Standard Costing/Variance Analysis

Funtime operates under a standard cost system. The standard costs for video game machines are as follows.
Standard Cost per Unit
Cost Item Quantity Cost Total
Direct material
Housing unit 1 $20 $20
Printed circuit boards 2 15 30
Reading Heads 4 10 40
Direct labor
Assembly group 2 hours 8 16
PCB group 1 hour 9 9
RH group 1.5 hours 10 15
Variable overhead 4.5 hours 2 9
Total standard cost per unit $139

Funtime prepares monthly performance reports based on standard costs. Presented below is the contribution report for May 2011, when production and sales both reached 2,200 units.

Question Continued

Funtime Inc.
Contribution Report
For the month of May 2011

Budget Actual Variance
Units 2,000 2,200 200F

Revenue $400,000 $440,000 $ 40,000F
Variable costs
Direct material 180,000 220,400 40,400U
Direct labor 80,000 93,460 13,460U
Variable overhead 18,000 18,800 800U
Total variable costs 278,000 332,660 54,660U
Contribution margin $122,000 $107,340 $ 14,660U

Funtime’s top management was surprised by the unfavorable contribution to overall corporate profits in spite of the increased sales in May. Jack Rath, cost accountant, was assigned to identify and report on the reasons for the unfavorable contribution results as well as the individuals or groups responsible. After review, Rath prepared the Usage Report presented below.

Cost Item Quantity Actual Cost
Direct material
Housing units 2,200 units $ 44,000
Printed circuit boards 4,700 units 75,200
Reading heads 9,200 units 101,200
Direct labor
Assembly 3,900 hours 31,200
Printed circuit boards 2,400 hours 23,760
Reading heads 3,500 hours 38,500
Variable overhead 9,800 hours 18,800
Total variable cost $332,660

Rath reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing idle manpower which required the use of overtime to keep up with the accelerated demand for parts. The idle time was charged to direct labor. Rath also reported that the production managers of these two groups resorted to parts rejections, as opposed to testing and modification procedures formerly applied. Rath determined that the Assembly Group met management’s objectives by increasing production while utilizing lower than standard hours.


A. For May 2011, Funtime Inc.’s labor rate variance was $5,660 unfavorable, and the labor efficiency variance was $200 favorable. By using these two variances and calculating the five variances below, prepare an explanation of the $14,660 unfavorable variance between budgeted and actual contribution margin during May 2011.
1. Material price variance.
2. Material quantity variance.
3. Variable overhead spending variance.
4. Variable overhead efficiency variance.
5. Contribution margin volume variance.

B. 1. Identify and briefly explain the behavioral factors that may promote friction among the production managers and between the production managers and the maintenance manager.
2. Evaluate Jack Rath’s analysis of the unfavorable contribution results in terms
of its completeness and its effect on the behavior of the production groups.