In: Accounting
Genuine Spice Inc. began operations on January 1 of the current year. The company produces eight- 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 oz. | $0.02 | $ 2.00 |
Natural oils | Variable | 30 oz. | 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. wants 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:
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 portion of the utility cost using the high-low method. |
2. | Determine the contribution margin per case. |
3. | Determine the fixed costs per month, including the utility fixed cost from part (1). |
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 |
|
(oz.) |
(oz.) |
(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. NOTE: Because you are not required to prepare a cost of
goods sold budget, the cost of goods sold calculations will be part
of the budgeted income statement.*
|
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 oz. |
Natural oils | $0.32 per oz. | 31 oz. |
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 from 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. |
11. | Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest tenth of an hour. |
12. | Determine and interpret the factory overhead controllable variance. |
13. | Determine and interpret the factory overhead volume variance. |
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 1,375 cases of production used in the budgets for parts (6) and (7)? |
Amount Descriptions-Part A | |
Controllable variance | |
Equipment depreciation | |
Facility lease | |
Supplies | |
Utilities | |
Volume variance |
1. Determine the fixed and variable portion of the utility cost using the high-low method.
At High Point |
At Low Point |
|
Variable cost per unit | ||
Total fixed cost | ||
Total cost |
2. Determine the contribution margin per case.
3. Determine the fixed costs per month, including the utility fixed cost from part (1).
Answer:
Part A
1. Variable Cost per Unit = Difference in Total Cost / Difference in Production
Variable Cost per Unit = $740 - $600 / 1,200 cases - 500 cases = $0.20 per case
Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost
At the high point: At the low point:
$740 = ($0.20 × 1,200 units) + Fixed Cost $600 = ($0.20 × 500 units) + Fixed Cost
Fixed Cost = $500 Fixed Cost = $500
2.
Selling price…………………………… |
$100.00 |
||||
Less variable costs per case: |
$17.00 |
||||
Direct materials……………………… |
|||||
Direct labor…………………………… |
7.20 |
||||
Utilities [see part (1)]……………… |
0.20 |
||||
Selling expenses…………………… |
20.00 |
||||
Total variable costs per case……… |
44.40 |
||||
Contribution margin per case……… |
$ 55.60 |
||||
3. Total fixed costs:
Utilities [see part (1)]…………………………………… |
$500 |
|
Facility lease…………………………………………… |
14,000 |
|
Equipment depreciation……………………………… |
4,300 |
|
Supplies………………………………………………… |
660 |
|
$19,460 |
||
4. Break-Even Sales (units) = Fixed Costs / Unit Contribution Margin
Break-Even Sales (units) = $19460 / $55.60 = 350 cases
Part B
5.
GENUINE SPICE INC. |
||||||||||||
Production Budget |
||||||||||||
For the Month Ended August 31, current year |
||||||||||||
Cases |
||||||||||||
Expected cases to be sold |
1,500 |
|||||||||||
Plus desired ending inventory |
175 |
|||||||||||
Total |
1,675 |
|||||||||||
Less estimated beginning inventory |
300 |
|||||||||||
Total units to be produced |
1,375 |
6.
GENUINE SPICE INC. |
|||||||||||||
Direct Materials Purchases Budget |
|||||||||||||
For the Month Ended August 31, current year |
|||||||||||||
Cream |
Natural |
||||||||||||
Base |
Oils |
Bottles |
Total |
||||||||||
(ozs.) |
(ozs.) |
(bottles) |
|||||||||||
Units required for production |
137,5001 |
41,2502 |
16,500 |
3 |
|||||||||
Plus desired ending inventory |
1,000 |
360 |
240 |
||||||||||
Less estimated beginning inventory |
(250) |
(290) |
(600) |
||||||||||
Direct materials to be purchased |
138,250 |
41,320 |
16,140 |
||||||||||
× Unit price |
$0.02 |
$0.30 |
$0.50 |
||||||||||
Total direct materials to be purchased |
$2,765 |
$12,396 |
$8,070 |
$23,231 |
1Cream base: 1,375 cases × 100 ozs. = 137,500 ozs.
2Natural oils: 1,375 cases × 30 ozs. = 41,250 ozs.
3Bottles: 1,375 cases × 12 bottles = 16,500 bottles
7.
GENUINE SPICE INC. |
||||||
Direct Labor Budget |
||||||
For the Month Ended August 31, current year |
||||||
Mixing |
Filling |
Total |
||||
Hours required for production of: |
||||||
Hand and body lotion |
4581 |
1152 |
||||
× Hourly rate |
$18.00 |
$14.40 |
||||
Total direct labor cost |
$8,244 |
$1,656 |
$9,900 |
|||
1Mixing: (1,375 cases × 20.00 min.) ÷ 60 min. = 458 hrs.
2Filling: (1,375 cases × 5.00 min.) ÷ 60 min. = 115 hrs.
8.
GENUINE SPICE INC. |
|||||||||
Factory Overhead Budget |
|||||||||
For the Month Ended August 31, current year |
|||||||||
Fixed1 |
Variable2 |
Total |
|||||||
Factory overhead: |
|||||||||
Utilities |
$ |
500 |
$275 |
$ |
775 |
||||
Facility lease |
14,000 |
14,000 |
|||||||
Equipment depreciation |
4,300 |
4,300 |
|||||||
Supplies |
660 |
660 |
|||||||
Total |
$ |
19,460 |
$275 |
$ |
19,735 |
1Fixed costs [from part (3)]
2Variable utility cost: $0.20 × 1,375 cases = $275
9.
GENUINE SPICE INC. |
|||||||||
Budgeted Income Statement |
|||||||||
For the Month Ended August 31, current year |
|||||||||
Sales1 |
$ |
150,000 |
|||||||
Finished goods inventory, August 1 |
$12,000 |
||||||||
Direct materials inventory, August 12 |
$ |
392 |
|||||||
Direct materials purchases [from part (6)] |
23,231 |
||||||||
Less direct materials inventory, August 313 |
248 |
||||||||
Cost of direct materials for production |
$ |
23,375 |
|||||||
Direct labor [from part (7)] |
9,900 |
||||||||
Factory overhead [from part (8)] |
19,735 |
53,010 |
|||||||
Less finished goods inventory, August 31 |
7,000 |
||||||||
Cost of goods sold |
58,010 |
||||||||
Gross profit |
$ |
91,990 |
|||||||
Selling expenses4 |
30,000 |
||||||||
Income before income tax |
$ |
61,990 |
1Sales: 1,500 cases × $100 per case = $150,000
2Direct materials inventory, August 1: (250 × $0.020) + (290 × $0.300) + (600 × $0.500)
= $392
3Direct materials inventory, August 31: (1,000 × $0.020) + (360 × $0.300) + (240 × $0.500)
= $248
4Selling expenses: 1,500 cases × $20 per case = $30,000.
Part C
10. Direct Materials Price Variance:
Cream |
Natural |
||||||||||||
Base |
Oils |
Bottles |
|||||||||||
Actual price………………………… |
$ |
0.016 |
$ |
0.32 |
$ |
0.42 |
|||||||
Standard price…………………… |
0.020 |
0.30 |
0.50 |
||||||||||
Difference………………………… |
$ |
(0.004) |
$ |
0.02 |
$ |
(0.08) |
|||||||
× Actual quantity (units)*……… |
153,000 |
ozs. |
46,500 |
ozs. |
18,750 |
btls. |
|||||||
Direct materials price variance… |
$ |
(612) F |
$ |
930 |
U |
$ |
(1,500) F |
* Actual quantity:
Cream base: 1,500 cases × 102 ozs. = 153,000 ozs.
Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs.
Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles
The fluctuation in market prices caused the direct material price variances. Prices increased for natural oils compared to standard and declined for cream base and bottles compared to standard.
Direct Materials Quantity Variance:
Cream |
Natural |
|||||||||
Base |
Oils |
Bottles |
||||||||
Actual quantity1……………………… |
153,000 |
ozs. |
46,500 |
ozs. |
18,750 |
btls. |
||||
Standard quantity2…………………… |
150,000 |
45,000 |
18,000 |
|||||||
Difference……………………………… |
3,000 |
ozs. |
1,500 |
ozs. |
750 |
btls. |
||||
× Standard price……………………… |
$ |
0.02 |
$ |
0.30 |
$ |
0.50 |
||||
Direct materials quantity variance… |
$ |
60 |
U |
$ |
450 |
U |
$ |
375 |
U |
All the direct materials quantity variances were unfavorable, indicating some material losses, scrap, and quality rejections. All the quantity variances were unfavorable because the standards were set at ideal quantity amounts.
Thus, only unfavorable variances were possible. The standard quantities were ideal standards for 12 8-ounce bottles per case (96 ozs. total), as shown below.
1Actual quantity:
Cream base: 1,500 cases × 102 ozs. = 153,000 ozs.
Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs.
Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles
2Standard quantity:
Cream base: 1,500 cases × 100 ozs. = 150,000 ozs.
Natural oils: 1,500 cases × 30 ozs. = 45,000 ozs.
Bottles: 1,500 cases × 12 bottles = 18,000 bottles
11. Direct Labor Rate Variance:
Mixing |
Filling |
|||||||
Department |
Department |
|||||||
Actual rate………………………………………………… |
$18.20 |
$ |
14.00 |
|||||
Standard rate…………………………………………… |
18.00 |
14.40 |
||||||
Difference………………………………………………… |
$ 0.20 |
$ |
(0.40) |
|||||
× Actual time (hours)1………………………………… |
487.5 |
140.00 |
||||||
Direct labor rate variance……………………………… |
$97.50 U |
$ |
(56.00) F |
The Mixing Department has an unfavorable direct labor rate variance from using a higher classification of labor. The higher labor classification costs an additional $0.20 per hour. The Filling Department has a favorable direct labor rate variance due to using a lower classification of labor. The lower labor classification saved $0.40 per hour.
Direct Labor Time Variance: |
Mixing |
Filling |
|||||||
Department |
Department |
||||||||
Actual time (hours)1…………………………………… |
487.5 |
140 |
|||||||
Standard time (hours)2………………………………… |
500 |
125 |
|||||||
Difference………………………………………………… |
(12.5) |
15 |
|||||||
× Standard rate………………………………………… |
$ |
18 |
$ |
14.40 |
|||||
Direct labor time variance…………………………… |
$ |
(225) F |
$ |
216 |
U |
||||
1 Actual time:
Mixing: (1,500 units × 19.50 min.) ÷ 60 min. = 487.5 hrs.
Filling: (1,500 units × 5.60 min.) ÷ 60 min. = 140 hrs.
2Standard time:
Mixing: (1,500 units × 20.00 min.) ÷ 60 min. = 500 hrs.
Filling: (1,500 units × 5.00 min.) ÷ 60 min. = 125 hrs.
The Mixing Department is producing at a labor time that is slightly better than standard, thus producing a favorable direct labor time variance. This may be the result of using a higher grade of labor. The net impact for the Mixing Department is favorable by $127.50 ($97.50 - $225). The Filling Department had an unfavorable direct labor time variance. This may be the result of using a lower grade of labor in the department. The net impact for the department is unfavorable by $160.00 ($216.00 - $56.00). Thus, the savings in the labor rate from using a lower grade classification of labor was insufficient to offset the loss of efficiency from such labor.
12. Factory Overhead Controllable Variance:
Actual variable overhead……………………………………………………… |
$ |
305 |
||
Variable overhead at standard cost*……………………………………… |
300 |
|||
Factory overhead controllable variance…………………………………… |
$ |
5 |
U |
|
*Variance overhead (utility cost) at standard cost: $0.20 × 1,500 cases = $300
13. Factory Overhead Volume Variance:
Normal volume (cases)……………………………………………………… |
1,600 |
|
Actual volume (cases)………………………………………………………… |
1,500 |
|
Difference……………………………………………………………………… |
100 |
|
× Fixed factory overhead rate*……………………………………………… |
$ 12.1625 |
|
$1,216.25 U |
* Fixed factory overhead rate: $19,460** ÷ 1,600 cases = $12.1625 per case
** Total fixed factory overhead shown in part (8)
The unfavorable volume variance indicates the cost of underused capacity of 100 cases per month.
Alternative Computation of Overhead Variances
14. The production volume of 1,375 cases determined in part (5) 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 1,500 units of actual production. This amount is compared with an actual cost also based on 1,500 units. The variable costs of the budget must flex to the actual production volume so that variances are compared across the same production volume.