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 lbs.		9 lbs.		$4.40
Sugar	10 lbs.		14 lbs.		0.60
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	5,800 cases		11,800 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)	5,500		12,300
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$4.50		177,600
Sugar	0.55		221,500
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$14.00 per hr.		1,500
Light chocolate	15.00 per hr.		5,040

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. 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	$

Part 2:

Net Present Value Method, Present Value Index, and Analysis for a service company

Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows:

		Maintenance Equipment		Ramp Facilities		Computer Network
Amount to be invested		$884,770		$605,076		$286,452
Annual net cash flows:
	Year 1	419,000		306,000		193,000
	Year 2	390,000		275,000		133,000
	Year 3	356,000		245,000		97,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Required:

1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each proposal. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

	Maintenance Equipment	Ramp Facilities	Computer Network
Present value of net cash flow total	$	$	$
Amount to be invested	$	$	$
Net present value	$	$	$

2. Determine a present value index for each proposal. If required, round your answers to two decimal places.

	Present Value Index
Maintenance Equipment
Ramp Facilities
Computer Network

Answer 1

Part - I
Direct Material Price Variance = (Actual price - Budgeted price) x Actual quantity
Direct Material Quantity Variance = (Actual usage in units - Standard usage in units) x Standard cost per unit

Direct Labor Rate Variance = (Actual rate - Standard rate) x Actual hours worked
Direct Labor Time Variance = (Actual hours - Standard hours) x Standard rate

		Coco		Sugar		Total
	Standard Quantity for Actual Production
	Dark Choclate	66000	5500 x12	55000	5500 x 10
	Light	110700	12300 x 9	172200	12300 x 14
1	Total	176700		227200
2	Standard Rate	4.4		0.6
3	Actual Material	177600		221500
4	Actual Price	4.5		0.55
5	Difference in Price (2-3)	0.1		-0.05
6	Direct Material Price Variance (5x3)	17760		-11075		6685
7	Difference In Quantity (1-3)	900		-5700
8	Direct Material Quantity Variance (7x2)	3960		-3420		540
	Total Material Cost Variance					7225

		Dark		Light		Total
1	Standard Hours for Actual Production	1650	5500 x 0.30	4920	12300 x 0.40
2	Standard Rate	14.5		14.5
3	Actual Hours	1500		5040
4	Actual Rate	14		15
5	Difference in Price (2-3)	-0.5		0.5
6	Direct Labor Price Variance (5x3)	-750		2520		1770
7	Difference In Time (1-3)	-150		120
8	Direct Labor Time Variance (7x2)	-2175		1740		-435
	Total Labor Cost Variance					1335

Part - II

		Maintenance Equipment		Ramp Facilities		Computer Network
Year	PV @ 15%	Annual Net Cash Flows	PV of Cash Flows	Annual Net Cash Flows	PV of Cash Flows	Annual Net Cash Flows	PV of Cash Flows
1	0.870	419000	364530	306000	266220	193000	167910
2	0.756	390000	294840	275000	207900	133000	100548
3	0.658	356000	234248	245000	161210	97000	63826
Total			893618		635330		332284

	Maintenance Equipment	Ramp Facilities	Computer Network
PV of net cash flows	$    893,618.00	$ 635,330.00	$ 332,284.00
Amount to be invested	$    884,770.00	$ 605,076.00	$ 286,452.00
Net Present Value	$        8,848.00	$    30,254.00	$    45,832.00

Present Value Index = NPV / Initial Outlay
Maintenance Activities = $8848 / $884770 = 0.01
Ramp Facilites = $30254 / $605076 = 0.05
Computer Network = $45832 / $332284 = 0.16