Chapter 23, Problem 1COMP

(1)

To determine

Ascertain the fixed and variable portion of the utility cost using the high-low method.

Explanation of Solution

Direct material variances:

The difference between the actual material cost per unit and the standard material cost per unit for the direct material purchased is known as direct material cost variance. The direct material variance can be classified as follows:

• v Direct materials price variance.
• v Direct materials quantity variance.

Direct labor variances:

The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows:

• v Labor rate variance.
• v Labor time variance.

Variable factory overhead controllable variances:

The difference between the actual variable overhead costs and the standard overhead for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

  $\begin{array}{l}\text{Variable factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)$

Fixed factory overhead volume variances:

Factory overhead volume variances refers to the difference between the budgeted fixed overheads at 100% of normal capacity, and the standard fixed overheads for the actual units produced. The factory overhead volume variances can be calculated as follows:

$\begin{array}{l}\text{Fixed factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard hours for 100\% of}\\ \text{normal capacity}-\text{Standard}\\ \text{hours for actual units produced}\end{array}\right)\times \left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)$

The fixed, and variable portion of the utility cost using the high-low method is $500,and $240 in the high cost method, and $500,and $100 in the low cost method respectively.

Working Notes:

(1) Calculate the variable cost per unit.

  $\begin{array}{c}\text{Variable cost per unit = }\frac{\text{Difference in total cost}}{\text{Difference in production}}\\ =\frac{\$740\left(\text{March}\right)-\$600\left(\text{January}\right)}{1,200\text{cases}\left(\text{March}\right)-500\text{cases}\left(\text{January}\right)}\\ \text{=}\frac{\$140}{700\text{cases}}\\ \text{=\$0}\text{.20}\text{per case}\end{array}$

Calculate the fixed and variable portion of the utility cost using high method:

  $\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$740=\left(\$0.20(1)\times 1,200\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$240}\\ \end{array}$    

  $\begin{array}{c}\text{\$740 =\$240+Fixed cost}\\ \text{Fixed cost}\text{=\$740}-\text{\$240}\\ \text{Fixed cost =\$500}\end{array}$

Calculate the fixed and variable portion of the utility cost using low method:

  $\begin{array}{c}\text{Total cost=}\left(\begin{array}{l}\text{Variable cost per unit}\\ \times \text{Units of production}\end{array}\right)+\text{Fixed cost}\\ \$600=\left(\$0.20(1)\times 500\text{units}\right)+\text{Fixed cost}\\ \text{Variable cost=\$100}\end{array}$    

  $\begin{array}{c}\text{\$600 =\$100+Fixed cost}\\ \text{Fixed cost}\text{=\$600}-\text{\$100}\\ \text{Fixed cost =\$500}\end{array}$

Conclusion

Hence, using the high method, the fixed and variable portion of the utility cost is $500, and $240. On the other hand, using the low method, the fixed and variable portion of the utility cost is $500, and $100 respectively.

2.

To determine

Ascertain the contribution margin per case.

Explanation of Solution

Selling price		$100.00
Less: Variable costs per case
Direct materials	$ 17.00
Direct labor	7.20
Utilities (1)	0.20
Selling expenses	20.00
Total variable costs per case		44.40
Contribution margin per case		$ 55.60

Table (1)

Conclusion

The contribution margin per case is $55.60.

3.

To determine

Ascertain the fixed costs per month, including the utility fixed cost.

Explanation of Solution

Utilities	$ 500
Facility lease	14,000
Equipment depreciation	4,300
Supplies	660
Total fixed costs	$19,460

Table (2)

Conclusion

The fixed costs per month are $19,460.

4.

To determine

Ascertain the break-even number of cases per month.

Explanation of Solution

The break-even number of cases per month is 350 cases.

Working Note:

    $\begin{array}{c}\text{Break-even sales (units)=}\frac{\text{Fixed costs}}{\text{Unit contribution margin}}\\ =\frac{\$19,460}{\$55.60}\\ =350\text{cases}\end{array}$

5.

To determine

Prepare the August production budget.

Explanation of Solution

Prepare the production budget for the month of August.

Incorporation GS
Production Budget
For the month ended August 31
Particulars	Cases
Expected cases to be sold	1,500
Plus desired ending inventory	175
Total units required	1,675
Less: Estimated beginning inventory	300
Total units to be produced	1,375

Table (3)

6.

To determine

Prepare the direct materials purchases budget for the month of August.

Explanation of Solution

Incorporation GS
Direct Materials Purchases Budget
For the month ended August 31
Particulars	Cream Base (oz.)	Natural oils (oz.)	Bottles	Total
Units required for production	137,500 (2)	41,250 (3)	16,500 (4)
Add: Desired ending inventory	1,000	360	240
Total units required	138,500	41,610	16,740
Less: Estimated beginning inventory	250	290	600
Total materials to be purchased	138,250	41,320	16,140
Multiply: Unit price	$ 0.02	$ 0.30	$ 0.50
Total direct materials to be purchased	$ 2,765	$12,396	$ 8,070	$23,231

Table (4)

Working Notes:

(2) Calculate the units required for producing cream base.

    $\begin{array}{c}\left\{\begin{array}{l}\text{Units required for producing}\\ \text{cream base }\end{array}\right\}=\left\{\begin{array}{l}\text{Total cases to be produced}\\ \times \text{Units per case}\end{array}\right\}\\ =1,375\text{cases}\times 100\text{oz}\text{.}\\ \text{=137,500}\text{oz}\text{.}\end{array}$

(3) Calculate the units required for producing natural oils.

    $\begin{array}{c}\left\{\begin{array}{l}\text{Units required for producing}\\ \text{natural oils }\end{array}\right\}=\left\{\begin{array}{l}\text{Total cases to be produced}\\ \times \text{Units per case}\end{array}\right\}\\ =1,375\text{cases}\times 30\text{oz}\text{.}\\ \text{=41,250}\text{oz}\text{.}\end{array}$

(4) Calculate the units required for producing bottles.

    $\begin{array}{c}\left\{\begin{array}{l}\text{Units required for producing}\\ \text{bottles }\end{array}\right\}=\left\{\begin{array}{l}\text{Total cases to be produced}\\ \times \text{Units per case}\end{array}\right\}\\ =1,375\text{cases}\times 12\text{bottles}\\ \text{=16,500}\text{bottles}\end{array}$

7.

To determine

Prepare the direct labor cost budget for the month of August.

Explanation of Solution

Incorporation GS
Direct Labor Cost Budget
For the month ended August 31
Particulars	Mixing	Filling	Total
Hours required for production of:
Hand and body lotion	$458 (5)	$115 (6)
Multiply:      Hourly rate	18.00	14.40
Total direct labor cost	$ 8,244	$ 1,656	$ 9,900

Table (5)

Working Notes:

(5) Calculate the hours required for mixing the hand and body lotion.

    $\begin{array}{c}\left\{\begin{array}{l}\text{Hours required for mixing}\\ \text{the hand and body lotion }\end{array}\right\}=\left\{\frac{\begin{array}{l}\text{Total cases to be produced}\\ \times \text{Time per case}\end{array}}{60\text{minutes}}\right\}\\ =\frac{1,375\text{cases}\times 20\text{minutes}}{60\text{minutes}}\\ \text{=458}\text{hours}\end{array}$

(6) Calculate the hours required for filling the hand and body lotion.

    $\begin{array}{c}\left\{\begin{array}{l}\text{Hours required for filling}\\ \text{the hand and body lotion }\end{array}\right\}=\left\{\frac{\begin{array}{l}\text{Total cases to be produced}\\ \times \text{Time per case}\end{array}}{60\text{minutes}}\right\}\\ =\frac{1,375\text{cases}\times 5\text{minutes}}{60\text{minutes}}\\ \text{=115}\text{hours}\end{array}$

8.

To determine

Prepare the factory overhead cost budget for the month of August.

Explanation of Solution

Incorporation GS
Factory Overhead Cost Budget
For the month ended August 31
Particulars	Fixed (2)	Variable (7)	Total
Utilities	$ 500	$ 275	$ 775
Facility lease	14,000		14,000
Equipment depreciation	4,300		4,300
Supplies	660		660
Total factory overhead cost	$ 19,460	$ 275	$19,735

Table (6)

Working Note:

(7) Calculate the variable utility cost.

    $\begin{array}{c}\text{Variable utility cost=Variable cost per unit}\times \text{Number of cases}\\ \text{=\$0}\text{.20}\times \text{1,375 cases}\\ \text{=\$275}\end{array}$

9.

To determine

Prepare the budgeted income statement including the selling expenses for the month of August.

Explanation of Solution

Incorporation GS Budgeted Income Statement For the month ended August 31
Sales (8)			$ 150,000
Finished goods inventory, August 1		$ 12,000
Direct materials:
Direct materials inventory, August 1 (9)	$ 392
Direct materials purchases (Table 4)	23,231
Cost of direct materials available for use	$ 23,623
Less: Direct materials inventory, August 31 (10)	248
Cost of direct materials used in production	$ 23,375
Direct labor (Table 5)	9,900
Factory overhead (Table 6)	19,735
Cost of goods manufactured		53,010
Cost of finished goods available for sale		$ 65,010
Less: Finished goods inventory, August 31		7,000
Cost of goods sold			58,010
Gross profit			$ 91,990
Less: Selling expenses			30,000
Income from operations			$ 61,990

Table (7)

Working Notes:

(8) Calculate the sales.

    $\begin{array}{c}\text{Sales=Number of cases expected}\times \text{Rate per case}\\ \text{=1,500}\text{cases}\times \text{\$100}\text{per case}\\ \text{=\$150,000}\end{array}$

(9) Calculate the beginning direct materials inventory as on August 1.

    $\begin{array}{c}\left[\begin{array}{l}\text{Direct materials inventory,}\\ \text{August 1}\end{array}\right]=\left[\begin{array}{l}\text{Estimated beginning materials inventory}\\ \text{of cream base, oils, and bottles}\times \text{Cost per}\\ \text{unit of cream base, oils, and bottles}\end{array}\right]\\ =\left[\begin{array}{l}\left(250\times \$0.02\right)+\left(290\times \$0.30\right)\\ +\left(600\times \$0.50\right)\end{array}\right]\\ =\$392\end{array}$

(10) Calculate the ending direct materials inventory as on August 31.

    $\begin{array}{c}\left[\begin{array}{l}\text{Direct materials inventory,}\\ \text{August 31}\end{array}\right]=\left[\begin{array}{l}\text{Estimated ending materials inventory}\\ \text{of cream base, oils, and bottles}\times \text{Cost per}\\ \text{unit of cream base, oils, and bottles}\end{array}\right]\\ =\left[\begin{array}{l}\left(1,000\times \$0.02\right)+\left(360\times \$0.30\right)\\ +\left(240\times \$0.50\right)\end{array}\right]\\ =\$248\end{array}$

(11) Calculate the selling expenses.

    $\begin{array}{c}\text{Selling expenses=}\left(\text{Number of cases expected}\times \text{Selling commission per case}\right)\\ \text{=1,500}\text{cases}\times \text{\$20}\text{per case}\\ \text{=\$30,000}\end{array}$

10.

To determine

Ascertain and interpret the direct materials price and quantity variances for the three materials.

Explanation of Solution

Determine the direct materials price variances for the three materials.

	Cream Base	Natural oils	Bottles
Actual price	$ 0.016	$0.32	$0.42
Less: Standard price	0.020	0.30	0.50
Difference	$(0.004)	0.02	$(0.08)
Multiply: Actual quantity	153,000 (12)	46,500      (13)	18,750 (14)
Direct materials price variance	$(612) Favorable	$930 (Unfavorable)	$(1,500) Favorable

Table (8)

(12)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for cream base}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 102\text{oz}\text{.}\\ \text{=153,000 oz}\text{.}\end{array}$   

(13)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for natural oils}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 31\text{oz}\text{.}\\ \text{=46,500 oz}\text{.}\end{array}$   

(14)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Actual quantity}\\ \text{for bottles}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Actual direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 12.5\text{bottles}\\ \text{=18,750}\text{bottles}\end{array}$   

Conclusion

It can be understood from the above data that there is variances in the direct materials prices due to the fluctuations in the market prices. The actual price for natural oils got increased when compared to its standard price, whereas, the actual prices for the cream base, and bottles got decreased when compared to their respective standard prices.

To determine

Ascertain the direct materials quantity variances for the three materials.

Explanation of Solution

Determine the direct materials quantity variances for the three materials.

	Cream Base	Natural oils	Bottles
Actual quantity	153,000 oz.(12)	46,500 oz. (13)	18,750 (14)
Less: Standard quantity	150,000 (15)	45,000 (16)	18,000 (17)
Difference	3,000 oz.	1,500	750
Multiply: Standard price	$ 0.02	$0.30	$0.50
Direct materials quantity variance	$60 Unfavorable	$450 Unfavorable	$375 Unfavorable

Table (9)

(15)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Standard quantity}\\ \text{for cream base}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Standard direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 100\text{oz}\text{.}\\ \text{=150,000 oz}\text{.}\end{array}$   

(16)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Standard quantity}\\ \text{for natural oils}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Standard direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 30\text{oz}\text{.}\\ \text{=45,000 oz}\text{.}\end{array}$   

(17)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Standard quantity}\\ \text{for bottles}\end{array}\right)\text{=}\left(\begin{array}{l}\text{Number of cases expected}\times \text{Standard direct}\\ \text{materials quantity per case}\end{array}\right)\\ =1,500\text{cases}\times 12\text{bottles}\\ \text{=18,000}\text{bottles}\end{array}$   

Conclusion

It can be understood from the above data that there are unfavorable direct materials quantity variances for all the three materials because of the fact that the standards were set at ideal quantity amounts for all the three materials.

11.

To determine

Ascertain and interpret the direct labor rate and time variances for the two departments.

Explanation of Solution

Determine the direct labor rate variances for the two departments.

	Mixing Department	Filling Department
Actual rate	$ 18.20	$14.00
Less: Standard rate	18.00	14.40
Difference	$0.20	$(0.40)
Multiply: Actual time (hours)	487.5      (18)	140.00      (19)
Direct labor rate variance	$97.50 Unfavorable	$(56.00) Favorable

Table (10)

(18)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Actual time}\\ \text{for mixing}\end{array}\right)\text{=}\frac{\left(\text{Number of cases expected}\times \text{Actual time per case}\right)}{60\text{minutes}}\\ =\frac{1,500\text{units}\times 19.50\text{minutes}}{60\text{minutes}}\\ \text{=487}\text{.5}\text{hours}\end{array}$   

(19)Working Note:

  $\begin{array}{c}\left(\begin{array}{l}\text{Actual time}\\ \text{for filling}\end{array}\right)\text{=}\frac{\left(\text{Number of cases expected}\times \text{Actual time per case}\right)}{60\text{minutes}}\\ =\frac{1,500\text{units}\times 5.60\text{minutes}}{60\text{minutes}}\\ \text{=140}\text{hours}\end{array}$   

Conclusion

It can be understood from the above finding that the mixing department has the unfavorable direct labor rate variance, and the filling department has favorable direct labor rate variance because of the fact that the former department uses the higher classification of labor, and the latter department uses the lower classification of labor. The higher classification of labor costs an additional cost of $0.20 per hour, whereas, the lower classification of labor saves an amount of $0.40 per hour.

12.

To determine

Ascertain and interpret the factory overhead controllable variance.

Explanation of Solution

Determine the variable factory overhead controllable variance.

  $\begin{array}{c}\begin{array}{l}\text{Factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)\\ =\text{\$305}-\text{\$300}\\ \text{=\$5}\end{array}$

Determine the standard variable factory overhead.

  $\begin{array}{c}\begin{array}{l}\text{Standard variable}\\ \text{factory overhead}\end{array}\}=\left[\begin{array}{l}\text{Variable cost per unit}\times \\ \text{Units of production}\end{array}\right]\\ =1,500\text{cases}\times \text{\$0}\text{.20}\\ =\text{\$300}\end{array}$

Conclusion

The factory overhead controllable variance is $5 and it is an unfavorable variance.

13.

To determine

Ascertain and interpret the factory overhead volume variance.

Explanation of Solution

Determine the factory overhead volume variance.

  $\begin{array}{c}\begin{array}{l}\text{Factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard units for 100\% of}\\ \text{normal capacity}-\text{Standard units produced }\end{array}\right)\text{×}\left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)\\ \text{=}\left(1,600\text{cases}-1,500\text{cases×\$12}\text{.1625}\right)\\ \text{=100}\text{cases×\$12}\text{.1625}\\ \text{=\$1,216}\text{.25}\end{array}$

Conclusion

The factory overhead volume variance is $1,216.25 and it is an unfavorable variance.

14.

To determine

Identify the reason behind the standard direct labor and direct material costs are calculated based on the actual production volume of 1,500 cases rather than the planned production value of 1,375 cases.

Explanation of Solution

The variances are the differences between the actual costs and the standard costs. Hence, the standard direct labor and direct material costs are calculated based on the actual production volume of 1,500 cases rather than the planned production value of 1,375 cases. The variable costs of the budget must be flexible with the actual volume of production in order to compare the variances across the same production value.