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

1). Direct Material price variance = (Std price - Actual price )* Actual Qty
Cocoa = (5 - 5.10)*136000 = 13600 U
Sugar = (0.60 - 0.55)*192300 = 9615 F

Direct Material Qty variance = (Std qty for actual production - Actual Qty)*Std rate
Cocoa= Std qty for actual production = (10 lbs * 3800 cases of Dark chocolate) + (7 lbs * 13900 cases of light chocolate) = 38000 + 97300 = 135300 pounds
Sugar = Std qty for actual production = (8 lbs * 3800 cases of Dark chocolate) + (12 lbs * 13900 cases of light chocolate) = 30400 + 166800 = 197200 pounds
Direct material qty variance:
Cocoa = (135300 - 136000)* 5 = 3500 U
Sugar = (197200- 192300) * 0.60 = 2940 F

Direct material total variance = Direct material price variance + Direct material qty variance
Cocoa = 13600 U +3500 U = 17100 U
Sugar = 9615 F + 2940 F = 12555 F

Direct Labour rate variance = (std rate - Actual rate)*Actual hrs
Dark Chocolate = (16.5 - 16.0)*1040 = 520 F
Light Chocolate = (16.5 - 17.0)*5700 = 2850 U

Direct Labour time variance = (Std hrs for actual production -Actual hrs)*Std rate
Dark Chocolate = Std hrs for actual production = 0.3 hrs * 3800 cases = 1140 hrs
Light Chocolate = Std hrs for actual production = 0.4 hrs * 13900 cases = 5560 hrs
Direct Labour time variance:
Dark Chocolate = (1140 - 1040)*16.5 = 1650 F
Light Chocolate = (5560 - 5700)*16.5 = 2310 U

Total Direct labour cost variance : Direct labour rate varince + Direct labour time variance
Dark Chocolate = 520 F+ 1650 F = 2170 F
Light Chocolate = 2850 U +2310 U = 5160 U