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	11 lb.		8 lb.		$5
Sugar	9 lb.		13 lb.		0.6
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	4,200 cases		13,700 cases
Standard labor rate	$13 per hr.		$13 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:

	Dark Chocolate		Light Chocolate
Actual production (cases)	4,000		14,200
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$5.1		158,400
Sugar	0.55		215,100
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$12.6 per hr.		1,090
Light chocolate	13.4 per hr.		5,820

Required:

Prepare the following variance analyses for both chocolates and total, based on the actual results and production levels at the end of the budget year:

1. Direct materials price variance, direct materials quantity variance, and total variance.
2. 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	$	Favorable/Unfavorable
	Direct materials quantity variance	$	Favorable/Unfavorable
	Total direct materials cost variance	$	Favorable/Unfavorable
b.	Direct labor rate variance	$	Favorable/Unfavorable
	Direct labor time variance	$	Favorable/Unfavorable
	Total direct labor cost variance	$	Favorable/Unfavorable

2. The variance analyses should be based on the ACTUAL/STANDARD amounts at ACTUAL/STANDARD volumes. The budget must flex with the volume changes. If the ACTUAL/STANDARD 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/STANDARD production. In this way, spending from volume changes can be separated from efficiency and price variances.

Answer 1

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Direct Material Variance	Price Per Pound	Pounds used	Amount
Cocoa	5.10	158,400.00	807,840.00
Sugar	0.55	215,100.00	118,305.00
Actual Price for Actual Quantity of Input			926,145.00	A
Cocoa	5.00	158,400.00	792,000.00
Sugar	0.60	215,100.00	129,060.00
Standard Price for Actual Quantity of Input			921,060.00	B
Cocoa (4000*11+14200*8)	5.00	157,600.00	788,000.00
Sugar (4000*9+14200*13)	0.60	220,600.00	132,360.00
Standard Price for Standard Quantity of Input			920,360.00	C
Price Variance (A-B)			5,085.00	Unfavorable
Quantity Variance (B-C)			700.00	Unfavorable
Total Variance (A-C)			5,785.00	Unfavorable
Direct Labor Variance
Dark Chocolate	12.60	1,090.00	13,734.00
Light Chocolate	13.40	5,820.00	77,988.00
Actual Price for Actual Quantity of Input			91,722.00	D
Dark Chocolate	13.00	1,090.00	14,170.00
Light Chocolate	13.00	5,820.00	75,660.00
Standard Price for Actual Quantity of Input			89,830.00	E
Dark Chocolate (4000*.3)	13.00	1,200.00	15,600.00
Light Chocolate (14200*.4)	13.00	5,680.00	73,840.00
Standard Price for Standard Quantity of Input			89,440.00	F
Price Variance (D-E)			1,892.00	Unfavorable
Quantity Variance (E-F)			390.00	Unfavorable
Total Variance (D-F)			2,282.00	Unfavorable
The Variance analysis should be based on the standard amounts at actual volumes. The budget must flex with he volume changes. If the actual volume is different than 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 change can be separated from price variation.