Chapter 22, Problem 5CPP

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	30ozs.	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	1.2
		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

Instructions

1. 1. Determine the fixed and variable portions of the utility cost using the high-low method.
2. 2. Determine the contribution margin per ease.
3. 3. Determine the fixed costs per month, including the utility fixed cost from part (1).
4. 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 (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 tile cost per unit or estimated units per case operating data from January.

Instructions

1. 5. Prepare the August production budget.
2. 6. Prepare the August direct materials purchases budget.
3. 7. Prepare the August direct labor budget. Round the hours required for production to the nearest hour.
4. 8. Prepare the August factory overhead budget.
5. 9. Prepare the August budgeted income statement, including selling expenses.

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	Actual Direct Materials 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 Labor Rate	Actual Direct Labor 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 rale to exceed standard. The Filling Department used a lower grade labor classification during the month, thus causing the actual labor rate to be less titan standard.

Instructions

1. 10. Determine and interpret the direct materials price and quantity variances for the three materials.
2. 11. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest hour.
3. 12. Determine and interpret the factory overhead controllable variance.
4. 13. Determine and interpret the factory overhead volume variance.
5. 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 1,250 cases of production used in the budgets for parts (6) and (7)?

To determine

Direct material variances:

The difference between the actual material cost per unit and the standard material cost per unit for the direct material purchased is known as direct material cost variance. The direct material variance can be classified as follows:

• Direct materials price variance.
• Direct materials quantity variance.

Direct labor variances:

The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows:

• Labor rate variance.
• Labor time variance.

Variable factory overhead controllable variances:

The difference between the actual variable overhead costs and the standard overhead for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

$\begin{array}{l}\text{Variable factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)$

Fixed factory overhead volume variances:

Factory overhead volume variances refers to the difference between the budgeted fixed overheads at 100% of normal capacity, and the standard fixed overheads for the actual units produced. The factory overhead volume variances can be calculated as follows:

$\begin{array}{l}\text{Fixed factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard hours for 100\% of}\\ \text{normal capacity}-\text{Standard}\\ \text{hours for actual units produced}\end{array}\right)\times \left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)$

To determine: The fixed and variable portion of the utility cost using the high-low method.

Explanation of Solution

The fixed, and variable portion of the utility cost using the high-low method is $500,and $240 in the high cost method, and $500,and $100 in the low cost method respectively.

Working Notes:

Calculate the variable cost per unit.

$\begin{array}{c}\text{Variable cost per unit = }\frac{\text{Difference in total cost}}{\text{Difference in production}}\\ =\frac{\$740\left(\text{March}\right)-\$600\left(\text{January}\right)}{1,200\text{cases}\left(\text{March}\right)-500\text{cases}\left(\text{January}\right)}\\ \text{=}\frac{\$140}{700\text{cases}}\\ \text{=\$0}\text{.20}\text{per case}\end{array}$ (1)

Calculate the fixed and variable portion of the utility cost using high method:

$\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$740=\left(\$0.20(1)\times 1,200\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$240}\\ \end{array}$

$\begin{array}{c}\text{\$740 =\$240+Fixed cost}\\ \text{Fixed cost}\text{=\$740}-\text{\$240}\\ \text{Fixed cost =\$500}\end{array}$

Calculate the fixed and variable portion of the utility cost using low method:

$\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$600=\left(\$0.20(1)\times 500\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$100}\end{array}$

$\begin{array}{c}\text{\$600 =\$100+Fixed cost}\\ \text{Fixed cost}\text{=\$600}-\text{\$100}\\ \text{Fixed cost =\$500}\end{array}$

Conclusion

Hence, using the high method, the fixed and variable portion of the utility cost is $500, and $240. On the other hand, using the low method, the fixed and variable portion of the utility cost is $500, and $100 respectively.

To determine

To prepare: The August production budget.

Answer to Problem 5CPP

Incorporation GS Budgeted Income Statement For the month ended August 31
Sales (9)			$ 150,000
Finished goods inventory, August 1		$ 12,000
Direct materials:
Direct materials inventory, August 1 (10)	$ 392
Direct materials purchases (Table 4)	23,231
Cost of direct materials available for use	$ 23,623
Less: Direct materials inventory, August 31 (11)	248
Cost of direct materials used in production	$ 23,375
Direct labor (Table 5)	9,900
Factory overhead (Table 6)	19,735
Cost of goods manufactured		53,010
Cost of finished goods available for sale		$ 65,010
Less: Finished goods inventory, August 31		7,000
Cost of goods sold			58,010
Gross profit			$ 91,990
Less: Selling expenses			30,000
Income from operations			$ 61,990

Table (7)

Explanation of Solution

Prepare the production budget for the month of August.

Incorporation GS
Production Budget
For the month ended August 31
Particulars	Cases
Expected cases to be sold	1,500
Plus desired ending inventory	175
Total units required	1,675
Less: Estimated beginning inventory	300
Total units to be produced	1,375

Table (3)

To determine

To determine and interpret: The direct materials price and quantity variances for the three materials.

Explanation of Solution

Determine the direct materials price variances for the three materials.

	Cream Base	Natural oils	Bottles
Actual price	$ 0.016	$0.32	$0.42
Less: Standard price	0.020	0.30	0.50
Difference	$(0.004)	0.02	$(0.08)
Multiply: Actual quantity	153,000 (13)	46,500 (14)	18,750 (15)
Direct materials price variance	$(612) Favorable	$930 (Unfavorable)	$(1,500) Favorable

Table (8)

Working Note:

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for cream base}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 102\text{oz}\text{.}\\ \text{=153,000 oz}\text{.}\end{array}$ (13)

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for natural oils}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 31\text{oz}\text{.}\\ \text{=46,500 oz}\text{.}\end{array}$ (14)

$\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for bottles}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 12.5\text{bottles}\\ \text{=18,750}\text{bottles}\end{array}$ (15)

Conclusion

Interpretation:

It can be understood from the above data that there is variances in the direct materials prices due to the fluctuations in the market prices. The actual price for natural oils got increased when compared to its standard price, whereas, the actual prices for the cream base, and bottles got decreased when compared to their respective standard prices.