Question

In: Accounting

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

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 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:

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.

13. Determine and interpret the factory overhead volume variance. 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. Round rate to four decimal places and round your final answer to two decimal places.

Factory Overhead Volume Variance

Normal volume (cases)

Actual volume (cases)

Difference

Factory overhead volume variance

The volume variance indicates the cost of _____________ .

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)?

The production volume of __________ cases was planned at the beginning of August. The variances compare the actual cost and the standard cost of __________ for the month. Thus, the standard cost must be based on the ___________ units of actual production.

Solutions

Expert Solution

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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