Miller Toy Company and Valley View Hospital

Introduction to Managerial Accounting 3rd edition Brewer, Garrison, Noreen
Chapter 8

Could please provide a step-by step formula how these examples were solved

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12A
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:

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:

Ms. Dunn has determined that during June the plant produced 15,000 pools and incurred the following costs:

a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound.
b. Used 49,200 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 $7.00
d. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 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:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiently variances
c. Variable overhead spending and efficiently 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 the two most significant variances that you computed in (1) above. Explain to Ms. Dunn possible cause of these variances.

Chapter 8
14A

John Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in the hospital’s lab Charges for lab tests are consistently higher at Valley View than at other hospitals and have resulted in many complaints. Also, because of strict regulations on amount reimbursed for lab tests, payments received from insurance companies and governmental units have not been high enough to cover lab costs.

Mr. Fleming has asked you to evaluate costs in the hospital’s lab for the past month. The following information is available:

a. Two types of tests are performed in the lab-blood tests and smears. During the past month, 1,800 blood tests and 2,400 smears were performed in the lab.
b. Small glass plates are used in both types of tests. During the past month, the hospital purchased 12,000 plates at a cost of $28,200. This cost is net of 6% quantity discount. 1,500 of these plates were unused at the end of the month; no plates were on hand at the beginning of the month.
c. During the past month, 1,150 hours of labor time were recorded in the lab at a cost of $13,800.
d. The lab’s variable overhead cost last month totaled 7, 820.

Valley View Hospital has never used standard costs. By searching industry literature, however
you have determine the following nationwide average for hospital labs:

a. Plates: Two plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed.
b. Labor: Each blood test should require 0.3 hours to complete, and each smear should require 0.15 hours to complete. The average cost of this lab time is $14 per hour.
c. Overhead: Overhead cost is based on direct labor-hours. The average rate for variable overhead is $6 per hour.
Required
1. Compute a material price variance for the plates purchased last month and a material quantity variance for the plates used last month.
2. For labor cost in the lab:
a. Compute a labor rate variance and a labor efficiency variance.
b. In most hospitals, one half of the workers in the lab are senior technicians and one-half are assistants. In an effort to reduce costs, Valley View Hospital employs only one- fourth senior technicians and three fourths assistants. Would you recommend that this policy be continued? Explain
3. Compute the variable overhead spending and efficiently variances. Is there any relation between the variable overhead efficiently variance and the labor efficiently variance? Explain.

c

Solution Preview
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12A
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:

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:

Ms. Dunn has determined that during June the plant produced 15,000 pools and incurred the following costs:

a. Purchased 60,000 pounds of materials at a cost of $1.95 per pound.
b. Used 49,200 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 $7.00
d. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 machine-hours was recorded.

It is the company’s policy to close all variances to cost of goods sold on a monthly basis.

For the problem that needs to solve for variances question, we need to distinguish the actual and budget costs. For the budget cost or standard cost, it would be easier to find the variances if we can distinguish the standard quantity per unit of product and standard rate or price per unit of direct material, direct labor, and variable manufacturing overhead. (The quantity unit based could also be kilogram, pounds, oz. and etc.)

For the actual cost, it is also advisable to do the same thing. However, sometimes, the material purchased and material used would be different. We need to separate them into two parts. So, for the information given, we can rearrange as follows: –

Actual Quantity Actual Price Actual
of Hours or Rate Cost

Direct materials purchased… 60,000 pounds $1.95 per pound $117,000
Direct materials used………. 3.28 pounds $1.95 per pound $6.396
(49,200 pounds/15,000 pools = 3.28 pounds/pool)

Direct labor………………….. 0.79 hour $7.00 per hour 5.530
(11,800 direct labor-hours/15,000 pools = 0.79 hour)

Variable manufacturing overhead 0.39 hour $3.10 per hour 1.209
(5,900 machine-hours/15,000 pools = 0.39 hour)
($18,290/5,900 machine-hours = $3.10

Required
1. Compute the following variance for June:

a. Direct materials price and quantity variances.

In order to find the variance, we need to use the formula for each type of variance and replace the information given to find the variance.

Materials price variance = actual quantity purchased x difference between actual and standard
costs per unit of input purchased
= 60,000 lb x ($1.95 – $2.00)
= $3,000 F

For the material price variance, the result is favorable because the actual price purchased is lower than the standard costs.

Materials quantity variance = difference between actual quantity x standard cost per unit of
used and standard quantity allowed input

= [49,200 lb – (3 lb x 15,000 pools)] x $2/lb
= (49,200 lb – 45,000 lb) x $2/lb
= 4,200 lb x $2/lb
= $8,400 U

For the material quantity variance, the result is unfavorable because the actual quantity used is higher than the standard quantity …

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