Question & Answer: The plant has been experiencing problems as shown by its June contribution format income statement below:…..

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:

Flexible Budget Actual
Sales (15,000 pools) $ 675,000 $ 675,000
Variable expenses:
Variable cost of goods sold* 435,000 461,890
Variable selling expenses 20,000 20,000
Total variable expenses 455,000 481,890
Contribution margin 220,000 193,110
Fixed expenses:
Manufacturing overhead 130,000 130,000
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.

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Question & Answer: The plant has been experiencing problems as shown by its June contribution format income statement below:…..
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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 3.0 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.

Expert Answer

Material Variances:
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
Labor variances:
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:
Material Price 3000 Fav
Material Quantity 21000 Unfav
Labour rate 11800 Unfav
Labour Efficiency 3200 fav
Variable OH Rate 590 Unfav
Variable Oh efficiency 300 fav
Overall Net variance 26890 Unfav

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