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 Light Chocolate Standard Price per Pound Chocolate Cocoa 12 lb. 9 lb. $5.3 0.6 Sugar 10 lb. 14 lb. Standard labor 0.4 hr. 0.5 hr. time Dark Chocolate Light Chocolate Planned production 5,400 cases 10,100 cases Standard labor rate $14 per hr. $14 per hr. I Love My Chocolate 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:

Answer 1

Direct Material Price Variance
	Cocoa	Sugar	Total
Actual Price	$              5.40	$                0.55
Standard Price	$              5.30	$                0.60
Difference	$              0.10	$               -0.05
Actual Quantity (Units)	156500	193100
Direct Material Price Variance	$    15,650.00	$       -9,655.00	$        5,995.00
	Unfavorable	Favorable	Unfavorable

	Dark	Light	Total Standard Quantity
Cocoa	61200	94500	155700
Sugar	51000	147000	198000
Direct Material Quantity Variance
	Cocoa	Sugar	Total
Actual Quantity	156500	193100
Standard Quantity	155700	198000
Difference	800	-4900
Standard Price	$              5.30	$                0.60
Direct Material Qunatity Variance	$      4,240.00	$       -2,940.00	$        1,300.00
	Unfavorable	Unfavorable	Unfavorable

Direct Labor Rate Variance
	Dark	Light	Total
Actual Rate	$            13.70	$              14.30
Standard Rate	$            14.00	$              14.00
Difference	$             -0.30	$                0.30
Actual Hours	1860	5380
Direct Labor Rate Variance	$        -558.00	$         1,614.00	$        1,056.00
	Favorable	Unfavorable	Unfavorable

Direct Labor Time Variance
	Dark	Light	Total
Actual Hours	1860	5380
Standard Hours	2040	5250
Difference	-180	130
Standard Rate	$            14.00	$              14.00
Direct Labor Time Variance	$     -2,520.00	$         1,820.00	$          -700.00
	Favorable	Unfavorable	Favorable

a.	Direct materials price variance	$      5,995.00	U
	Direct materials quantity variance	$      1,300.00	U
	Total direct materials cost variance	$      7,295.00	U
b.	Direct labor rate variance	$      1,056.00	U
	Direct labor time variance	$        -700.00	F
	Total direct labor cost variance	$          356.00	U

2. The variance analyses should be based on the budgeted 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.