Mikhail Manufacturing produces ceramic teapots. Mikhail allocates overhead based on the number of direct labor hours. The company is looking into using a standard cost system and has developed the following standards (one "unit" is a batch of 100 teapots).
Standards:
Direct material 100 pounds per batch at $3.00 per pound
Direct labor 4.0 hours per batch at $15.00 per hour
Variable MOH standard rate $6.00 per direct labor hour
Predetermined fixed MOH standard rate $8.00 per direct labor hour
Total budgeted fixed MOH cost $5,000
Actual cost and operating data from the most recent month follows:
Purchased 8,600 pounds at a cost of $3.40 per pound
Used 8,400 pounds in producing 80 batches
Actual direct labor cost of $6,090 at an average direct labor cost per hour of $14.50
Actual variable MOH cost $2,100
Actual fixed MOH cost $5,200
All manufacturing overhead is allocated on the basis of direct labor hours.
Requirements
1. Calculate the standard cost of one batch.
2. Calculate the following variances:
a. The direct material variances.
b. The direct labor variances.
c. The variable manufacturing overhead variances.
d. The fixed manufacturing overhead variances.
3. Have the company's managers done a good job or a poor job controlling materials, labor, and overhead costs? Why or why not?
4. Describe how the company's managers can benefit from the standard costing system.
Do you think the company should continue with the standard cost system?