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.		$4.20
Sugar	8 lbs.		12 lbs.		0.60
Standard labor time	0.4 hr.		0.5 hr.

	Dark Chocolate		Light Chocolate
Planned production	4,400 cases		13,300 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)	4,200		13,800
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.30		139,300
Sugar	0.55		194,200
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$16.20 per hr.		1,530
Light chocolate	16.80 per hr.		7,070

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	$fill in the blank 1
	Direct materials quantity variance	$fill in the blank 3
	Total direct materials cost variance	$fill in the blank 5
b.	Direct labor rate variance	$fill in the blank 7
	Direct labor time variance	$fill in the blank 9
	Total direct labor cost variance	$fill in the blank 11

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
	(13,930)	Unfavourable
	Material Quantity Variance = (Standard quantity - Actual Quantity ) Standard Price
	(2,940)	Unfavorable
Sugar
	Material Price Variance = (Standard Price - Actual Price ) Actual Quantity Purchased
	9,710	Favorable
	Material Quantity Variance = (Standard quantity - Actual Quantity ) Standard Price
	3,000	Favorable
Total
	Material Price Variance	(4,220)	Unfavourable
	Material Quantity Variance	60	Favorable
	Material Cost Variance	(4,160)	Unfavourable
Dark Chocolate
	Labour Rate Variance = (Standard Rate - Actual Rate) Actual Hrs Worked
	456	Favorable
	Labour Efficiency Variance = (Standard Hrs. - Actual Hrs) Standard Rate
	2,640	Favorable
Light Chocolate	Labour Rate Variance = (Standard Rate - Actual Rate) Actual Hrs Worked
	(2,121)	Unfavorable
	Labour Efficiency Variance = (Standard Hrs. - Actual Hrs) Standard Rate
	(2,805)	Unfavorable
Total	Labor Rate Variance	(1,665)	Unfavourable
	Labour Efficiency Variance	(165)	Unfavourable
	Labour Cost Variance	(1,830)	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.