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

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

Answer 1

1.

a. Direct Material Price Variance = (Standard Price – Actual Price) x Actual Quantity

For Cocoa = (4.5 -4.6) x 124,300 = -12,430 U

For Sugar = (0.60 - 0.55) x 165,800 = 8,290 F

Total Direct Material Price Variance = -4,140 U

Direct materials quantity variance = (Standard Quantity – Actual Quantity) x Standard Price

Standard Quantity for Cocoa = (4,600 x 10) + (11,100 x 7) = 123,700

Standard Quantity for Cocoa = (4,600 x 8) + (11,100 x 12) = 170,000

Thereofore,

Direct materials quantity variance for Cocoa = (123,700 - 124,300) x 4.50 = -2,700 U

Direct materials quantity variance for Sugar = (170,000 - 165,800) x 0.60 = 2,520 F

Total Direct materials quantity variance = -180 U

Total Direct Material Variance = Standard Cost - Actual Cost

For Cocoa = 123,700 x 4.50 - 124,300 x 4.6 = -15,130 U

For Sugar = 170,000 x 0.6 - 165,800 x 0.55 = 10,810 F

Total Direct Material Variance = -4,320

b.  Labor rate variance = (Actual rate - Standard rate) x Actual hours worked

For Dark Chocolate = (14.50 - 15.00) x 1,670 = -835 F

For Light Chocolate = (15.50 - 15.00) x 5,690 = 2,845 U

Total Labor rate variance = 2,010 U

Direct labor time variance = (Actual hours - Standard hours) x Standard rate

Standard Hours for Dark Chocolate = 4,600 x 0.4 = 1,840

Standard Hours for Light Chocolate = 11,100 x 0.5 = 5,550

Therefore,

Direct labor time variance for Dark Chocolate = (1,670 - 1,840) x 15 = -2,550 F

Direct labor time variance for Light Chocolate = (5,690 - 5,550) x 15 = 2,100 U

Total Direct labor time variance = 450 F

Total Direct Labor variance = Standard Cost of Labour - Actual Cost of Labour

For Dark Chocolate = 1,840 x 15 - 1,670 x 14.50 = 3,385 F

For Light Chocolate = 5,550 x 15 - 5,690 x 15.50 = -4,945 U

Total Direct Labor variance = -1,560 U

The results can be summarised as under: