Managerial Accounting: Comprehensive Problem 5 - Essence of Persia, Inc.

Managerial Accounting

Comprehensive Problem 5
Essence of Persia, 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
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
Bottles (8-oz) Variable 12 bottles $0.400 4.80
$11.88

Direct Labor
Department Cost Behavior Time per Case Labor rate per hour Direct Labor Cost per Case
Mixing Variable 16.8 min $15.00 $4.20
Filling Variable 4.2 min $12.00 0.84
$5.04

Factory Overhead Cost Behavior Total Cost
Utilities Mixed $230
Facility Lease Fixed 14,392
Equipment depreciation Fixed 3,600
Supplies Fixed 600
$18,822

Part A - Break-Even Analysis
The management of Essence of Persia, 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:
1. Determine the fixed and variable portion of the utility cost using the high-low method. Round the per unit cost to the nearest cent.
2. Determine the contribution margin per case. Enter your answer to the nearest cent. 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 answers to the nearest whole number. 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. Round your answer to the nearest whole number.

Part B - August Budgets
During July of the current year, the management of Essence of Persia, Inc., asked the controller to prepare August manufacturing and income statement budgets. Demand was expected to be 1,400 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, 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 400 240 500
Desired materials goods inventory, August 31, 2012 600 300 400

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. Enter all amounts as positive numbers.
6. Prepare the August direct materials purchases budget. Enter the unit price as dollars and cents but carry out to three decimal places. For example, enter .2357 as 0.236 and enter 3.61 as 3.610. Enter all amounts as positive numbers.
7. Prepare the August direct labor budget. For hours required, round to nearest whole hour. For hourly rate, enter the amount as rounded to nearest whole dollar.
8. Prepare the August factory overhead budget. If an amount box does not require an entry, enter "0".
9. Prepare the August budgeted income statement, including selling expenses. Enter all amounts as positive numbers.

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 1,500 actual cases produced during August, which was 200 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 $1.05 (for 72 ozs) 76 ozs.
Natural Oils $6.25 (for 24 ozs) 25 ozs.
Bottles (8-oz) $4.65 (for 12 bottles) 12.4 bottles

Actual direct labor rate Actual direct labor time per case
Mixing $15.40 16.00 min.
Filling $11.80 4.60 min.

Actual variable overhead $158.00
Normal volume 1,450 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:
10. Determine and interpret the direct materials price and quantity variances for the three materials. Enter the costs in dollars and cents (carried to three decimal places when required). Enter all amounts as positive numbers. Enter the standard price to three decimal places. For example, $1.3458 would be entered as 1.346. Interpret your results. The input in the box below will not be graded, but may be reviewed and considered by your instructor
11. Determine and interpret the direct labor rate and time variances for the two departments. Enter the costs in dollars and cents. Enter all amounts as positive numbers. Interpret your results. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
12. Determine and interpret the factory overhead controllable variance. Enter all amounts as positive numbers. Interpret your results. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
13. Determine and interpret the factory overhead volume variance. When determining the fixed factory overhead rate, round your answer to two decimal places. Enter all amounts as positive numbers. Interpret your results.
14. Why are the standard direct labor and direct materials costs in the calculation for parts (10) and (11) based on the actual 1,500-case production volume rather than the planned 1,300 cases of production used in the budget for parts (6) and (7)?
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