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	11 lbs.		8 lbs.		$4.20
Sugar	9 lbs.		13 lbs.		0.60
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	3,800 cases		11,600 cases
Standard labor rate	$16.50 per hr.		$16.50 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)	3,600		12,100
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.30		137,100
Sugar	0.55		185,000
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$16.20 per hr.		980
Light chocolate	16.80 per hr.		4,960

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.

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

a.	Direct materials price variance	$          4,460.00	U
	Direct materials quantity variance	$             120.00	U
	Total direct materials cost variance	$          4,580.00	U
b.	Direct labor rate variance	$          1,194.00	U
	Direct labor time variance	$             330.00	U
	Total direct labor cost variance	$          1,524.00	U

Direct Material Price Variance
	Cocoa	Sugar	Total
Actual Price	$                  4.30	$                  0.55
Standard Price	$                  4.20	$                  0.60
Difference	$                  0.10	$                -0.05
Actual Quantity (Units)	137100	185000
Direct Material Price Variance	$        13,710.00	$         -9,250.00	$         4,460.00
	Unfavorable	Favorable	Unfavorable
	Dark	Light	Total Standard Quantity
Cocoa	39600	96800	136400
Sugar	32400	157300	189700
Direct Material Qunatity Variance
	Cocoa	Sugar	Total
Actual Quantity	137100	185000
Standard Quantity	136400	189700
Difference	700	-4700
Standard Price	$                  4.20	$                  0.60
Direct Material Qunatity Variance	$          2,940.00	$         -2,820.00	$            120.00
	Unfavorable	Favorable	Unfavorable
Direct Labor Rate Variance
	Dark	Light	Total
Actual Rate	$               16.20	$                16.80
Standard Rate	$               16.50	$                16.50
Difference	$                -0.30	$                  0.30
Actual Hours	980	4960
Direct Labor Rate Variance	$            -294.00	$          1,488.00	$         1,194.00
	Favorable	Unfavorable	Unfavorable
Direct Labor Time Variance
	Dark	Light	Total
Actual Hours	980	4960
Standard Hours	1080	4840
Difference	-100	120
Standard Rate	$               16.50	$                16.50
Direct Labor Time Variance	$        -1,650.00	$          1,980.00	$            330.00
	Favorable	Unfavorable	Unfavorable

2.
The variance analyses should be based on the standard amounts at actual volumes. The budget must flex with the volume changes. If the actual 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 actual production. In this way, spending from volume changes can be separated from efficiency and price variances.