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:

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 lbs., at an actual price of \($0.18\) per lb.

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

d. Actual overhead cost was $40,900.
Requirements 

1. Compute the price variance and efficiency variance 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 total variance, the flexible budget variance, and the production volume variance.
4. Smith intentionally hired more-skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Transcribed Image Text:

Direct materials (0.2 lbs @ $0.25 per lb) $ 0.05 0.36 Direct labor (3 minutes @ $0.12 per minute) Manufacturing overhead: Variable (3 minutes @ $0.05 per minute) $ 0.15 Fixed (3 minutes @ $0.14 per minute) Total cost per coffee mug 0.42 0.57 $ 0.98