Problem - 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 (5,800 pools)
|
$290,000
|
$290,000
|
|
Variable expenses:
|
|
|
|
Variable cost of goods sold*
|
98,658
|
111,959
|
|
Variable selling expenses
|
20,000
|
20,000
|
|
Total variable expenses
|
118,658
|
131,959
|
|
Contribution margin
|
171,342
|
158,041
|
|
Fixed expenses:
|
|
|
|
Manufacturing overhead
|
51,000
|
51,000
|
|
Selling and administrative
|
65,500
|
65,500
|
|
Total fixed expenses
|
116,500
|
116,500
|
|
Net operating income
|
$54,842
|
$41,541
|
*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
|
4.40 pounds
|
$2.80 per pound
|
$12.32
|
|
Direct labor
|
.50 hours
|
$8.30 per hour
|
4.15
|
|
Variable manufacturing overhead
|
.30 hours*
|
$1.80 per hour
|
.54
|
|
Total standard cost
|
|
|
$17.01
|
*Based on machine-hours.
During June the plant produced 5,800 pools and incurred the following costs:
a. Purchased 31,624 pounds of materials at a cost of $3.10 per pound.
b. Used 25,220 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 $8.00 per hour.
d. Incurred variable manufacturing overhead cost totaling $4,656 for the month. A total of 1,940 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. (a) Compute the direct materials price and quantity variances for June.
(b) Compute the direct labor rate and efficiency variances for June.
(c) Compute the variable overhead rate and efficiency variances for June.
2. (a) Compute the net overall variance for the month.
(b) What impact did this figure have on the company's income statement?