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	10 lbs.		7 lbs.		$4.90
Sugar	8 lbs.		12 lbs.		0.60
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	5,500 cases		11,400 cases
Standard labor rate	$14.00 per hr.		$14.00 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)	5,200		11,900
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$5.00		136,000
Sugar	0.55		179,800
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$13.70 per hr.		1,420
Light chocolate	14.30 per hr.		4,880

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

1.

Direct material price variance = (Standard price - Actual price) * Actual quantity

Cocoa = ($4.90 - $5) * 136,000 = $13,600 Unfavorable

Sugar = ($0.60 - $0.55) * 179,800 = $8,990 Favorable

Total Direct material price variance = $4,610 Unfavorable

Direct material quantity variance = (Standard quantity - Actual quantity) * Standard price

Standard quantity (Cocoa) = (5,200*10 + 11,900*7) = 135,300

Standard quantity (Sugar) = (5,200*8 + 11,900*12) = 184,400

Direct material quantity variance :

Cocoa = (135,300 - 136,000) * $4.90 = $3,430 Unfavorable

Sugar = (184,400 - 179,800) * $0.60 = $2,760 Favorable

Total Direct material quantity variance = $670 Unfavorable

Total direct material cost variance :

Cocoa = $3,430 U + $13,600 U = $17,030 Unfavorable

Sugar = $8,990 F + $2,760 F = $11,750 Favorable

Total direct material cost variance = $5,280 Unfavorable

2.

Direct labor rate variance = (Standard rate - Actual rate) * Actual hours

Dark chocolate = ($14 - $13.70) * 1,420 = $426 Favorable

Light chocolate = ($14 - $14.30) * 4,880 = $1,464 Unfavorable

Total Direct labor rate variance = $1,038 Unfavorable

Direct labor time variance = (Standard hours - Actual hours) * Standard rate

Standard hours = 5,200*0.3 = 1,560 hours

Dark chocolate = (1,560 - 1,420) * $14 = $1,960 Favorable

Standard hours = 11,900*0.4 = 4,760 hours

Light chocolate = (4,760 - 4,880) * $14 = $1,680 Unfavorable

Total Direct labor time variance = $280 Favorable

Total direct labor cost variance :

Dark chocolate = $1,960 F + $426 F = $2,386 Favorable

Light chocolate = $1,680 U + $1,464 U = $3,144 Unfavorable

Total direct labor cost variance = $758 Unfavorable

3.

The variance analysis 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 planned volumes, 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.

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