Question

Instructions:

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.

Amount descriptions:

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. ___________ per case

Answer 1

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, 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