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Flexible Budgeting and Variance Analysis I Love My Chocolate Company makes dark chocolate and light chocolate....

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. $4.40
Sugar 10 lbs. 14 lbs. 0.60
Standard labor time 0.4 hr. 0.5 hr.
Dark Chocolate Light Chocolate
Planned production 5,600 cases 12,200 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) 5,300 12,700
     Actual Price per Pound      Actual Pounds Purchased and Used
Cocoa $4.50 178,800
Sugar 0.55 225,000
Actual Labor Rate      Actual Labor Hours Used
Dark chocolate $15.60 per hr. 1,930
Light chocolate 16.40 per hr. 6,510

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 $ Favorable
Direct materials quantity variance $ Favorable
Total direct materials cost variance $ Favorable
b. Direct labor rate variance $ Unfavorable
Direct labor time variance $ Unfavorable
Total direct labor cost variance $ Unfavorable

2. The variance analyses should be based on the actual  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.

Solutions

Expert Solution

1.

a. Direct materials price variance $ 6,630.00 U
Direct materials quantity variance $     480.00 U
Total direct materials cost variance $ 7,110.00 U
b. Direct labor rate variance $ 1,832.00 U
Direct labor time variance $   (480.00) F
Total direct labor cost variance $ 1,352.00 U
Direct Material Price Variance
Cocoa Sugar Total
Actual Price $                           4.50 $                            0.55
Standard Price $                           4.40 $                            0.60
Difference $                        0.100 $                          (0.05)
Actual Quantity 178800 225000
Direct Material Price Variance $                17,880.00 $               (11,250.00) $          6,630.00
Unfavorable Favorable Unfavorable
Dark Light Total Standard Quantity
Cocoa 63600 114300 177900
Sugar 53000 177800 230800
Direct Material Quantity Variance
Cocoa Sugar Total
Actual Quantity 178800 225000
Standard Quantity 177900 230800
Difference 900 -5800
Standard Price $                           4.40 $                            0.60
Direct Material Quantity Variance $                  3,960.00 $                 (3,480.00) $              480.00
Unfavorable Favorable Unfavorable
Direct labor rate Variance
Dark Light Total
Actual Rate $                        15.60 $                          16.40
Standard Rate $                        16.00 $                          16.00
Difference $                        (0.40) $                            0.40
Actual time 1930 6510
Direct labor rate Variance $                    (772.00) $                    2,604.00 $          1,832.00
Favorable Unfavorable Unfavorable
Direct labor time Variance
Dark Light Total
Actual hours 1930 6510
Standard hours 2120 6350
Difference -190 160
Standard rate $                        16.00 $                          16.00
Direct labor time Variance $                (3,040.00) $                    2,560.00 $            (480.00)
Favorable Unfavorable Favorable

2.

The variance analyses should be based on the actual 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.


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