BUSINESS

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:
  2. Direct materials price and quantity variances.
  3. Direct labor rate and efficiently variances
  4. Variable overhead spending and efficiently variances
  5. 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.

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