 pools) $ 240,000 $ 240,000 Variable expenses: Variable cost of goods sold* 94,000 112,470 Variable selling expenses10,000
10,000 Total variable expenses104,000
122,470 Contribution margin136,000
117,530 Fixed expenses: Manufacturing overhead 55,000 55,000 Selling and administrative 70,000 70,000 Total fixed expenses125,000
125,000 Net operating income (loss) $ 11,000 $(7,470
)Explanation / Answer
Material price variance AP (a) SP (b) Variance (c=b-a) AQ (d) Total variance (e=c*d) F/U Material price variance = (AP-SP)*AQ AP = Actual price per unit = $2.95 SP = Standard price per unit = $2.5 AQ = Actual quantity consumed= 27800 F= Favourable U = Unfavourable Material price variance AP (a) SP (b) Variance (c=b-a) AQ (d) Total variance (e=c*d) F/U 2.95 2.5 -0.45 27800 -12510 U Material quantity variance AQ (a) SQ (b) Variance (c=b-a) SP (d) Total variance (e=c*d) F/U Material quantity variance = (AQ-SQ)*SP AQ = Actual quantity consumed= 27800 SQ = Standard quantity = 2000*6 = 3.5*8000 = 28000 SP = Standard price per unit = $2.5 F= Favourable U = Unfavourable Material quantity variance AQ (a) SQ (b) Variance (c=b-a) SP (d) Total variance (e=c*d) F/U 27800 28000 200 2.5 500 F Labor Rate variance AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U Labor Rate variance = (AR-SR)*AH AR = Actual Rate per hour = $6.2 SR = Standard Rate per hour = $6.5 AH = Actual hours = 3800 F= Favourable U = Unfavourable Labor Rate variance AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U 6.2 6.5 0.3 3800 1140 F Labor Efficiency variance AH (a) SH (b) Variance (c=b-a) AR (d) Total variance (e=c*d) F/U Labor Efficiency variance = (AH-SH)*AR AH = Actual hours = 3800 SH = Standard Hours = 0.4*8000 = 4000 SR = Standard Rate per hour = $6.5 F= Favourable U = Unfavourable Labor Efficiency variance AH (a) SH (b) Variance (c=b-a) SR (d) Total variance (e=c*d) F/U 3800 4000 200 6.5 1300 F VOH spending variance AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U VOH spending variance = (AR-SR)*AH AR = Actual Rate per hour = $4560/1900 = $2.4 SR = Standard Rate per hour = $2 AH = Actual machine hours = 1900 F= Favourable U = Unfavourable VOH spending variance AR (a) SR (b) Variance (c=b-a) AH (d) Total variance (e=c*d) F/U 2.4 2 -0.4 1900 -760 U VOH efficiency variance AH (a) SH (b) Variance (c=b-a) SR (d) Total variance (e=c*d) F/U VOH efficiency variance = (AH-SH)*SR AH = Actual machine hours = 1900 SH = Standard machine Hours = 8000*0.2 = 1600 SR = Standard Rate per hour = $2 F= Favourable U = Unfavourable VOH efficiency variance AH (a) SH (b) Variance (c=b-a) Price (d) Total variance (e=c*d) F/U 1900 1600 -300 2 -600 U 1) 1a. Material price variance -12510 U Material quantity variance 500 F 1b. Labor rate variance 1140 F Labor efficiency variance 1300 F 1c. Variable overhead rate variance -760 U Variable overhead efficiency variance -600 U 2) Net variance = 12510+760+600-500-1140-1300 = $10930 U