Royal Essentials, Inc. began operations on January 1, 2008. 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:

DIRECT MATERIALS

 

Cost

Units

Cost

Direct Materials

 

Behavior

per Case

per Unit

Cost per Case

Cream base

Variable

72 ozs.

$0.015

$ 1.08

Natural oils

Variable

24 ozs.

0.250

6.00

Bottle (8 oz.)

Variable

12 bottles

0.400

4.80

 

 

 

 

$11.88

 

DIRECT LABOR

 

Cost

Time

Labor Rate

Direct Labor Cost

Department

Behavior

per Case

per Hour

per Case

Mixing

Variable

16.80 min.

$15.00

$4.20

Filling

Variable

4.20 min.

12.00

0.84

 

 

21.00 min.

 

$5.04

 

FACTORY OVERHEAD

 

Cost Behavior

Total Cost

Utilities

Mixed

$ 230

Facility lease

Fixed

9,694

Equipment depreciation

Fixed

3,600

Supplies

Fixed

600

 

 

$14,124

Part A—Break Even Analysis

The management of Royal Essentials, 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:

2008

Case Production

Utility Total Cost

January

300

$230

February

600

265

March

1,000

300

April

900

292

May

750

275

June

825

280

Instructions

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 B—August Budget

During July of the current year, the management of Royal Essentials, Inc., asked the controller to prepare August manufacturing and income statement budgets. Demand was expected to be 1,200 cases at $80 per case for August. Inventory planning information is provided as follows:

Finished Goods Inventory:

 

 

 

 

 

Cases

Cost

Estimated finished goods inventory, August 1, 2008

 

150

$3,160

Desired finished goods inventory, August 31, 2008

 

100

2,100

Materials Inventory:

 

 

 

 

Cream Base

Oils

Bottles

 

(ozs.)

(ozs.)

(bottles)

Estimated materials inventory, August 1, 2008

500

260

500

Desired materials inventory, August 31, 2008

700

300

400

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.

6. Prepare the August direct materials purchases budget.

7. Prepare the August direct labor budget.

8. Prepare the August factory overhead budget.

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

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 1,200 actual cases produced during August, which was 50 more cases than planned at the beginning of the month. Actual data for August were as follows:

 

Actual Direct Materials

Actual Direct Materials

 

Price per Case

Quantity per Case

Cream base

$1.00 (for 72 ozs.)

75 ozs.

Natural oils

6.20 (for 24 ozs.)

25 ozs.

Bottle (8 oz.)

4.50 (for 12 bottles)

12.2 bottles

 

 

 

Actual Direct Labor

 

Actual Direct Labor Rate

Time per Case

Mixing

$15.25

16.50 min.

Filling

11.50

4.50 min.

Actual variable overhead

$125.00

 

Normal volume

1,500 cases

 

The prices of the materials were different than standard due to fluctuations in market prices. Specifically, the prices of the cream base and bottles were below the standard price, while the price of natural oils was above the standard price. 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

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 1,200 case production volume rather than the planned 1,150 cases of production used in the budgets for parts (6) and (7)?