Question

Genuine Spice Inc. began operations on January 1 of the current year. The company produces 8-ounce bottles of hand and body lotion called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for $100 per case. There is a selling commission of $20 per case. The January direct materials, direct labor, and factory overhead costs are as follows:

DIRECT MATERIALS
	Cost Behavior	Units per Case	Cost per Unit	Cost per Case
Cream base	Variable	100 ozs.	$0.02	$ 2.00
Natural oils	Variable	30 ozs.	0.30	9.00
Bottle (8-oz.)	Variable	12 bottles	0.50	6.00
				$17.00

DIRECT LABOR
Department	Cost Behavior	Time per Case	Labor Rate per Hour	Cost per Case
Mixing	Variable	20 min.	$18.00	$6.00
Filling	Variable	5	14.40	1.20
		25 min.		$7.20

FACTORY OVERHEAD
	Cost Behavior	Total Cost
Utilities	Mixed	$600
Facility lease	Fixed	14,000
Equipment depreciation	Fixed	4,300
Supplies	Fixed	660
		$19,560

Part A—Break-Even Analysis

The management of Genuine Spice Inc. wishes to determine the number of cases required to break even per month. The utilities cost, which is part of factory overhead, is a mixed cost. The following information was gathered from the first six months of operation regarding this cost:

Month	Case Production	Utility Total Cost
January	500	$600
February	800	660
March	1,200	740
April	1,100	720
May	950	690
June	1,025	705

	Required-Part A:
1.	Determine the fixed and variable portions of the utility cost using the high-low method. Round your per unit cost to two decimal places.
2.	Determine the contribution margin per case. Round your answer to two decimal places.
3.	Determine the fixed costs per month, including the utility fixed cost from part (1). Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries.
4.	Determine the break-even number of cases per month.

Part B—August Budgets

During July of the current year, the management of Genuine Spice Inc. asked the controller to prepare August manufacturing and income statement budgets. Demand was expected to be 1,500 cases at $100 per case for August. Inventory planning information is provided as follows:

Finished Goods Inventory:

	Cases	Cost
Estimated finished goods inventory, August 1	300	$12,000
Desired finished goods inventory, August 31	175	7,000

Materials Inventory:

	Cream Base	Oils	Bottles
	(ozs.)	(ozs.)	(bottles)
Estimated materials inventory, August 1	250	290	600
Desired materials inventory, August 31	1,000	360	240

There was negligible work in process inventory assumed for either the beginning or end of the month; thus, none was assumed. In addition, there was no change in the cost per unit or estimated units per case operating data from January.

	Required-Part B:
5.	Prepare the August production budget.*
6.	Prepare the August direct materials purchases budget.*
7.	Prepare the August direct labor cost budget. Round the hours required for production to the nearest hour.*
8.	Prepare the August factory overhead cost budget. If an amount box does not require an entry, leave it blank. (Entries of zero (0) will be cleared automatically by CNOW.)*
9.	Prepare the August budgeted income statement, including selling expenses.* *Enter all amounts as positive numbers.

Part C—August Variance Analysis

During September of the current year, the controller was asked to perform variance analyses for August. The January operating data provided the standard prices, rates, times, and quantities per case. There were 1,500 actual cases produced during August, which was 250 more cases than planned at the beginning of the month. Actual data for August were as follows:

	Actual Direct Materials
	Price per Unit	Quantity per Case
Cream base	$0.016 per oz.	102 ozs.
Natural oils	$0.32 per oz.	31 ozs.
Bottle (8-oz.)	$0.42 per bottle	12.5 bottles

	Actual Direct	Actual Direct Labor
	Labor Rate	Time per Case
Mixing	$18.20	19.50 min.
Filling	14.00	5.60 min.

Actual variable overhead	$305.00
Normal volume	1,600 cases

The prices of the materials were different than standard due to fluctuations in market prices. The standard quantity of materials used per case was an ideal standard. The Mixing Department used a higher grade labor classification during the month, thus causing the actual labor rate to exceed standard. The Filling Department used a lower grade labor classification during the month, thus causing the actual labor rate to be less than standard.

	Required-Part C:
10.	Determine and interpret the direct materials price and quantity variances for the three materials. Round your price values for Cream Base to three decimal places and Natural Oils & Bottles to two decimal places.*
11.	Determine and interpret the direct labor rate and time variances for the two departments. Do not round hours. Round your answers to two decimal places.*
12.	Determine and interpret the factory overhead controllable variance.*
13.	Determine and interpret the factory overhead volume variance. Round rate to four decimal places and round your final answer to two decimal places.*
14.	Why are the standard direct labor and direct materials costs in the calculations for parts (10) and (11) based on the actual 1,500-case production volume rather than the planned 1,250 cases of production used in the budgets for parts (6) and (7)?
	*Negative amount should be indicated by the minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Amount Descriptions-Part A
Controllable variance
Equipment depreciation
Facility lease
Supplies
Utilities
Volume variance

1. Determine the fixed and variable portions of the utility cost using the high-low method. Round your per unit cost to two decimal places.

	At the High Point	At the Low Point
Variable cost per unit
Total fixed cost
Total cost

2. Determine the contribution margin per case. Round your answer to two decimal places.

3. Determine the fixed costs per month, including the utility fixed cost from part (1). Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries.

1	Total fixed costs:
2
3
4
5
6

4. Determine the break-even number of cases per month. cases

5. Prepare the August production budget. Enter all amounts as positive numbers.

Genuine Spice Inc.
Production Budget
For the Month Ended August 31
	Cases
Expected cases to be sold
Desired ending inventory
Total units available
Estimated beginning inventory
Total units to be produced

6. Prepare the August direct materials purchases budget. Enter all amounts as positive numbers.

Genuine Spice Inc.
Direct Materials Purchases Budget
For the Month Ended August 31
	Cream Base (ozs.)	Natural Oils (ozs.)	Bottles (bottles)	Total
Units required for production
Desired ending inventory
Estimated beginning inventory
Direct materials to be purchased
Unit price
Total direct materials to be purchased

7. Prepare the August direct labor cost budget. Round the hours required for production to the nearest hour. Enter all amounts as positive numbers.

Genuine Spice Inc.
Direct Labor Cost Budget
For the Month Ended August 31
Hours required for production of:	Mixing	Filling	Total
Hand and body lotion
Hourly rate
Total direct labor cost

8. Prepare the August factory overhead cost budget. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank. (Entries of zero (0) will be cleared automatically by CNOW.)

Genuine Spice Inc.
Factory Overhead Cost Budget
For the Month Ended August 31
	Fixed	Variable	Total
Factory overhead:
Utilities
Facility lease
Equipment depreciation
Supplies
Total

9. Prepare the August budgeted income statement, including selling expenses. Enter all amounts as positive numbers.

Genuine Spice Inc.
Budgeted Income Statement
For the Month Ended August 31
Sales
Finished goods inventory, August 1
Direct materials inventory, August 1
Direct materials purchases
Direct materials inventory, August 31
Cost of direct materials for production
Direct labor
Factory overhead
Finished goods inventory, August 31
Cost of goods sold
Gross profit
Selling expenses
Income before income tax

10. Determine and interpret the direct materials price and quantity variances for the three materials. Negative amount should be indicated by the minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Round your price values for Cream Base to three decimal places and Natural Oils & Bottles to two decimal places.

Direct Materials Price Variance
	Cream Base		Natural Oils		Bottles
Actual price
Standard price
Difference
Actual quantity		ozs.		ozs.		btls.
Direct materials price variance		F		U		F

Points:

9 / 24

Direct Materials Quantity Variance
	Cream Base		Natural Oils		Bottles
Actual quantity		ozs.		ozs.		btls.
Standard quantity
Difference		ozs.		ozs.		btls.
Standard price
Direct materials quantity variance		U		U		U

Points:

12 / 27

The fluctuation in     caused the direct material price variances. All the Direct material quantity variances were unfavorable   indicating some material losses, scrape, and quality rejections .

Points:

2 / 3

Feedback

11. Determine and interpret the direct labor rate and time variances for the two departments. Negative amount should be indicated by the minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Do not round hours. Round your answers to two decimal places.

Direct Labor Rate Variance
	Mixing Department		Filling Department
Actual rate
Standard rate
Difference
Actual time
Direct labor rate variance		U		F

Points:

5 / 15

Direct Labor Time Variance
	Mixing Department		Filling Department
Actual time
Standard time
Difference
Standard rate
Direct labor time variance		F		U

Points:

5 / 15

The change in the labor classification   caused the labor rate variances. This change could also   have been responsible for the direct labor time variance.

Points:

2 / 2

Feedback

12. Determine and interpret the factory overhead controllable variance. Negative amount should be indicated by the minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Factory Overhead Controllable Variance
Actual variable overhead
Variable overhead at standard cost
Factory overhead controllable variance		U

Points:

3 / 6

The factory overhead controllable variance was caused by the variance in utilities .

Points:

1 / 1

Feedback

13. Determine and interpret the factory overhead volume variance. Negative amount should be indicated by the minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. Round rate to four decimal places and round your final answer to two decimal places.

Factory Overhead Volume Variance
Normal volume (cases)
Actual volume (cases)
Difference
Fixed factory overhead rate
Factory overhead volume variance		U

Points:

2 / 7

The volume variance indicates the cost of underused capacity .

Points:

1 / 1

Feedback

14. Why are the standard direct labor and direct materials costs in the calculations for parts (10) and (11) based on the actual 1,500-case production volume rather than the planned 1,250 cases of production used in the budgets for parts (6) and (7)?

The production volume of  cases was planned at the beginning of August. The variances compare the actual cost and the standard cost of actual production   for the month. Thus, the standard cost must be based on the  units of actual production.

Answer 1