Smith manufactures coffee mugs that it sells to other companies for customizing

Question

Smith manufactures coffee mugs that it sells to other companies for customizing with their own logos. Smith 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 59,700 coffee mugs per month.

Direct materials (0.2 Ibs @ $0.25 per Ib)                     $0.05

Direct labor (3 minutes @ $0.12 per minute)                 0.36

Manufacturing overhead:

Variable (3 minutes @ $0.05 per minute)    $0.15

Fixed (3 minutes @ $0.14 per minute)        $ 0.42          0.57

Total cost per coffee mug                                             $.0.98

Actual cost and production information for july:

a. Actual production and sales were 62, 400 coffee mugs.

b. Actual direct materials usage was 12,000 Ibs., at an actual price of $0.18 per Ib.

c. Actual direct labor usage of 203,000 minutes at a total cost of $28,420.

d. Actual overhead cost was $40,900.

     1. Compute the price and quantity variances for direct materials.

     2. Compute the rate and efficiency variances for direct labor.

     3. Journalize the usage of Direct Materials and the assignment of Direct Labor (including related variances).

     4. For manufacturing OH, compute the total variance, the flexible budget variance and the production volume variance.

Explanation / Answer

Now we can compute the variances:

Price Variances:

Price variance

=Actual priceStandard price×Actual quantityper input unitper input unitof inputDirect material

s=     ($0.18 per lb. $0.25 per lb.)× 12,000 lbs

= $840 F

.price variance

Direct labor

=   ($0.14 per min. $0.12 per min. ) x 203,000 Mins

= $ 4060 U

Efficiency Variances:

Efficiency=Actual quantityStandard quantity×Standard pricevarianceof input of input per input unit

Direct materials .efficiency variance

=     (12,000 lbs. – 12,480 lbs.)× $0.25/lb

= $120 F

Direct labor efficiency variance

=(203,000 min.   187,200 min.)× $.12/min.

=$1,896 U   

Materials Inventory (12,000 × $0.25)

Work in Process Inventory (187,200 × $0.12

Direct Labor Efficiency Variance

Manufacturing Wages (203,000 × $0.12

Flexible budget overhead for 62,400 coffee mugs:

Variable overhead     

     (62,400 coffee mugs × $0.15/coffee mug)...........$  9,360

Fixed overhead  

        (59,700 coffee mugs × $0.42/coffee mug)...........  25,074

*Total flexible budget overhead................................$34,434

*Note that to get the budgeted fixed overhead, one must multiply the $0.42 fixed overhead per coffee mug by the static budget output of 59,700 coffee mugs

Direct Materil Actual price ($28,420/ 203,000 min.) $0.18 Standard price $0.25 Actual quantity 12000 lbs Standard quantity 62,400 coffee mugs × 0.2 lbs 12480 lbs

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