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	12 lb.		9 lb.		$4.8
Sugar	10 lb.		14 lb.		0.6
Standard labor time	0.4 hr.		0.5 hr.

	Dark Chocolate		Light Chocolate
Planned production	4,000 cases		12,200 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)	3,800		12,700
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.9		160,700
Sugar	0.55		210,400
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.7 per hr.		1,380
Light chocolate	15.3 per hr.		6,510

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

Total 1.a. Direct Material Price Variance Actual pound purchased Standard rate Actual purchase at standard rate Actual rate Actual purchase at actual rate Direct material price variance Cocoa 160700 4.8 771360 4.9 787430 16070 Sugar 210400 0.6 126240 0.55 115720 -10520 5550 Unfavourable Direct Material Quantity Variance Dark chocolate Cocoa Sugar Total Standard rate Actual pounds used Actual usage at standard rate Standard usage allowed for actual production Light chocolate Total Cocoa Sugar Cocoa Sugar 4.8 0.6 160700 210400 771360 126240 1 14300 177800 159900 215800 (12700 x 9) (12700 x 14) (45600 + 114300) (38000 + 177800) 767520 129480 3840 -3240 45600 (3800 x 12) 38000 (3800 x 10) Standard usage at standard rate Direct material quantity variance 600 Unfavourable Total direct materials cost variance (5550+600) 6150 Unfavourable

15 1.b. Direct labor rate variance Actual direct labor hours Standard rate Actual labor cost at standard rate Actual rate Actual labor cost at actual rate Total Direct labor rate variance Dark chocolate Light chocolate 1380 6510 15 20700 97650 14.7 15.3 20286 99603 -414 1953 1539 Unfavourable Direct labor time variance Dark chocolate Light chocolate Standard rate Actual direct labor hours 1380 6510 Actual labor cost at standard rate 20700 97650 Standard direct labor hours for actual production 1520 6350 (3800 x 0.40) (12700 x 0.50) Standard labor cost at standard rate 22800 95250 Direct labor time variance -2100 2400 300 Unfavourable Total direct labor cost variance (1539 + 300) 1839 Unfavourable

2. The variance analysis should be based on the standard/planned 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.