   Chapter 23, Problem 5CPP

Chapter
Section
Textbook Problem

Genuine Spice Inc. began operations on January 1 of the current year. The company produces eight-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 oz. $0.02$ 2.00 Natural oils Variable 30 oz. 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 1.20 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. wants 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:   Case Production Utility Total Cost January 500 5600 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 portion of the utility cost using the high-low method. 2. Determine the contribution margin per case. 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 (oz.) Oils [oz.] 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 the 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 cost budget. Round the hours required for production to the nearest hour. 8. Prepare the August factory overhead cost budget. 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 oz. Natural oils$0.32 per oz. 31 oz. 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 from 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. Instructions 1. Determine and interpret the direct materials price and quantity variances for the three materials. 2. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest hour. 3. Determine and interpret the factory overhead controllable variance. 4. Determine and interpret the factory overhead volume variance. 5. 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)? Part–A 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: Variable factory overheadcontrollable variance}(Actual variable factory overheadStandard variable factory overhead ) 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: Fixed factory overheadvolume variance}(Standard hours for 100% ofnormal capacityStandardhours for actual units produced)×(Fixed factory overhead rate) 1. To determine: The fixed and variable portion of the utility cost using the high-low method. Explanation 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. Variable cost per unit = Difference in total costDifference in production=$740(March)$600(January)1,200cases(March)500cases(January)=$140700cases=$0.20per case (1) Calculate the fixed and variable portion of the utility cost using high method: Total cost=(Variable cost per unit×Units of production)+Fixed cost$740=(\$0

Part–B

5.

To determine

To prepare: The August production budget.

Part–C

10.

To determine

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

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