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:

Flexible
Budge
Actual
Sales (7,000 pools)
$265,000 $265,000
Variable expenses:
Variable cost of goods sold*
79,240
97,525
Variable selling expenses
19,000
19,000
Total variable expenses
98,240
116,525
Contribution margin
166,760
148,475
Fixed expenses:
Manufacturing overhead
Selling and administrative
Total fixed expenses
Net operating income (loss)
67,000
67,000
85,000
85,000
152,000
152,000
$ 14,760 $ (3,525)

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:

Direct materials
Direct labor
Variable manufacturing overhead
Total standard cost per unit

Standard
Quantity or
Hours
3.5 pounds
0.4 hours
0.3 hours

Standard Price or Rate
§ 2.10 per pound
$ 7.60 per hour
$ 3.10 per hour

Standard
Cost
$ 7.35
3.04
0.93
$ 11.32

During June, the plant produced 7,000 pools and incurred the following costs:
a. Purchased 29,500 pounds of materials at a cost of $2.55 per pound.
b. Used 24,300 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c. Worked 3,400 direct labor-hours at a cost of $7.30 per hour.
d. Incurred variable manufacturing overhead cost totaling $8,400 for the month. A total of 2,400 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 1

Materials price and quantity variances:
a. Materials price variance = (Standard price - Actual price) x Actual quantity
= ($2.10 - $2.55) x 24,300 pounds
= -$10,935 (Unfavorable)
b. Materials quantity variance = (Standard quantity - Actual quantity) x Standard price
= (3.5 pounds - 24,300 pounds) x $2.10 per pound
= -$48,465 (Unfavorable)

Labor rate and efficiency variances:
a. Labor rate variance = (Standard rate - Actual rate) x Actual hours
= ($7.60 - $7.30) x 3,400 hours
= $1,020 (Favorable)
b. Labor efficiency variance = (Standard hours - Actual hours) x Standard rate
= (0.3 hours - 3,400 hours) x $7.60 per hour
= -$23,600 (Unfavorable)

Variable overhead rate and efficiency variances:
a. Variable overhead rate variance = (Standard rate - Actual rate) x Actual hours
= ($3.10 - $8,400/2,400 hours) x 2,400 hours
= -$2,800 (Unfavorable)
b. Variable overhead efficiency variance = (Standard hours - Actual hours) x Standard rate
= (0.3 hours - 2,400 hours) x $3.10 per hour
= -$7,194 (Unfavorable)

Net overall favorable or unfavorable variance for the month:
To calculate the net overall variance, we sum up all the variances:
Overall Variance = Materials price variance + Materials quantity variance + Labor rate variance + Labor efficiency variance + Variable overhead rate variance + Variable overhead efficiency variance

= -$10,935 + (-$48,465) + $1,020 + (-$23,600) + (-$2,800) + (-$7,194)
= -$94,014 (Unfavorable)