# Comprehensive Problem 5: Essence of Persia

Comprehensive Problem 5: Essence of Persia, Inc., began operations on
January 1, 2010. 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 Aâ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:
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 Bâ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:
Materials Inventory:
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 Câ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:
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.
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 1,500-case
production volume rather than the planned 1,300 cases of production used
in the budgets for parts (6) and(7)?