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.		$4.50
Sugar	8 lbs.		12 lbs.		0.60
Standard labor time	0.4 hr.		0.5 hr.

	Dark Chocolate		Light Chocolate
Planned production	4,800 cases		10,700 cases
Standard labor rate	$15.00 per hr.		$15.00 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)	4,600		11,100
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.60		124,300
Sugar	0.55		165,800
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.50 per hr.		1,670
Light chocolate	15.50 per hr.		5,690

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 (ACUTAL OR STANDARD) amounts at (ACTUAL OR STANDARD) volumes. The budget must flex with the volume changes. If the (ACTUAL OR STANDARD) 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 OR STANDARD)  production. In this way, spending from volume changes can be separated from efficiency and price variances.

Answer 1

		Cocoa	Sugar	Total
a	Direct material price variance	-12,430	8290	-4,140
	Direct material quantity variance	-5850	1800	-4,050
	Total direct material cost variance	-18280	10090	-8,190
b	Direct labor rate variance			-2,010.00
	Direct labor efficiency variance			-300.00
	Direct labor total cost variance			-2,310.00

workings:

Cocoa
Standard quantity required for actual production	Standard rate	Standard cost	Actual quantity used	Actual rate	Actual cost
SQ	SP	SC	AQ	AP	AC
a	b	c=a*b	d	e	f=d*e
1,23,000.00	4.50	5,53,500.00	1,24,300.00	4.6	5,71,780.00
Total material cost/spending variance		SQ*SP - AQ*AP
		553500-571780
		-18280
		18280 U
Material price variance		AQ*(SP-AP)
		124300*(4.5-4.6)
		-12430
		12430 U
Material usage/quantity variance		SP*(SQ-AQ)
		4.5*(123000-124300)
		-5850
		5850 U

Cocoa
Standard quantity required for actual production	Standard rate	Standard cost	Actual quantity used	Actual rate	Actual cost
SQ	SP	SC	AQ	AP	AC
a	b	c=a*b	d	e	f=d*e
1,68,800.00	0.60	1,01,280.00	1,65,800.00	0.55	91,190.00
Total material cost/spending variance		SQ*SP - AQ*AP
		101280-91190
		10090
		10090 F
Material price variance		AQ*(SP-AP)
		165800*(0.6-0.55)
		8290
		8290 F
Material usage/quantity variance		SP*(SQ-AQ)
		0.6*(168800-165800)
		1800
		1800 F

	Cocoa
	Standard quantity required for actual output
	Particulars	Dark choc	Light choc	Total
a	Actual output	4,600	11,000
b	Direct material required per unit of output	10.0	7
c=a*b	Standard quantity of direct material required	46,000	77,000	1,23,000
	Sugar
	Standard quantity required for actual output
	Particulars	Dark choc	Light choc	Total
a	Actual output	4,600	11,000
b	Direct material required per unit of output	8.0	12
c=a*b	Standard quantity of direct material required	36,800	1,32,000	1,68,800

Standard Hours	Standard rate	Standard cost	Actual Hours	Actual rate	Actual cost
a	b	c=a*b	d	e	f=d*e
SH	SR	SC	AH	AR	AC
7,340.00	15.00	1,10,100.00	7,360.00	15.27	1,12,410.00
Labor cost variance		SC-AC
		110100-112410
		-2,310.00
		2310 U
Labor rate/Price variance		AH*(SR-AR)
		7360*(15-15.27)
		-2,010.00
		2010 U
Labor efficiency variance		SR*(SH-AH)
		15*(7340-7360)
		-300.00
		300 U

	Standard hours required for actual output
	Particulars	Dark choc	Light choc	Total
	Actual output	4600	11000	15600
	Hours required per set	0.4	0.5
	Standard hours required	1840	5500	7340
	Actual labor rate per hour:	Dark choc	Light choc	Total
a	Number of hours worked	1,670	5,690	7,360
b	Actual rate per hour	14.50	15.50
c= a*b	Actual labor cost	24,215	88,195	1,12,410
	Average cost per labor hour			15.27