Problem - Flexible Budget Performance Report
AirQual Test Corporation provides on-site air quality testing services. The company has provided the following data concerning its operations:
Fixed Variable Actual Component Component Total for per Month per Job February
Revenue . . . . . . . . . . . . . . . . . . . . . $360 $18,950
Technician wages . . . . . . . . . . . . . . $6,400 $6,450
Mobile lab operating expenses . . . . $2,900 $35 $4,530
Office expenses . . . . . . . . . . . . . . . $2,600 $2 $3,050
Advertising expenses . . . . . . . . . . . $970 $995
Insurance . . . . . . . . . . . . . . . . . . . . $1,680 $1,680
Miscellaneous expenses . . . . . . . . . $500 $3 $465
The company uses the number of jobs as its measure of activity. For example, mobile lab operating expenses should be $2,900 plus $35 per job, and the actual mobile lab operating expenses for February were $4,530.
The company expected to work 50 jobs in February, but actually worked 52 jobs.
Required: Prepare a flexible budget performance report showing AirQual Test Corporation's activity variances and revenue and spending variances for February.
Problem - Comprehensive Variance Analysis
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) . . . . . . . . . . . . . . . . . . . . $450,000 $450,000
Variable expenses:
Variable cost of goods sold* . . . . . . . . . . . . 180,000 196,290
Variable selling expenses . . . . . . . . . . . . . . 20,000 20,000
Total variable expenses . . . . . . . . . . . . . . . . . . 200,000 216,290
Contribution margin . . . . . . . . . . . . . . . . . . . . . 250,000 233,710
Fixed expenses:
Manufacturing overhead . . . . . . . . . . . . . . . 130,000 130,000
Selling and administrative . . . . . . . . . . . . . . 84,000 84,000
Total fixed expenses . . . . . . . . . . . . . . . . . . . . 214,000 214,000
Net operating income . . . . . . . . . . . . . . . . . . . $ 36,000 $ 19,710
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 Standard Price Standard or Hours or Rate Cost
Direct materials . . . . . . . . . . . . . . . . . 3.0 pounds $2.00 per pound $ 6.00
Direct labor . . . . . . . . . . . . . . . . . . . . 0.8 hours $6.00 per hour 4.80
Variable manufacturing overhead . . . 0.4 hours* $ 3.00 per hour 1.20
Total standard cost . . . . . . . . . . . . . . $12.00
*Based on machine-hours.
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 per hour.
d. Incurred variable manufacturing overhead cost totaling $18,290 for the month. A total of 5,900 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 June:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances.
c. Variable overhead rate 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 the two most significant variances that you computed in (1) above. Explain to Ms. Dunn possible causes of these variances.