Reference no: EM13944824

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:

a. Actual production and sales were 62,500 coffee mugs.
b. Actual direct materials usage was 10,000 lbs., at an actual price of $0.17 per lb.
c. Actual direct labor usage of 198,000 minutes at a total cost of $25,740.
d. Actual overhead cost was $8,500 variable and $32,100 fixed.
e. Marketing and administrative costs were $110,000.

Requirements

1. Compute the price and efficiency variances for direct materials and direct labor.

2. Journalize the usage of direct materials and the assignment of direct labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead spending and efficiency variances and the fixed overhead spending and volume variances.

4. 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.

5. McKnight intentionally hired more-skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?