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

Instructions

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	$0.10	$0.10
Total Fixed Cost	$200	$200
Total Cost	$300	$230

Determine the contribution margin per case.

Contribution margin per case: $46.98

Determine 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

Determine 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.

Instructions

5. Prepare the August production budget.

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

6. Prepare the August direct materials purchases budget.

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

7. Prepare the August direct labor budget.

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

8. Prepare the August factory overhead budget.

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

9. Prepare the August budgeted income statement, including selling expenses.

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

11. Mixing time variance,$195 F

12. $32 U

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.

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 1,300-case production volume rather than the planned 1,200 cases of production used in the budgets for parts (6) and (7)?