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.		$4.8
Sugar	9 lb.		13 lb.		0.6
Standard labor time	0.4 hr.		0.5 hr.

	Dark Chocolate		Light Chocolate
Planned production	5,700 cases		12,700 cases
Standard labor rate	$15 per hr.		$15 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)	5,400		13,200
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.9		165,800
Sugar	0.55		214,700
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.7 per hr.		1,970
Light chocolate	15.3 per hr.		6,760

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	$
	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

Direct Material Price Variance
	Cocoa	Sugar	Total
Actual Price	$              4.90	$                0.55
Standard Price	$              4.80	$                0.60
Difference	$              0.10	$               -0.05
Actual Quantity (Units)	165800	214700
Direct Material Price Variance	$    16,580.00	$     -10,735.00	$        5,845.00
	Unfavorable	Favorable	Unfavorable

	Dark	Light	Total Standard Quantity
Cocoa	59400	105600	165000
Sugar	48600	171600	220200
Direct Material Quantity Variance
	Cocoa	Sugar	Total
Actual Quantity	165800	214700
Standard Quantity	165000	220200
Difference	800	-5500
Standard Price	$              4.80	$                0.60
Direct Material Qunatity Variance	$      3,840.00	$       -3,300.00	$           540.00
	Unfavorable	Favorable	Unfavorable

Direct Labor Rate Variance
	Dark	Light	Total
Actual Rate	$            14.70	$              15.30
Standard Rate	$            15.00	$              15.00
Difference	$             -0.30	$                0.30
Actual Hours	1970	6760
Direct Labor Rate Variance	$        -591.00	$         2,028.00	$        1,437.00
	Favorable	Unfavorable	Unfavorable

Direct Labor Time Variance
	Dark	Light	Total
Actual Hours	1970	6760
Standard Hours	2280	6600
Difference	-310	160
Standard Rate	$            15.00	$              15.00
Direct Labor Time Variance	$     -4,650.00	$         2,400.00	$       -2,250.00
	Favorable	Unfavorable	Favorable

a.	Direct materials price variance	$      5,845.00	U
	Direct materials quantity variance	$          540.00	U
	Total direct materials cost variance	$      6,385.00	U
b.	Direct labor rate variance	$      1,437.00	U
	Direct labor time variance	$     -2,250.00	F
	Total direct labor cost variance	$        -813.00	F

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.