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	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.

Answer 1

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.