Question

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	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	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	$600
February	800	660
March	1,200	740
April	1,100	720
May	950	690
June	1,025	705

	Required-Part A:
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	Oils	Bottles
	(oz.)	(oz.)	(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.

	Required-Part B:
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. If an amount box does not require an entry, leave it blank. (Entries of zero (0) will be cleared automatically by CNOW.)*
9.	Prepare the August budgeted income statement, including selling expenses. NOTE: Because you are not required to prepare a cost of goods sold budget, the cost of goods sold calculations will be part of the budgeted income statement.* *Enter all amounts as positive numbers.

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 oz.
Natural oils	$0.32 per oz.	31 oz.
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 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

	Required-Part C:
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 tenth of an 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 1,375 cases of production used in the budgets for parts (6) and (7)?

Amount Description:

Amount Descriptions-Part A
Controllable variance
Equipment depreciation
Facility lease
Supplies
Utilities
Volume variance

Answer 1

Part A

1.

High - Low Method:

The High-Low Method is used is method of computing the variable cost rate and the total amount of fixed costs that are part of Mixed Costs. Mixed costs are costs that are partly fixed, and partly variable.

The high-Low method takes the cost at the highest level of activity and lowest level of activity.

To ascertain the variable component / unit and fixed component of Utility cost using the High-Low method, we use the following formula:

Difference in Total Utility Cost / Difference in Production Level (activity)

=> (Highest Utility cost - Lowest Utility Cost) / (Highest Production - Lowest Production)

1
	Given:	Amount $	Month
a.	Highest Utility cost	740	March
b.	Lowest Utility cost	600	January
c.	Highest Production	1200	March
d.	Lowest Production	500	January
	Therefore, variable cost / unit of production using the High-Low method:
=>	(740-600) / (1200-500)	$      0.20	per unit
	Therefore, Variable Utility cost
	for highest activity month (March)
=>	Production Qty * Variable cost/ Unit
=>	1200 units * $ 0.20 / Unit	$ 240.00	A
	Fixed Utility cost for March = Total Utility cost for March - Variable Utility cost for March
=>	$ 740 - $ 240 =	$ 500.00	A
	Therefore, Variable Utility cost
	for Lowest activity month (January)
=>	Production Qty * Variable cost/ Unit
=>	500 units * $ 0.20 / Unit	$ 100.00	B
	Fixed Utility cost for March = Total Utility cost for March - Variable Utility cost for March
=>	$ 600 - $ 100 =	$ 500.00	B
Q1	Answer	Amount in US $
S.No.	Utility Cost	Variable	Fixed
A	Highest Activity - March	$ 240.00	$ 500.00
B	Lowest Activity - January	$ 100.00	$ 500.00

Q 2

	Given:	Amount $	Amount $
a	Sales per case of Lotion		$ 100.00
Less: b	Variable costs / case
i.	Direct Material / case	$     17.00
ii.	Direct Labor / case	$       7.20
iii.	Factory Overhead / case:
	Variable Utility cost (computed in Q1)	$       0.20
iv.	Selling commission / case	$     20.00
	Total Variable Cost		$   44.40
Answer	Contribution (a-b)		$   55.60

Q3

Q3	Fixed costs per month:
i	Fixed Utility case ( see Q1 computation)	$         500
ii	Factory Lease	$   14,000
iii.	Equipment Depreciation	$     4,300
iv.	Supplies	$         660
Answer	Total Fixed Costs per month (i+ii+iii+iv)	$   19,460

Q4

Q 4	Break even cases per month =	Fixed cost / Contribution per case
i	Fixed cost per month ( see question 3)	$        19,460
ii	Contribution / case (See Question 2)	$          55.60
	Contribution / case per month	i / ii
Answer	Contribution / case per month	350

PART B

Q 5

	Genuine Spice Inc.
	Production Budget
	For the month of August…
S.No.	Particulars	Unit (Cases)
1	Cases of Lotion expected to be sold	1,500
Add:
2	Desired Ending Finished Goods Inventory	175
		1,675
Less:
3	Estimated Opening Finished Goods Inventory	300
Answer	Budgeted Production for August	1,375

Q 6
	Genuine Spice Inc.
	Direct Materials Purchases Budget
	For the month of August…
S.No.	Particulars	Cream Base (in Ozs.)	Natural Oils (in Ozs.)	Bottles (Nos.)	Total Amount $
A.	Total units (cases) to be produced (see Q 6)	1,375	1,375	1,375
B.	Units ( Ozs / Bottles) per case (given in question)	100	30	12
C.	Total equivalent Ozs/Bottles required for production (A*B)	1,37,500	41,250	16,500
Add:
D.	Desired Ending Materials Inventory (Ozs/Bottles)	1000	360	240
Less:
E.	Expected Opening Materials Inventory ( Ozs / Bottles)	250	290	600
F.	Direct Materials to be Purchased - Qty (C + D - E)	1,38,250	41,320	16,140
G.	Cost / Unit (Given in Question)	0.02	0.30	0.50
Answer:	Value of Direct Materials to be Purchased ( F * G)	2,765.00	12,396.00	8,070.00	23,231.00

Q 7
	Genuine Spice Inc.
	Direct Labor Budget
	For the month of August…
S.No.	Particulars	Mixing	Filling	Total
A.	Time ( in hrs) required for production of hand and body lotion:
1	Budgeted production (in cases) for August (refer Question 6)	1,375	1,375
2	Time (in min) per case for Mixing and Filling operations	20	5
3	Time (in hrs) per case for Mixing and Filling operations (2/60)	0.333333333	0.0833333
4	Time (in hrs) per case for production ( 1*3)	458.33	114.58
5	Labor rate / hour ( in $) - Given in Question	18.00	14.40
Answer	Total Direct Labor Cost ( 4 * 5)	8,250	1,650	9,900

Q 8
	Genuine Spice Inc.
	Factory Overhead Cost Budget
	For the month of August…
S.No.	Particulars	Fixed	Variable	Total
A.	Budgeted production (in cases) for August (refer Question 6)		1,375
B.	Factory Overheads:
1	Utility cost (refer Question 1 : Variable cost: $ 0.20*1375)	$              500	$           275	$         775
2	Factory Lease (Given in question)	$        14,000	$              -	$    14,000
3	Equipment Depreciation	$           4,300	$              -	$      4,300
4	Supplies	$              660	$              -	$         660
Answer	Total Factory Overhead Cost ( 1+2+3+4+5)	19,460	275	19,735

Q9	Genuine Spice Inc.
	Budgeted Income Statement
	For the month of August…
S.No.	Particulars	Amount $	Amount $	Amount $
A.	Sales ( $ 100/ Case * 1500)			1,50,000
Less:
C.	Cost of Goods Sold (g+h-i)			58,010
D.	Gross Profit (A-C)			91,990
E.	Selling Expenses			30,000
F.	Earnings Before Taxes (D-E)			61,990