Genuine Spice Inc. began operations on January 1, 2016. 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 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	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. 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:

2016	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, 2016	300	$12,000
Desired finished goods inventory, August 31, 2016	175	7,000

Materials Inventory:

	Cream Base	Oils	Bottles
	(ozs.)	(ozs.)	(bottles)
Estimated materials inventory, August 1, 2016	250	290	600
Desired materials inventory, August 31, 2016	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 budget. Round the hours required for production to the nearest hour.*

8.

Prepare the August factory overhead 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 ozs.
Natural oils	$0.32 per oz.	31 ozs.
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 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.

	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 hour.
12.	Determine and interpret the factory overhead controllable variance.
13.	Determine and interpret the factory overhead volume variance.

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
Total fixed cost
Total cost

2. Determine the contribution margin per case.

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

1	Total fixed costs:
2
3
4
5
6

4. Determine the break-even number of cases per month. 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, 2016
	Cases
Plus
Total
Less

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, 2016
	Cream Base (ozs.)	Natural Oils (ozs.)	Bottles (bottles)	Total
Plus
Less
Total
X

Direct Labor Budget

7. Prepare the August direct labor budget. Round the hours required for production to the nearest hour. Enter all amounts as positive numbers.

Genuine Spice Inc.
Direct Labor Budget
For the Month Ended August 31, 2016
	Mixing	Filling	Total
X

Factory Overhead Budget

8. Prepare the August factory overhead 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 Budget
For the Month Ended August 31, 2016
	Fixed	Variable	Total
Factory overhead:
Utilities
Facility lease
Equipment depreciation
Supplies
Total

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 goods sold budget, the cost of goods sold calculations will be part of the budgeted income statement.

Genuine Spice Inc.
Budgeted Income Statement
For the Month Ended August 31, 2016
Sales
Finished goods inventory, August 1
Direct materials inventory, August 1
Direct materials purchases
Less direct materials inventory, August 31
Cost of direct materials for production
Direct labor
Factory overhead
Less finished goods inventory, August 31
Cost of goods sold
Gross profit
Selling expenses
Income before income tax

Variance Analysis (Part C)

10. Determine and interpret the direct materials price and quantity variances for the three materials.

Direct Materials Price Variance
	Cream Base		Natural Oils		Bottles
Difference
X
Direct materials price variance

Direct Materials Quantity Variance
	Cream Base		Natural Oils		Bottles
Difference
X
Direct materials quantity variance

The fluctuation in caused the direct material price variances. All the quantity variances were 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.

Direct Labor Rate Variance
	Mixing Department		Filling Department
Difference
X
Direct labor rate variance

Direct Labor Time Variance
	Mixing Department		Filling Department
Difference
X
Direct labor time variance

The change in the caused the labor rate variances. This change have been responsible for the direct labor time variance.

12. Determine and interpret the factory overhead controllable variance.

Factory Overhead Controllable Variance
Factory overhead controllable variance

The factory overhead controllable variance was caused by the variance in .

13. Determine and interpret the factory overhead volume variance. Round rate to four decimal places.

Factory Overhead Volume Variance
Normal volume (cases)
Actual volume (cases)
Difference
X
Factory overhead volume variance

The volume variance indicates the cost of .