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.		$4.60
Sugar	8 lbs.		12 lbs.		0.60
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	3,900 cases		10,300 cases
Standard labor rate	$14.50 per hr.		$14.50 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)	3,700		10,700
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.70		112,500
Sugar	0.55		154,100
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.10 per hr.		1,010
Light chocolate	14.90 per hr.		4,390

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	Sugar	Total
Actual Price	$              4.70	$              0.55
Standard Price	$              4.60	$              0.60
Difference	$            0.100	$            (0.05)
Actual Quantity	112500	154100
Direct Material Price Variance	$   11,250.00	$   (7,705.00)	$      3,545.00
	Unfavorable	Favorable	Unfavorable
	Dark	Light	Total Standard Quantity
Cocoa	37000	74900	111900
Sugar	29600	128400	158000
Direct Material Quantity Variance
	Cocoa	Sugar	Total
Actual Quantity	112500	154100
Standard Quantity	111900	158000
Difference	600	-3900
Standard Price	$              4.60	$              0.60
Direct Material Quantity Variance	$      2,760.00	$   (2,340.00)	$         420.00
	Unfavorable	Favorable	Unfavorable
Direct labor rate Variance
	Dark	Light	Total
Actual Rate	$            14.10	$            14.90
Standard Rate	$            14.50	$            14.50
Difference	$            (0.40)	$              0.40
Actual time	1010	4390
Direct labor rate Variance	$       (404.00)	$      1,756.00	$      1,352.00
	Favorable	Unfavorable	Unfavorable
Direct labor time Variance
	Dark	Light	Total
Actual hours	1010	4390
Standard hours	1110	4280
Difference	-100	110
Standard rate	$            14.50	$            14.50
Direct labor time Variance	$   (1,450.00)	$      1,595.00	$         145.00
	Favorable	Unfavorable	Unfavorable

a.	Direct materials price variance	$      3,545.00	U
	Direct materials quantity variance	$         420.00	U
	Total direct materials cost variance	$      3,965.00	U
b.	Direct labor rate variance	$      1,352.00	U
	Direct labor time variance	$         145.00	U
	Total direct labor cost variance	$      1,497.00	U

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.