Question

1. 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 lb.		7 lb.		$4.4
   Sugar	8 lb.		12 lb.		0.6
   Standard labor time	0.3 hr.		0.4 hr.

   	Dark Chocolate		Light Chocolate
   Planned production	5,100 cases		13,800 cases
   Standard labor rate	$15.5 per hr.		$15.5 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)	4,800		14,400
   	Actual Price per Pound		Actual Pounds Purchased and Used
   Cocoa	$4.5		149,500
   Sugar	0.55		205,900
   	Actual Labor Rate		Actual Labor Hours Used
   Dark chocolate	$15 per hr.		1,310
   Light chocolate	16 per hr.		5,900

   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. Price variance is the difference between the actual and standard prices, multiplied by the actual quantity.Direct materials price variance, The cost associated with the difference between the standard quantity and the actual quantity of direct materials used in producing a commodity.direct materials quantity variance, and total variance.
   2. The cost associated with the difference between the standard rate and the actual rate paid for direct labor used in producing a commodity.Direct labor rate variance, The cost associated with the difference between standard and actual hours of direct labor spent for producing a commodity.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	$	Favorable Unfavorable
   	Direct materials quantity variance	$	Favorable Unfavorable
   	Total direct materials The difference between actual cost and the flexible budget at actual volumes.cost variance	$	Favorable Unfavorable
   b.	Direct labor rate variance	$	Favorable Unfavorable
   	Direct labor time variance	$	Favorable Unfavorable
   	Total direct labor cost variance	$	Favorable Unfavorable

   2. The variance analyses should be based on the

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

Answer 1

Ans:-

a) Direct Material Variances

Direct Material Price Variance = (Standard price per unit - Actual price per unit) Actual Quantity

Direct Material price variance of Cocoa = (4.4 - 4.5) 149500

= - $14950

Direct Material price variance of Sugar = ( 0.6 - 0.55 ) 205900

= $10295

Direct MaterialPrice Variance = (-14950 + 10295) = - $4655

So Direct material Price variance is unfavourable = $4,655

Direct Material Quantity Variance = ( Standard Quantity - Actual Quantity) Standard price   

Direct Material Quantity Variance of Cocoa=   ( ( 4800*10 + 14400*7) - 149950) 4.4

= - $3080

Direct Material Quantity Variance of Sugar = ((4800*8 + 14400*12) - 205900) 0.6

   = $3180

Direct Material Quantity Variance = (-3080 + 3180) =$100

So Direct material Quantity variance is favourable = -$ 100

Total Direct Material Variance = Budgeted Cost at Actual Volume - Actual Cost

=((4800*10 + 14400*7) 4.4 + (4800*8 + 14400*12) 0.6) - ( 149500*4.5 + 205900*0.55)

= -$4555

So Total Direct Material Variance is unfavourable = $4,555

b) Direct Labour Variance

Labour rate variance = ( Standard rate per hour - Actual rate per hour) Actual hour worked

Labour rate variance of Dark Choclate = (15.5 - 15 ) 1310

= $655

Labour rate variance of Light Choclate = (15.5 - 16 ) 5900

= - $2950

Labour Rate Variance = (605 - 2950) = -$2295

So Labour Rate Variance is unfavourable =-$2295

Labour Time Variance = ( Standard time - Actual time) Standard rate

Labour Time Varianceof Dark Chocolate =((4800*.3)-1310)* 15.5

= $2015

Labour Time Varianceof Light Chocolate = ((14400*.4) - 5900) 15.5

= -$2170

So Labour time Variance is unfavourable = $155

Total Labour Variance =  Budgeted Cost at Actual Volume - Actual Cost

=((4800*.3*15.5) +(14400*.4*15.5)) - ( (1310*15) + (5900*16))

=-$2450

So Total Labour Variance is unfavourable = $2450