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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 ABreak-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 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	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 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	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)?

Questions (Part A) 1. Determine the fixed and variable portion of the utility cost using the high-low method. At High Point At Low Point Variable cost per unit $0.20 $0.20 $500.00 Total fixed cost L $500.00 Total cost $740.00 $600.00 2. Determine the contribution margin per case. $55.60 3. Determine the fixed costs per month, including the utility fixed cost from part (1). Total fixed costs: Utilities $500.00 Facility lease 14,000.00 Equipment depreciation 4,300.00 Supplies 660.00 $19,460.00 4. Determine the break-even number of cases per month. 350 cases Production Budget 5. Prepare the August production budget. Enter all amounts as positive numbers. Genuine Spice Inc. Production Budget For the Month Ended August 31 Cases Expected cases to be sold 1,500 Plus desired ending inventory 175 Total cases required 1,675 Less estimated beginning inventory 300 Total cases to be produced 1,375 Direct Materials Purchases Budget 6. Prepare the August direct materials purchases budget. Enter all amounts as positive numbers. Genuine Spice Inc. Direct Materials Purchases Budget For the Month Ended August 31 Cream Base (oz.) Natural Oils (oz.) Bottles (bottles) Total Units required for production 137,500 41,250 16,500 Plus desired ending inventory 1,000 360 240 Less estimated beginning inventory 250 290 600 Direct materials to be purchased 138,250 41,320 16,140 X Unit price $0.02 $0.30 $0.50 Total direct materials to be purchased $2,765 $12,396 $8,070 $23,231 Direct Labor Cost Budget 7. Prepare the August direct labor cost budget. Round the hours required for production to the nearest hour. Enter all amounts as positive numbe Genuine Spice Inc. Direct Labor Cost Budget For the Month Ended August 31 Mixing Filling Total Hours required for production of hand and body lotion 458 115 X Hourly rate $18.00 $14.40 Total direct labor cost $8,244 $1,656 $9,900 Factory Overhead Cost Budget 8. Prepare the August factory overhead cost budget. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank. (Entries of zero (0) will be cleared automatically by CNOW.) Genuine Spice Inc. Factory Overhead Cost Budget For the Month Ended August 31 Fixed Variable Total Factory overhead: Utilities $275 $500 $775 Facility lease 1,400 14,000 Equipment depreciation 4,300 4,300 Supplies 660 660 Total $275 $19,460 $19,735 Budgeted Income Statement 9. Prepare the August budgeted income statement, including selling expenses. Enter all amounts as positive numbers. NOTE: Because you are not required to prepare a cost of calculations will be part of the budgeted income statement. Genuine Spice Inc. Budgeted Income Statement For the Month Ended August 31 Revenue from sales $137,500 Finished goods inventory, August 1 $12,000 Direct materials: Direct materials inventory, August 1 $392 Direct materials purchases 23,231 Cost of direct materials available for use $23,623 Less direct materials inventory, August 31 248 Cost of direct materials placed in production $23,375 Direct labor 9,900 Factory overhead 19,735 Cost of goods manufactured 53,010 Cost of finished goods available for sale 51,010 Less finished goods inventory, August 31 7,000 Cost of goods sold 58,010 Gross profit $79,490 Selling expenses 27,500 Income before income tax $51,990 Comprehensive Problem 5 Instructions Amount Descriptions Questions (Part A) Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Budgeted Income Statement 9. Variance Analysis (Part C) 10. Determine and interpret the direct materials price and quantity variances for the three materials. Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount Direct Materials Price Variance Cream Base Natural Oils Bottles Actual price $0.016 S0.32 $0.42 Standard price 0.020 0.30 0.50 Difference $0.0040 $0.02 $0.08 X Actual quantity OZ. 31 oz. 18,750 btls. Direct materials price variance $612 $930 U $1,500 Direct Materials Quantity Variance Cream Base Natural Oils Bottles Actual quantity 153,000 oz. 46,500 oz. 18,750 btls. Standard quantity 150,000 45,000 18,000 Difference 3,000 OZ 1,500 oz. 750 btls. X Standard price $0.02 $0.30 $0.50 Direct materials quantity variance $60 $450 U $375 U The fluctuation in market prices caused the direct material price variances. All the quantity variances were unfavorable indicating 11. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest tenth of an hour. Enter a favorable variance as a negative amount and an unfavorable variance as a positive amount Comprehensive Problem 5 Instructions Amount Descriptions Questions (Part A) Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Budgeted Income Statement Variance Analysis (Part C) 11. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest tenth of an hour. Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount Direct Labor Rate Variance Mixing Department Filling Department Actual rate $14.00 Standard rate $18.20 18.00 $0.20 14.40 Difference $0.40 X Actual time 488.0 140.0 Direct labor rate variance $97.60 $56.00 Direct Labor Time Variance Mixing Department Filling Department Actual time 488.0 140.0 0 1 Standard time 500.0 150.0 0 Difference 12.0 10.0 X Standard rate 18.00 14.40 Direct labor time variance $216.00 F $144.00 U The change in the labor classification caused the labor rate variances. This change could also have been responsible for the direct labor time varianco. 12. Determine and interpret the factory overhead controllable variance. Enter a favorable variance as a negative amount and an unfavorable variance as a positive amount Comprehensive Problem 5 Instructions Amount Descriptions Questions (Part A) Production Budget Direct Materials Purchases Budget Direct Labor Cost Budget Budgeted Income Statement Variance Analysis (Part C) 12. Determine and interpret the factory overhead controllable variance. Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount Factory Overhead Controllable Variance Actual variable overhead $305.00 Variable overhead at standard cost 300.00 Factory overhead controllable variance $5.00 The factory overhead controllable variance was caused by the variance in utilities d 13. Determine and interpret the factory overhead volume variance. Round rate to four decimal places. Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount. Factory Overhead Volume Variance Normal volume (cases) 1,600 Actual volume (cases) 1,500 Difference 100 X Fixed factory overhead rate $12.1600 Factory overhead volume variance $1,216.00 _U The volume variance indicates the cost of underused capacity . 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)? 50

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