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 (8,000 pools) $ 290,000 $ 290,000 Variable expenses: Variable cost of goods sold* 104,400 124,770 Variable selling expenses 20,000 20,000 Total variable expenses 124,400 144,770 Contribution margin 165,600 145,230 Fixed expenses: Manufacturing overhead 68,000 68,000 Selling and administrative 86,000 86,000 Total fixed expenses 154,000 154,000 Net operating income (loss) $ 11,600 $ (8,770 ) *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 3.6 pounds $ 2.20 per pound $ 7.92 Direct labor 0.5 hours $ 7.70 per hour 3.85 Variable manufacturing overhead 0.4 hours* $ 3.20 per hour 1.28 Total standard cost per unit $ 13.05 *Based on machine-hours. During June, the plant produced 8,000 pools and incurred the following costs: Purchased 33,800 pounds of materials at a cost of $2.65 per pound. Used 28,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) Worked 4,600 direct labor-hours at a cost of $7.40 per hour. Incurred variable manufacturing overhead cost totaling $12,600 for the month. A total of 3,500 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
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 (8,000 pools) | $ | 290,000 | $ | 290,000 | |||
| Variable expenses: | |||||||
| Variable cost of goods sold* | 104,400 | 124,770 | |||||
| Variable selling expenses |
20,000 |
20,000 | |||||
| Total variable expenses |
124,400 |
144,770 | |||||
| Contribution margin |
165,600 |
145,230 | |||||
| Fixed expenses: | |||||||
| Manufacturing overhead | 68,000 | 68,000 | |||||
| Selling and administrative | 86,000 | 86,000 | |||||
| Total fixed expenses |
154,000 |
154,000 | |||||
| Net operating income (loss) | $ | 11,600 | $ |
(8,770 |
) | ||
*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 Quantity or Hours | Standard Price or Rate |
Standard Cost | ||||
| Direct materials | 3.6 pounds | $ |
2.20 |
per pound | $ | 7.92 |
| Direct labor | 0.5 hours | $ |
7.70 |
per hour | 3.85 | |
| Variable manufacturing overhead | 0.4 hours* | $ |
3.20 |
per hour |
1.28 |
|
| Total standard cost per unit | $ | 13.05 | ||||
*Based on machine-hours.
During June, the plant produced 8,000 pools and incurred the following costs:
- Purchased 33,800 pounds of materials at a cost of $2.65 per pound.
-
Used 28,600 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
-
Worked 4,600 direct labor-hours at a cost of $7.40 per hour.
-
Incurred variable
manufacturing overhead cost totaling $12,600 for the month. A total of 3,500 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.
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