Part–A
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.
Part–A
Explanation of Solution
1.
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.
2.
The contribution margin per case.
Selling price | $100.00 | |
Less: Variable costs per case | ||
Direct materials | $ 17.00 | |
Direct labor | 7.20 | |
Utilities (1) | 0.20 | |
Selling expenses | 20.00 | |
Total variable costs per case | 44.40 | |
Contribution margin per case | $ 55.60 |
Table (1)
The contribution margin per case is $55.60.
3.
The fixed costs per month, including the utility fixed cost.
Utilities | $ 500 |
Facility lease | 14,000 |
Equipment |
4,300 |
Supplies | 660 |
Total fixed costs | $19,460 |
Table (2)
(2)
The fixed costs per month are $19,460.
4.
The break-even number of cases per month.
The break-even number of cases per month is 350 cases.
Working Note:
Part–B
The fixed and variable portion of the utility cost using the high-low method.
Part–B
Explanation of Solution
5.
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)
6.
Incorporation GS | ||||
Direct Materials Purchases Budget | ||||
For the month ended August 31 | ||||
Particulars | Cream Base (oz.) | Natural oils (oz.) | Bottles | Total |
Units required for production | 137,500 (3) | 41,250 (4) | 16,500 (5) | |
Add: Desired ending inventory | 1,000 | 360 | 240 | |
Total units required | 138,500 | 41,610 | 16,740 | |
Less: Estimated beginning inventory | 250 | 290 | 600 | |
Total materials to be purchased | 138,250 | 41,320 | 16,140 | |
Multiply: Unit price | $ 0.02 | $ 0.30 | $ 0.50 | |
Total direct materials to be purchased | $ 2,765 | $12,396 | $ 8,070 | $23,231 |
Table (4)
Working Notes:
Calculate the units required for producing cream base.
Calculate the units required for producing natural oils.
Calculate the units required for producing bottles.
7.
Incorporation GS | |||
Direct Labor Cost Budget | |||
For the month ended August 31 | |||
Particulars | Mixing | Filling | Total |
Hours required for production of: | |||
Hand and body lotion | $458 (6) | $115 (7) | |
Multiply: Hourly rate | 18.00 | 14.40 | |
Total direct labor cost | $ 8,244 | $ 1,656 | $ 9,900 |
Table (5)
Working Notes:
Calculate the hours required for mixing the hand and body lotion.
Calculate the hours required for filling the hand and body lotion.
To prepare the
Incorporation GS | |||
Factory Overhead Cost Budget | |||
For the month ended August 31 | |||
Particulars | Fixed (2) | Variable (8) | Total |
Utilities | $ 500 | $ 275 | $ 775 |
Facility lease | 14,000 | 14,000 | |
Equipment depreciation | 4,300 | 4,300 | |
Supplies | 660 | 660 | |
Total factory overhead cost | $ 19,460 | $ 275 | $19,735 |
Table (6)
Working Note:
Calculate the variable utility cost.
9.
To prepare the
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)
Working Notes:
Calculate the sales.
Calculate the beginning direct materials inventory as on August 1.
Calculate the ending direct materials inventory as on August 31.
Calculate the selling expenses.
Part–C
The fixed and variable portion of the utility cost using the high-low method.
Part–C
Explanation of Solution
10.
Explanation:
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.
Determine the direct materials quantity variances for the three materials.
Cream Base | Natural oils | Bottles | |
Actual quantity | 153,000 oz.(13) | 46,500 oz. (14) | 18,750 (15) |
Less: Standard quantity | 150,000 (16) | 45,000 (17) | 18,000 (18) |
Difference | 3,000 oz. | 1,500 | 750 |
Multiply: Standard price | $ 0.02 | $0.30 | $0.50 |
Direct materials quantity variance | $60 Unfavorable |
$450 Unfavorable | $375 Unfavorable |
Table (9)
Working Note:
Interpretation:
It can be understood from the above data that there are unfavorable direct materials quantity variances for all the three materials because of the fact that the standards were set at ideal quantity amounts for all the three materials.
11.
Determine the direct labor rate variances for the two departments.
Mixing Department | Filling Department | |
Actual rate | $ 18.20 | $14.00 |
Less: Standard rate | 18.00 | 14.40 |
Difference | $0.20 | $(0.40) |
Multiply: Actual time (hours) | 487.5 (19) | 140.00 (20) |
Direct labor rate variance | $97.50 Unfavorable |
$(56.00) Favorable |
Table (10)
Working Note:
Interpretation:
It can be understood from the above finding that the mixing department has the unfavorable direct labor rate variance, and the filling department has favorable direct labor rate variance because of the fact that the former department uses the higher classification of labor, and the latter department uses the lower classification of labor. The higher classification of labor costs an additional cost of $0.20 per hour, whereas, the lower classification of labor saves an amount of $0.40 per hour.
Determine the direct labor time variances for the two departments.
Mixing Department | Filling Department | |
Actual time (hours) | 487.5(19) | 140 (20) |
Less: Standard time (hours) | 500 (21) | 125 (22) |
Difference | (12.5) | 15 |
Multiply: Standard rate | $ 18 | $14.40 |
Direct labor time variance | $(225) Favorable |
$216 Unfavorable |
Table (11)
Working Note:
Interpretation:
It can be understood from the above finding that the mixing department has the favorable direct labor time variance, and the filling department has unfavorable direct labor time variance because of the fact that the former department uses the higher classification of labor, and the latter department uses the lower classification of labor.
12.
Determine the variable factory overhead controllable variance.
Determine the standard variable factory overhead.
Interpretation:
The factory overhead controllable variance is $5 and it is an unfavorable variance.
13.
Determine the factory overhead volume variance.
The factory overhead volume variance is $1,216.25 and it is an unfavorable variance.
14.
To identify: The reason behind the standard direct labor and direct material costs are calculated based on the actual production volume of 1,500 cases rather than the planned production value of 1,375 cases.
Explanation:
The variances are the differences between the actual costs and the
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Chapter 22 Solutions
Financial & Managerial Accounting
- 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 ABreak-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 BAugust 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 CAugust 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 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. 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