McKnight manufactures coffee mugs that it sells to other companies for customizing with their own logos. McKnight prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:
| Direct materials (0.2 lbs @ $0.25 per lb) | $ 0.05 | |
| Direct labor (3 minutes @ $0.11 per minute) | 0.33 | |
| Manufacturing overhead: | ||
| Variable (3 minutes @ $0.06 per minute) | $ 0.18 | |
| Fixed (3 minutes @ $0.15 per minute) | 0.45 | 0.63 |
| Total cost per coffee mug | $ 1.01 |
Actual cost and production information for July 2012 follow:
- Actual production and sales were 62,500 coffee mugs.
- Actual direct materials usage was 10,000 lbs., at an actual price of $0.17 per lb.
- Actual direct labor usage of 198,000 minutes at a total cost of $25,740.
- Actual overhead cost was $8,500 variable and $32,100 fixed.
- Marketing and administrative costs were $110,000.
Requirements
- Compute the price and efficiency variances for direct materials and direct labor.
- Journalize the usage of direct materials and the assignment of direct labor, including the related variances.
- For manufacturing overhead, compute the variable overhead spending and efficiency variances and the fixed overhead spending and volume variances.
- Journalize the actual manufacturing overhead and the applied manufacturing overhead. Journalize the movement of all production from WIP. Journalize the closing of the manufacturing overhead account.
- McKnight intentionally hired more-skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?
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