Question: Comprehensive Variance Analysis.
Kramer Toy Company manufactures a plastic swimming pool at its East Crest Plant. The plant has been experiencing problems as shown by its September contribution format income statement below:
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Budgeted
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Actual
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Sales (15,000 pools).................................
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$495,000
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$495,000
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Variable expenses:
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Variable cost of goods sold*...................
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220,050
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227,120
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Variable selling expenses......................
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24,000
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24,000
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Total variable expenses.............................
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224,050
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251,120
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Contribution margin..................................
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250,950
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243,880
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Fixed expenses:
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Manufacturing overhead.........................
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128,000
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128,000
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Selling and administrative.......................
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85,000
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85,000
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Total fixed expenses................................
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213,000
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213,000
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Net operating income...............................
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$37,950
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$30,880
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*Contains direct materials, direct labor, and variable manufacturing overhead.
Janet Wilson, who has just been appointed general manager of the East Crest Plant, has been given instructions to “get things under control.” Upon reviewing the plant’s income statement, Ms. Wilson 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:
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Standard Quantity of Hours
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Standard Price or Rate
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Standard Cost
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Direct materials........................................
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3.2 pounds
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$1.80 per pound
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$5.76
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Direct labor..............................................
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0.8 hours
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$9.20 per hour
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7.36
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Variable manufacturing overhead..................
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0.5 hours*
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$3.10 per hour
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1.55
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Total standard cost...................................
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$14.67
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*Based on machine-hours.
Ms. Wilson has determined that during September the plant produced 15,000 pools and incurred the following costs:
a. Purchased 62,000 pounds of materials at a cost of $1.75 per pound.
b. Used 51,000 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.)
c. Worked 11,800 direct labor-hours at a cost of $10.10 per hour.
d. Incurred variable manufacturing overhead cost totaling $19,240 per month. A total of 7,400 machine-hours were 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 September.
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances
c. Variable overhead spending 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. What impact did this figure have on the company’s income statement? Show computations.
3. Pick out two most significant variances that you computed in (1) above. Explain to Ms. Wilson possible causes of these variances.