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.		$5.00
Sugar	8 lbs.		12 lbs.		0.60
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	4,000 cases		13,400 cases
Standard labor rate	$16.50 per hr.		$16.50 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)	3,800		13,900
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$5.10		136,000
Sugar	0.55		192,300
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$16.00 per hr.		1,040
Light chocolate	17.00 per hr.		5,700

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.

Answer 1

Dark Chocolate - Actual Production = 3,800 Cases
Light Chocolate - Actual Production = 13,900 Cases
	Standard			Actual
	SQ / SH	SR	Total	AQ / AH	AR	Total
Cocoa - Dark Chocolate	38,000	5.00	190,000
Cocoa - Light Chocolate	97,300	5.00	486,500
Total Cocoa	135,300	5.00	676,500	136,000	5.10	693,600
Sugar - Dark	30,400	0.60	18,240
Sugar - Light	166,800	0.60	100,080
Total Sugar	197,200	0.60	118,320	192,300	0.55	105,765
Labor - Dark	1,140	16.50	18,810	1,040	16.00	16,640
Labor - Light	5,560	16.50	91,740	5,700	17.00	96,900
Total Labor	6,700	16.50	110,550	6,740	16.85	113,540
Answer a.
Material Price Variance = (SR - AR) X AQ
Material Price Variance - Cocoa = ($5.00 - $5.10) X 136,000 pounds
Material Price Variance - Cocoa = $13,600 (U)
Material Price Variance - Sugar = ($0.60 - $0.55) X 192,300 pounds
Material Price Variance - Sugar = $9,615 (F)
Material Quantity Variance = (SQ - AQ) X SR
Material Quantity Variance - Cooca = (135,300 pounds - 136,000 pounds) X $5
Material Quantity Variance - Cooca = $3,500 (U)
Material Quantity Variance - Sugar = (197,200 pounds - 192,300 pounds) X $0.60
Material Quantity Variance - Sugar = $2,940 (F)
Material Price Variance
Cocoa	13,600	(U)
Sugar	9,615	(F)
Total Material Price Variance			3,985	(U)
Material Quantity Variance
Cocoa	3,500	(U)
Sugar	2,940	(F)
Total Material Quantity Variance			560	(U)
Total Material Cost Variance			4,545	(U)
Answer b.
Labor Rate Variance = (SR - AR) X AH
Labor Rate Variance - Dark = ($16.50 - $16.00) X 1,040 hrs
Labor Rate Variance - Dark = $520 (F)
Labor Rate Variance - Light = ($16.50 - $17.00) X 5,700 hrs
Labor Rate Variance - Light = $2,850 (U)
Labor Time (Efficiency) Variance = (SH - AH) X SR
Labor Time (Efficiency) Variance - Dark = (1,140 Hrs - 1,040 hrs) X $16.50
Labor Time (Efficiency) Variance - Dark = $1,650 (F)
Labor Time (Efficiency) Variance - Light = (5,560 hrs - 5,700 hrs) X $16.50
Labor Time (Efficiency) Variance - Light = $2,310 (U)
Labor Rate Variance
Dark	520	(F)
Light	2,850	(U)
Total Labor Rate Variance			2,330	(U)
Labor Time Variance
Dark	1,650	(F)
Light	2,310	(U)
Total Labor Time Variance			(660)	(F)
Total Labor Cost Variance			2,990	(U)
Answer 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 isolated from efficiency and price variances.