Homework Problem 5

Problem 5

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:

Budgeted Actual Sales (15,000 pools)…………………………….. $240,000 $240,000 Less variable expenses: Variable cost of goods sold*………………. 57,900 74,210 Variable selling expenses…………………. 18,000 18,000 Total variable expense………………………….. 75,900 92,210 Contribution margin……………………………. 164,100 147,790 Less fixed expenses: Manufacturing overhead…………………… 66,000 66,000 Selling and administrative…………………. 84,000 84,000 Total fixed expenses…………………………… 150,000 150,000 Net operating income………………………….. $ 14,100 $(2,210) _______ ———- *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 Standard Price Standard Of Hours or Rate Cost Direct materials……………… 3.4 pounds $2.00 per pound $6.80 Direct labor………………….. 0.3 hour $7.50 per pound 2.25 Variable manufacturing overhead 0.2 hour $3.00 per pound 0.60 Total standard cost…………….. $9.65 ______ Based on machine-hours.

Ms. Dunn has determined that during June the plant produced 6,000 pools and incurred the following costs:

1. Purchased 25,400 pounds of materials at a cost of $2.45 per pound.
2. Used 20,200 pounds of materials in production. (finished goods and work in process inventories are insignificant and can be ignored.)
3. Worked 2,400 direct labor-hours at a cost of $7.20
4. Incurred variable manufacturing overhead cost totaling $5,100 for the month. A total of 1,500 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 variance for June:

1. Direct materials price and quantity variances.
2. Direct labor rate and efficiently variances
3. Variable overhead spending and efficiently variances

1. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. What impact did this figure have on the company’s income statement? Show computations.