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 budget. Round the hours required for production to the nearest hour.
8.	Prepare the August factory overhead 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.* *For those boxes in which you must enter subtractive or negative numbers use a minus sign.

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 1,375 cases of production used in the budgets for parts (6) and (7)?
	*For those boxes in which you must enter subtractive or negative numbers use a minus sign. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Answer 1

1	Under high-low method,Highest and lowest level of activity is selected
	Highest activity=Case production of 1200 in Mar
	Lowest activity=Case production of 500 in Jan
	Variable cost per case=Change in total utilty cost/Change in cases produced=(740-600)/(1200-500)=140/700=$ 0.20 per case
	Fixed cost=Total utility cost-(Cases produced*Variable cost per unit)
	Let's take case production of 500
	Fixed cost=600-(500*0.20)=600-100=$ 500
2	Contribution margin per case=Selling prcie-Variable costs
	Variable costs:
				$
	Direct materials			17
	Direct labor			7.2
	Utilties cost-Variable			0.2
	Selling commission			20
	Total			44.4
	Contribution margin per case=100-44.4=$ 55.6 per case
3	Fixed costs per month:
				$
	Utilities			500
	Facility lease			14000
	Equipment depreciation			4300
	Supplies			660
	Total			19460
4	Break-even number of cases per month=Fixed costs per month/Contribution margin per case=19460/55.6=350 cases
5			Production budget
						Cases
	Demand for the month					1500
	Plus: Desired finished goods inventory					175
	Total cases required					1675
	Less:Estimated finished goods inventory,August 1					300
	Cases to be produced					1375
6		Direct materials purchases budget
						Cream base (oz.)	Natural Oils (oz.)	Bottles (bottles)	Total
	Cases to be produced				a	1375	1375	1375
	Material required per case				b	100	30	12
	Total material required				a*b	137500	41250	16500
	Plus:Desired materials inventory,August 31					1000	360	240
	Less:Estimated materials inventory,August 1					250	290	600
	Direct materials to be purchased					138250	41320	16140
	x Cost per unit					0.02	0.3	0.5
	Direct materials purchase in $					2765	12396	8070	23231