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	Direct Materials Cost per Case
Cream base	Variable	100 ozs.	$0.02		$2.00
Natural oils	Variable	30 ozs.	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 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 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.

10. Determine and interpret the direct materials price and quantity variances for the three materials. Enter the costs in dollars and cents (carried to three decimal places when required). Enter all amounts as positive numbers.

11. Determine and interpret the direct labor rate and time variances for the two departments. Do not round hours. Enter the costs in dollars and cents. Enter all amounts as positive numbers.

12. Determine and interpret the factory overhead controllable variance. Enter all amounts as positive numbers.

13. Determine and interpret the factory overhead volume variance. When determining the fixed factory overhead rate, round the factory overhead rate to two decimal places and the factory overhead volume variance to whole dollars. Enter all amounts as positive numbers.

Answer 1

ANSWER:

Part C

10.       Direct Materials Price Variance:

			Cream				Natural
			Base				Oils				Bottles
Actual price…………………………	$	0.016			$	0.32		$	0.42
Standard price……………………			0.020					0.30				0.50
Difference…………………………	$	(0.004)		$	0.02		$	(0.08)
× Actual quantity (units)*………			153,000		ozs.			46,500	ozs.			18,750	btls.
Direct materials price variance…	$	(612) F	$	930	U	$	(1,500) F

* Actual quantity:

Cream base: 1,500 cases × 102 ozs. = 153,000 ozs.

Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs.

Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles

The fluctuation in market prices caused the direct material price variances. Prices increased for natural oils compared to standard and declined for cream base and bottles compared to standard.

Direct Materials Quantity Variance:

		Cream			Natural
		Base			Oils			Bottles
Actual quantity1………………………	153,000	ozs.		46,500		ozs.		18,750	btls.
Standard quantity2……………………	150,000			45,000				18,000
Difference………………………………		3,000	ozs.		1,500		ozs.		750	btls.
× Standard price………………………	$	0.02		$	0.30			$	0.50
Direct materials quantity variance…	$	60	U	$	450		U	$	375	U

All the direct materials quantity variances were unfavorable, indicating some material losses, scrap, and quality rejections. All the quantity variances were unfavorable because the standards were set at ideal quantity amounts.

Thus, only unfavorable variances were possible. The standard quantities were ideal standards for 12 8-ounce bottles per case (96 ozs. total), as shown below.

¹Actual quantity:

Cream base: 1,500 cases × 102 ozs. = 153,000 ozs.

Natural oils: 1,500 cases × 31 ozs. = 46,500 ozs.

Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles

²Standard quantity:

Cream base: 1,500 cases × 100 ozs. = 150,000 ozs.

Natural oils: 1,500 cases × 30 ozs. = 45,000 ozs.

Bottles: 1,500 cases × 12 bottles = 18,000 bottles

11.       Direct Labor Rate Variance:

	Mixing		Filling
		Department	Department
	Actual rate…………………………………………………	$18.20	$	14.00
	Standard rate……………………………………………		18.00				14.40
	Difference…………………………………………………	$ 0.20		$	(0.40)
	× Actual time (hours)1…………………………………		487.5				140.00
	Direct labor rate variance………………………………		$97.50 U		$	(56.00) F

The Mixing Department has an unfavorable direct labor rate variance from using a higher classification of labor. The higher labor classification costs an additional $0.20 per hour. The Filling Department has a favorable direct labor rate variance due to using a lower classification of labor. The lower labor classification saved $0.40 per hour.

Direct Labor Time Variance:	Mixing	Filling
	Department	Department
Actual time (hours)1……………………………………			487.5			140
Standard time (hours)2…………………………………			500				125
Difference…………………………………………………			(12.5)			15
× Standard rate…………………………………………	$	18		$	14.40
Direct labor time variance……………………………		$	(225) F	$	216	U

¹ Actual time:

Mixing: (1,500 units × 19.50 min.) ÷ 60 min. = 487.5 hrs.

Filling: (1,500 units × 5.60 min.) ÷ 60 min. = 140 hrs.

²Standard time:

Mixing: (1,500 units × 20.00 min.) ÷ 60 min. = 500 hrs.

Filling: (1,500 units × 5.00 min.) ÷ 60 min. = 125 hrs.

The Mixing Department is producing at a labor time that is slightly better than standard, thus producing a favorable direct labor time variance. This may be the result of using a higher grade of labor. The net impact for the Mixing Department is favorable by $127.50 ($97.50 - $225). The Filling Department had an unfavorable direct labor time variance. This may be the result of using a lower grade of labor in the department. The net impact for the department is unfavorable by $160.00 ($216.00 - $56.00). Thus, the savings in the labor rate from using a lower grade classification of labor was insufficient to offset the loss of efficiency from such labor.

12.       Factory Overhead Controllable Variance:                                         

Actual variable overhead………………………………………………………	$	305
Variable overhead at standard cost*………………………………………		300
Factory overhead controllable variance……………………………………	$	5		U

^*Variance overhead (utility cost) at standard cost: $0.20 × 1,500 cases = $300

13.       Factory Overhead Volume Variance:

Normal volume (cases)………………………………………………………	1,600
Actual volume (cases)…………………………………………………………	1,500
Difference………………………………………………………………………	100
× Fixed factory overhead rate*………………………………………………	$ 12.1625
	$1,216.25 U

* Fixed factory overhead rate: $19,460** ÷ 1,600 cases = $12.1625 per case

** Total fixed factory overhead shown in part (8)

The unfavorable volume variance indicates the cost of underused capacity of 100 cases per month.

Alternative Computation of Overhead Variances

Actual costs ($19,460 + $305) Balance (underapplied) Factory Overhead 19,765.00 Applied costs 18,543.75 [1,500 * ($12.1625 + $0.20)] 1,221.25 Actual Factory Overhead $19,765.00 Budgeted Factory Overhead for Amount Produced Variable cost (1,500 * $0.20)... Fixed cost...... Total........ Applied Factory Overhead $18,543.75 $ 300 19,460.00 $19,760.00 $5 U Controllable Variance $1,216.25 U Volume Variance $1,221.25 U Total Factory Overhead Cost Variance