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.		$4.50
Sugar	10 lbs.		14 lbs.		0.60
Standard labor time	0.4 hr.		0.5 hr.

	Dark Chocolate		Light Chocolate
Planned production	5,800 cases		11,700 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)	5,500		12,200
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.60		176,700
Sugar	0.55		220,200
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.60 per hr.		2,000
Light chocolate	15.40 per hr.		6,250

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.

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

Cocoa
	Material Price Variance = (Standard Price - Actual Price ) Actual Quantity Purchased
	(17,670)	Unfavourable
	Material Quantity Variance = (Standard quantity - Actual Quantity ) Standard Price
	(4,050)	Unfavorable
Sugar
	Material Price Variance = (Standard Price - Actual Price ) Actual Quantity Purchased
	11,010	Favorable
	Material Quantity Variance = (Standard quantity - Actual Quantity ) Standard Price
	3,360	Favorable
Total
	Material Price Variance	(6,660)	Unfavourable
	Material Quantity Variance	(690)	Unfavourable
	Material Cost Variance	(7,350)	Unfavourable
Dark Chocolate
	Labour Rate Variance = (Standard Rate - Actual Rate) Actual Hrs Worked
	800	Favorable
	Labour Efficiency Variance = (Standard Hrs. - Actual Hrs) Standard Rate
	3,000	Favorable
Light Chocolate	Labour Rate Variance = (Standard Rate - Actual Rate) Actual Hrs Worked
	(2,500)	Unfavorable
	Labour Efficiency Variance = (Standard Hrs. - Actual Hrs) Standard Rate
	(2,250)	Unfavorable
Total	Labor Rate Variance	(1,700)	Unfavourable
	Labour Efficiency Variance	750	Favorable
	Labour Cost Variance	(950)	Unfavourable
Q.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.