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Genuine Spice Inc. began operations on January 1 of the current year. The company produces eight-...

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.*
*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 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).

Solutions

Expert Solution

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.


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