August Variance Analysis Natural Fragrance, Inc , began operations on January 1, 2012 The company produces a hand and body lotion in an eight ounce bottle called Eternal Beauty The lotion is sold wholesale in 12 bottle cases for $80 per case There is a selling commission of $16 per case The January direct materials, direct labor, and factory overhead costs are as follows Part A and Break Even Analysis The management of Natural Fragrance, 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 2012 Case Production Utility Total Cost January 300 $230 February 600 263 March 1,000 300 April 900 292 May 750 280 June 825 285 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 10 $0 10 Total Fixed Cost $200 $200 Total Cost $300 $230 The contribution margin per case Contribution margin per case $46 98 The fixed costs per month, including the utility fixed cost from part (1) Utilities Cost (from part 1) $200 Facility Lease $12,043 Equipment Depreciation $3,600 Supplies $600 Total Fixed Costs $16,443 The break even number of cases per month 350 Cases Part B and August Budgets During July of the current year, the management of Natural Fragrance, Inc , asked the controller to prepare August manufacturing and income statement budgets Demand was expected to be 1,300 cases at $80 per case for August Inventory planning information is provided as follows Bookmark Title Finished Goods Inventory Cases Cost Estimated finished goods inventory, August 1, 2012 200 $6,000 Desired finished goods inventory, August 31, 2012 100 3,000 Materials Inventory Cream Base (ozs ) Oils (ozs ) Bottles (bottles) Estimated materials inventory, August 1, 2012 200 240 500 Desired materials inventory, August 31, 2012 800 300 200 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 NATURAL FREGRANCE, INC Production Budget For the Month Ended August 31, 2012 Cases Expected Cases to be sold $1,300 Plus desired ending Inventory $100 Total $1,400 Less estimated beginning inventory $200 Total units to be produced $1,200 NATURAL FREGRANCE, INC Direct Materials Purchases Budget For the Month Ended August 31, 2012 Case Base (ozs) Natural Oils (ozs) Bottles (bottles) Total Units required for production 86,400 28,800 14,400 Plus desired ending inventory 800 300 200 Less estimated beginning inventory (200) (240) (500) Direct Materials to be purchased 87,000 28,860 14,100 Unit Price x $0 015 x $0 250 x $0 400 Total direct materials to be purchased 1,305 7,215 $5,640 $14,160 Cream Base 1200 cases x 72 ozs 86,400 ozs Natural Oils 1200 cases x 24 ozs 28,800 ozs Bottles 1200 cases x 12 bottles 14,400 bottles NATURAL FREGRANCE, INC Direct Labor Budget For the Month Ended August 31, 2012 Mixing Filling Total Hours required for production Hand and body lotion 336 84 Hourly rate x $15 00 x $12 00 Total direct labor cost $5,040 $1,008 $6048 Mixing (1200 cases x 16 80 min ) 60 min 336 Filling (1200 cases x 4 20 min) 60 min 84 NATURAL FREGRANCE, INC Factory Overhead Budget For the Month Ended August 31, 2012 Factory Overhead Fixed Variable Total Utilities $200 $120 $320 Facility lease 12,043 12,043 Equipment depreciation 3,600 3,600 Supplies 600 600 Total $16,443 $120 $16,563 NATURAL FRAGRANCE, INC Budgeted Income Statement For the Month Ended August 31, 2012 Sales $104,000 Finished Goods Inventory, August 1 $6,000 Direct materials inventory, August 1 $263 Direct materials purchase from part (6) $14160 Less direct materials inventory, August 31 $167 Cost of direct materials for production $14,256 Direct labor from part (7) $6,048 Factory overhead from part (8) $16,563 $36,867 Less finished goods inventory, August 31 $3,000 Cost of goods sold $39,867 Gross profit $64,133 Selling expenses $20,800 Income before income taxes $43,333 Sales 1300 cases x $80 per case $104,000 Direct materials inventory, August 1 (200x $0 015) (240 x $0 250) (500 x $0 400) $263 Direct materials inventory, August 31 (800x $0 015) (300 x $0 250) (200 x $0 400) $167 Selling expenses 1,300 cases x $16 per case $20,800 Part C and 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 1,300 actual cases produced during August, which was 100 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 $0 014 per oz 74 ozs Natural oils $0 27 per oz 26 ozs Bottle (8 oz ) $0 35 per bottle 12 6 bottles Actual Direct Labor Rate Actual Direct Labor Rate Time per Case Mixing $15 20 16 20 min Filling 11 70 4 80 min Actual variable overhead $162 00 Normal volume 1,350 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 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 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 (1) and (2) based on the actual 1,300 case production volume rather than the planned 1,200 cases of production used in the budgets for parts (B)

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August Variance Analysis Natural Fragrance, Inc., began operations on January 1, 2012. The company produces a hand and body lotion in an eight-ounce bottle called

August

Variance Analysis

Natural Fragrance, Inc., began operations on January 1, 2012. The company produces a hand and body lotion in an eight-ounce bottle called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for $80 per case. There is a selling commission of $16 per case. The January direct materials, direct labor, and factory overhead costs are as follows:

Part A and Break-Even Analysis

The management of Natural Fragrance, 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:

2012	Case Production	Utility Total Cost
January	300	$230
February	600	263
March	1,000	300
April	900	292
May	750	280
June	825	285

The fixed and variable portion of the utility cost using the high-low method.

	At High Point	At Low Point
Variable Cost per Unit	$0.10	$0.10
Total Fixed Cost	$200	$200
Total Cost	$300	$230

The contribution margin per case.

Contribution margin per case: $46.98

The fixed costs per month, including the utility fixed cost from part (1).

Utilities Cost (from part 1)	$200
Facility Lease	$12,043
Equipment Depreciation	$3,600
Supplies	$600
Total Fixed Costs	$16,443

The break-even number of cases per month. 350 Cases

Part B and August Budgets

During July of the current year, the management of Natural Fragrance, Inc., asked the controller to prepare August manufacturing and income statement budgets. Demand was expected to be 1,300 cases at $80 per case for August. Inventory planning information is provided as follows:

Bookmark Title:

Finished Goods Inventory:

	Cases	Cost
Estimated finished goods inventory, August 1, 2012	200	$6,000
Desired finished goods inventory, August 31, 2012	100	3,000

Materials Inventory:

	Cream Base (ozs.)	Oils (ozs.)	Bottles (bottles)
Estimated materials inventory, August 1, 2012	200	240	500
Desired materials inventory, August 31, 2012	800	300	200

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.

NATURAL FREGRANCE, INC Production Budget For the Month Ended August 31, 2012
	Cases
Expected Cases to be sold	$1,300
Plus desired ending Inventory	$100
Total	$1,400
Less estimated beginning inventory	$200
Total units to be produced	$1,200

NATURAL FREGRANCE, INC Direct Materials Purchases Budget For the Month Ended August 31, 2012
	Case Base (ozs)	Natural Oils (ozs)	Bottles (bottles)	Total
Units required for production	86,400	28,800	14,400
Plus desired ending inventory	800	300	200
Less estimated beginning inventory	(200)	(240)	(500)
Direct Materials to be purchased	87,000	28,860	14,100
Unit Price	x $0.015	x $0.250	x $0.400
Total direct materials to be purchased	1,305	7,215	$5,640	$14,160

Cream Base: 1200 cases x 72 ozs = 86,400 ozs

Natural Oils: 1200 cases x 24 ozs = 28,800 ozs

Bottles: 1200 cases x 12 bottles = 14,400 bottles

NATURAL FREGRANCE, INC Direct Labor Budget For the Month Ended August 31, 2012
	Mixing	Filling	Total
Hours required for production
Hand and body lotion	336	84
Hourly rate	x $15.00	x $12.00
Total direct labor cost	$5,040	$1,008	$6048

Mixing: (1200 cases x 16.80 min.)/60 min = 336

Filling: (1200 cases x 4.20 min)/60 min = 84

NATURAL FREGRANCE, INC Factory Overhead Budget For the Month Ended August 31, 2012
Factory Overhead	Fixed	Variable	Total
Utilities	$200	$120	$320
Facility lease	12,043		12,043
Equipment depreciation	3,600		3,600
Supplies	600		600
Total	$16,443	$120	$16,563

NATURAL FRAGRANCE, INC.

Budgeted Income Statement

For the Month Ended August 31, 2012

Sales $104,000

Finished Goods Inventory, August 1......... $6,000

Direct materials inventory, August 1. $263

Direct materials purchase [from part (6)] . $14160

Less direct materials inventory, August 31. _$167

Cost of direct materials for production.. $14,256

Direct labor [from part (7)] $6,048

Factory overhead [from part (8)]... $16,563 $36,867

Less finished goods inventory, August 31. $3,000

Cost of goods sold. $39,867

Gross profit $64,133

Selling expenses $20,800

Income before income taxes. $43,333

Sales: 1300 cases x $80 per case = $104,000

Direct materials inventory, August 1: (200x $0.015) + (240 x $0.250) + (500 x $0.400) = $263

Direct materials inventory, August 31: (800x $0.015) + (300 x $0.250) + (200 x $0.400) =$167

Selling expenses: 1,300 cases x $16 per case = $20,800

Part C and 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 1,300 actual cases produced during August, which was 100 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	$0.014 per oz.	74 ozs.
Natural oils	$0.27 per oz.	26 ozs.
Bottle (8-oz.)	$0.35 per bottle	12.6 bottles
	Actual Direct Labor Rate	Actual Direct Labor Rate Time per Case
Mixing	$15.20	16.20 min.
Filling	11.70	4.80 min.
Actual variable overhead	$162.00
Normal volume	1,350 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 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.

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 (1) and (2) based on the actual 1,300-case production volume rather than the planned 1,200 cases of production used in the budgets for parts (B)?