Question

Comprehensive Problem 5
Part B:

Note: This section is a continuation from Part A of the comprehensive problem. Be sure you have completed Part A before attempting Part B. You may have to refer back to data presented in Part A and use answers from Part A when completing this section.

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 Direct Materials 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 Direct Labor 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 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 (ozs.)	Oils (ozs.)	Bottles (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:

5. Prepare the August production budget.

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 the unit price to the nearest cent.

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. For hours required, round to nearest whole hour. For hourly rate, enter to the nearest cent, if required.

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

8. Prepare the August factory overhead cost budget. If an amount box does not require an entry, leave it blank.

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.

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
Operating income				$

Answer 1

Answer

Part B

5.

GENUINE SPICE INC.

Production Budget

For the Month Ended August 31, 2016

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, 2016
				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, 2016
		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, 2016
			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, 2016
	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.