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.
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.
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.

Answer:

See below

Explanation:

1a. Material price and quantity variances

Material price variance = (Actual price - Standard price) × Actual quantity purchased

= ($4.95 - $5) × 60,000

= -$0.05 × 60,000

= $3,000 unfavorable

Materials quantity variance = (Actual quantity used - Standard quantity allowed) × Standard price

= (49,200 - 15,000 × 3.0) × $5

= (49,200 - 45,000) × $5

= (4,200) × $5

= $21,000 favorable

b. Labor rate and efficiency variances

Labor rate variance = (Actual rate - Standard rate) × Actual hours

= ($17 - $16) × 11,800

= $11,800 favorable

Labor efficiency variance = (Actual hours - Standard hours allowed) × Standard rate

= (11,800 - 15,000 × 0.8) × $16

= (11,800 - 12,000) × $16

= $3,200 Favorable

C. Variable overhead rate and efficiency variances

Variable overhead rate variance = (Actual rate - Standard rate) × Actual machine hours

= $18,290 - ($3 × 5,900)

= $18,290 - $17,700

= $590 unfavorable

Variable overhead efficiency variance =(Actual hours - Standard hours allowed) × Standard rate

= (5,900 - 15,000 × 0.4) × $3

= (5,900 - 6,000) × $3

= $300 favorable

2. Variances amounts

Material price variance

$3,000 U

Material quantity variance

$21,000 F

Labor rate variance

$11,800 F

Labor efficiency variance

$3,200 F

Variable overhead variance

$590 U

Variable overhead efficiency variance

$300 F

Net variance

$32,710 F

The net variance of all the variances for the month is $32,710 F

1. The variances of the Miller Toy Company are as follows:

Material price variance:

= (Actual purchases x Actual price) - (Actual purchases x Standard price)

= (60,000 x 4.95) - (60,000 x 5)

= $3,000 Favorable

Material quantity variance:

= (Actual quantity that was used - Standard quantity) x Standard price

= (49,200 - 45,000) x 5

= $21,000 Unfavorable

Labor rate variance:

= (Actual hours worked x Actual labor cost) - (Actual hours worked x Standard labor cost)

= (11,800 x 17) - (11,800 x 16)

= $11,800 Unfavorable

Labor efficiency variance:

= (Actual hours worked - Standard hours worked) x Standard labor cost

= (11,800 - 12,000) x 16

= $3,200 Favorable

Variable overhead rate variance :

= (Actual overhead rate - Standard) x Actual machine hours

= (3.10 - 3.00) x 5,900

= $590 Unfavorable

Variable Overhead efficiency variance

= (Actual machine hours - Standard machine hours) x Standard variable overhead rate

= (5,900 - 6,000) x 3

= $300 Favorable

2. Overall net variance:

= Material price variance + Material quantity + Labor rate + Labor efficiency + Variable overhead rate + Variable overhead efficiency

= 3,000 - 21,000 - 11,800 + 3,200 - 590 + 300

= 26,890 Unfavorable

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