August Variance Analysis Natural Fragrance, Inc., began operations on January 1,
ID: 2464807 • Letter: A
Question
August
Variance Analysis
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
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
The contribution margin per case.
Contribution margin per case: $46.98
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
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.
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
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
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
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
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
1. Determine and interpret the direct materials price and quantity variances for the three materials.
2. Determine and interpret the direct labor rate and time variances for the two departments.
3. Determine and interpret the factory overhead controllable variance.
4. Determine and interpret the factory overhead volume variance.
5. Why are the standard direct labor and direct materials costs in the calculations for parts (1) and (2) based on the actual 1,300-case production volume rather than the planned 1,200 cases of production used in the budgets for parts (B)?
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
Explanation / Answer
We will be computing our variances w.r.t. 1300 cases produced
Compiling data from above , we conclude as
Actual quantity used for Case Base = 1300 x 74 ,= 96200
Natural oils = 1300 x 26 ,= 33800
Bottles = 1300 x 12.60,=16380
MAterial Price Variance can be calculated using following formula
= Actual Quantity ( Standard price - Actual price)
Case BAse = 96200 ( 0.015 - 0.014) , =96.20
Natural oils = 33800 ( 0.250 -0.270),= - 676
Bottles = 16380 (0.40 -0.35),= 819
MAterial price variance Net =96.20 -676 +819 ,= 239.20 F
Calculating MAterial quantity variance
= Standard price ( Standard quantity for actual production - actual quantity)
Case Base = 0.015 ( 1300 x 72 - 96200) ,= -39
Natural oils = 0.250 ( 1300 x 24 - 33800), = -650
Bottles = 0.400 ( 1300 x 12 - 16380), = -312
MAterial quantity variance Net, = -39 -650 -312,= 1001 U
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