
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
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. Determine the fixed and variable portions of the utility cost using the high-low method.
- 2. Determine the contribution margin per ease.
- 3. Determine the fixed costs per month, including the utility fixed cost from part (1).
- 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
- 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.
- 9. Prepare the August
budgeted income statement , including selling expenses.
Part C—August
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
- 10. Determine and interpret the direct materials price and quantity variances for the three materials.
- 11. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest hour.
- 12. Determine and interpret the factory overhead controllable variance.
- 13. Determine and interpret the factory overhead volume variance.
- 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)?
Part–A
(1)

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:
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:
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.
Calculate the fixed and variable portion of the utility cost using high method:
Calculate the fixed and variable portion of the utility cost using low method:
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.
Part–B
5.

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)
Part–C
10.

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:
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.
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