Question

Flexible Budgeting and Variance Analysis

I Love My Chocolate Company makes dark chocolate and light chocolate. Both products require cocoa and sugar. The following planning information has been made available:

Standard Amount per Case
     Dark Chocolate      Light Chocolate      Standard Price per Pound
Cocoa 12 lbs. 9 lbs. $5.00
Sugar 10 lbs. 14 lbs. 0.60
Standard labor time 0.4 hr. 0.5 hr.

Dark Chocolate Light Chocolate
Planned production 3,700 cases 12,700 cases
Standard labor rate $14.50 per hr. $14.50 per hr.

I Love My Chocolate Company does not expect there to be any beginning or ending inventories of cocoa or sugar. At the end of the budget year, I Love My Chocolate Company had the following actual results:

Dark Chocolate Light Chocolate
Actual production (cases) 3,500 13,200
     Actual Price per Pound      Actual Pounds Purchased and Used
Cocoa $5.10 161,600
Sugar 0.55 214,300
Actual Labor Rate      Actual Labor Hours Used
Dark chocolate $14.00 per hr. 1,270
Light chocolate 15.00 per hr. 6,760

Required:

1. Prepare the following variance analyses for both chocolates and the total, based on the actual results and production levels at the end of the budget year:

     a. Direct materials price variance, direct materials quantity variance, and total variance.

     b. Direct labor rate variance, direct labor time variance, and total variance.

Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number. If there is no variance, enter a zero.

a. Direct materials price variance $
Direct materials quantity variance $
Total direct materials cost variance $

b. Direct labor rate variance $
Direct labor time variance $
Total direct labor cost variance $

2. The variance analyses should be based on the   amounts at   volumes. The budget must flex with the volume changes. If the   volume is different from the planned volume, as it was in this case, then the budget used for performance evaluation should reflect the change in direct materials and direct labor that will be required for the   production. In this way, spending from volume changes can be separated from efficiency and price variances.

Answer 1

Material Price variance = (Standard Rate – Actual Rate) * Actual Quantity

Cocoa: ($5.00 - $5.10) x 161,600 = $16160 (U)
Sugar : ($0.60 - $0.55) x 214,300 = $10715 (F)

Total = $16160(U) + $10715(F) = 5445 (U)

Materials quantity variance = (Standard Quantity – Actual Quantity) × Standard Price

Cocoa: [(12 x 3500) – (9 x 13,200) - 161,600] x $5 = $4000(U)
Sugar: [(10 x 3500) – (14 x 13200) - 214,300] x $0.60 = $3300 (F)

Total = $4000(U) + $3300 (F) = $700(U)

Total Material Cost Variance = $5445 (U) + $700(U) = $6145(U)

Labour Rate variance = (Standard Rate – Actual Rate) * Actual Hours

Dark: ($14.50 - $14.00) x 1270 = $635 (F)
Light : ($14.50 - $15.00) x 6760 = $3380 (U)

Total = $635(F) + $3380(U) = $2745 (U)

Labour Time variance = (Standard Hour – Actual Hour) × Standard Rate

Dark: [(0.4 x 3500) – 1270] x $14.5 = $1885(F)
Light: [(0.5 x 13200) – 6760] x $14.5 = $2320(U)

Total = $1885(F) + $2320(U) = $435(U)

Total Labour Cost Variance = $2745 (U)+ $435(U) = $3180