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	9 lb.		6 lb.		$4.8
Sugar	7 lb.		11 lb.		0.6
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	3,800 cases		13,100 cases
Standard labor rate	$14 per hr.		$14 per hr.

I Love My Chocolate 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		13,600
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.9		114,600
Sugar	0.55		170,400
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$13.5 per hr.		980
Light chocolate	14.5 per hr.		5,580

Required:

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

1. Direct materials price variance, direct materials quantity variance, and total variance.
2. 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

1
a.	Direct materials price variance:
						Cocoa	Sugar	Total
	Actual price					4.9	0.55
	Standard price					4.8	0.6
	Difference				a	0.1	0.05
	Actual quantity (units)				b	114600	170400
	Direct materials price variance				a*b	11460	8520	2940
	Indicate if favorable or unfavorable					Unfavorable	Favorable	Unfavorable
	If actual price > Standard price,variance is unfavorable.Otherwise favorable
	Direct materials quantity variance:
						Cocoa	Sugar	Total
	Actual quantity					114600	170400
	Standard quantity				(Note:1)	114000	174800
	Difference					600	4400
	Standard price					4.8	0.6
	Direct materials quantity variance					2880	2640	240
	Indicate if favorable or unfavorable					Unfavorable	Favorable	Unfavorable
	If actual quantity > Standard quantity,variance is unfavorable.Otherwise favorable
	Note:1
	Standard quantity for Cocoa:
					Dark chocolate	Light chocolate	Total
	Actual production			a	3600	13600
	Cocoa required per case			b	9	6
	Standard quantity			a*b	32400	81600	114000
	Standard quantity for Sugar:
					Dark chocolate	Light chocolate	Total
	Actual production			a	3600	13600
	Sugar required per case			b	7	11
	Standard quantity			a*b	25200	149600	174800
	Total direct materials cost variance=Direct material price variance+Direct materials quantity variance=2940+240=3180 unfavorable
b.	Direct labor rate variance:
						Dark chocolate	Light chocolate	Total
	Actual rate					13.5	14.5
	Standard rate					14	14
	Difference					0.5	0.5
	Actual time (hours)					980	5580
	Direct labor rate variance					490	2790	2300
	Indicate if favorable or unfavorable					Favorable	Unfavorable	Unfavorable
	If actual rate > Standard rate,variance is unfavorable.Otherwise favorable

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