In: Accounting
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. | $4.30 | |||
Sugar | 10 lbs. | 14 lbs. | 0.60 | |||
Standard labor time | 0.4 hr. | 0.5 hr. |
Dark Chocolate | Light Chocolate | |||
Planned production | 4,200 cases | 13,800 cases | ||
Standard labor rate | $16.00 per hr. | $16.00 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) | 4,000 | 14,400 | ||
Actual Price per Pound | Actual Pounds Purchased and Used | |||
Cocoa | $4.40 | 178,500 | ||
Sugar | 0.55 | 235,600 | ||
Actual Labor Rate | Actual Labor Hours Used | |||
Dark chocolate | $15.60 per hr. | 1,460 | ||
Light chocolate | 16.40 per hr. | 7,380 |
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.
Cocoa |
calculation of direct material price variance: |
= (Standard price per unit of material - Actual price per unit of material) × Actual quantity |
= ($4.30/ib. - $4.40/ib ) × 178500 ib. = $17850 U F |
Calculation of direct material quantity variance |
=(standard quantity of material required for actual production - actual quantity used) × Standard price per unit |
((12 ibs. X 4000 Unit)+(9ibsX14400)-178500)X $4.30= $3870 U F |
For Sugar |
calculation of direct material price variance: |
= (Standard price per unit of material - Actual price per unit of material) × Actual quantity |
= ($0.60 - $0.55 ) × 235600 = $11780 F |
Calculation of direct material quantity variance |
=(standard quantity of material required for actual production - actual quantity used) × Standard price per unit |
((10 ibs. X 4000 Unit)+(14 ibsX14400)-235600)X $0.60= $3600 F |
Total Material Price Variance= $17850 UF+$11780 F= $6070 UF |
Total Material Quantity Variance= $3870 UF+ $3600 F=$270 UF |
Total Material Cost Variance= $6070 UF+ $270 UF= $6340UF |
Dark Choclate |
Calculation of direct labor rate variance |
= (Standard direct labor rate per hour - actual direct labor rate per hour) × Actual hours used |
= ($16/hour - $15.60/hour) × 1460 Hours= $584 F |
Calculation of direct labor efficiency variance: |
= (standard hours required for actual production - actual hours used) × standard overhead recovery rate |
= (0.40 Hour × 4200 Unit - 1460) × $16 = $3520 F |
Light Choclate |
Calculation of direct labor rate variance |
= (Standard direct labor rate per hour - actual direct labor rate per hour) × Actual hours used |
= ($16/hour - $16.40/hour) × 7380 Hours= $2952 UF |
Calculation of direct labor efficiency variance: |
= (standard hours required for actual production - actual hours used) × standard overhead recovery rate |
= (0.50 Hour × 13800 Unit - 7380) × $16 = $7680 U F |
Total LAbour Rate Variance= $584 F+ $2952 UF= $2368 UF |
Total Labour Efficiency Variance= $3520F+$7680 UF=$4160 U F |
Total Labour Cost Variance = $2368UF+ $4160 UF=$6528UF |