Financial and Managerial Accounting: Comprehensive Problem 5 - Royal Essentials Inc (Parts A to C)

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Financial and Managerial Accounting
Comprehensive Problem 5

Part A
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 Behavior Units per Case Cost per Unit Direct Materials 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 Behavior Time per Case Labor Rate per Hour Direct Labor Cost 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. Enter your answer in dollars and cents. Round to two decimal places. For example, 89.458 would be entered as 89.46
3. Determine the fixed costs per month, including the utility fixed cost from part (1). Enter your answer as a whole number. Round to the nearest whole unit. For example, 89.45 would be entered as 89 and 89.56 would be entered as 90.
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

Cream Base Oils Bottles
Materials Inventory: (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 Price per Case Actual Direct Materials 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 Rate Actual Direct Labor 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)?
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