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:
|Sales (15,000 pools)||$||675,000||$||675,000|
|Variable cost of goods sold*||435,000||461,890|
|Variable selling expenses||20,000||20,000|
|Total variable expenses||455,000||481,890|
|Selling and administrative||84,000||84,000|
|Total fixed expenses||214,000||214,000|
|Net operating income (loss)||$||6,000||$||(20,890||)|
*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
|Direct materials||3.0 pounds||$||5.00||per pound||$||15.00|
|Direct labor||0.8 hours||$||16.00||per hour||12.80|
|Variable manufacturing overhead||0.4 hours*||$||3.00||per hour||1.20|
|Total standard cost per unit||$||29.00|
*Based on machine-hours.
During June, the plant produced 15,000 pools and incurred the following costs:
Purchased 60,000 pounds of materials at a cost of $4.95 per pound.
Used 49,200 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
Worked 11,800 direct labor-hours at a cost of $17.00 per hour.
Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 machine-hours was recorded.
It is the company’s policy to close all variances to cost of goods sold on a monthly basis.
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.
|Std quantity allowed for actual output (15000*3): 45000 pounds|
|Std price per pound: $ 5.00 per pound|
|Actual Quantity purchased: 60000 pounds|
|Actual Quantity used: 49200 pounds|
|Actual price per pound: $ 4.95 per pound|
|Material price variance: Actual Quantity purchased (Std price-Actual price)|
|60000 (5.00 -4.95) = $ 3000 Fav|
|Material Quantity Variance: Std price (Std quantity -Actual Quantity)|
|5.00 (45000-49200) = $ 21000 Unfav|
|Std hours allowed for actual output (15000*.08): 12000 hours|
|Aactual hours worked: 11800 hours|
|Actual rate per hour: 17.00 per hour|
|Std rate per hour : $ 16.00 per hour|
|Labour rate variance: Actual hours (Std rate-Actual rate)|
|11800 (16-17) = $ 11800 Unfav|
|Labour Efficiency variance: Std rate (Std hours-Actual hours)|
|16 (12000-11800) = $ 3200 Fav|
|Variable OH Variances:|
|Std Machine hours allowed (15000*.04): 6000 MH|
|Actual MH: 5900 MH|
|Std variable OH rate: $ 3.00 per MH|
|Actual Ohh rate per hour: (18290/5900): $ 3.10 per MH|
|Variable OH rate variance: Actual MH (Std rate-Actual Rate)|
|5900 (3.00-3.10) = $ 590 Unfav|
|Variable OH efficiency Variance: Std rate per hour (Std MH-Actual MH)|
|3.00 (6000-5900) = $ 300 fav|
|Summary of Variance:|
|Variable OH Rate||590||Unfav|
|Variable Oh efficiency||300||fav|
|Overall Net variance||26890||Unfav|