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 Standard Price per Dark Light Chocolate Chocolate Pound Cocoa 9 lb. 6 lb. $5.2 11 lb Sugar 7 lb. 0.6 Standard labor 0.3 hr 0.4 hr time Dark Chocolate Light Chocolate 5,100 cases 11,500 cases Planned production $16.5 per hr $16.5 per hr. Standard labor rate 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 4,800 12,000 (cases) Actual Price per Actual Pounds Purchased and Pound Used Сосоа $5.3 115,800

Answer 1

Cocoa

calculation of direct material price variance:

= (Standard price per unit of material - Actual price per unit of material) × Actual quantity

= ($5.20/ib. - $5.30/ib ) × 115800 ib. = $11580 U F

Calculation of direct material quantity variance

=(standard quantity of material required for actual production - actual quantity used) × Standard price per unit

((9 ibs. X 4800 Unit)+(6ibsX12000)-115800)X $5.20= $3120 U F

For Sugar

calculation of direct material price variance:

= (Standard price per unit of material - Actual price per unit of material) × Actual quantity

= ($0.60 - $0.55 ) × 161500 = $8075 F

Calculation of direct material quantity variance

=(standard quantity of material required for actual production - actual quantity used) × Standard price per unit

((7 ibs. X 4800 Unit)+(11 ibsX12000)-161500)X $0.60= $2460 F

Total Material Price Variance= $11580 UF+$8075 F= $3505 UF

Total Material Quantity Variance= $3120 UF+ $2460 F=$660 UF

Total Material Cost Variance= $3505 UF+ $660 UF= $4165UF

Dark Choclate

Calculation of direct labor rate variance

= (Standard direct labor rate per hour - actual direct labor rate per hour) × Actual hours used

= ($16.5/hour - $16.20/hour) × 1310 Hours= $393 F

Calculation of direct labor efficiency variance:

= (standard hours required for actual production - actual hours used) × standard rate

= (0.30 Hour × 4800 Unit - 1310) × $16.50 = $2145 F

Light Choclate

Calculation of direct labor rate variance

= (Standard direct labor rate per hour - actual direct labor rate per hour) × Actual hours used

= ($16.50/hour - $16.80/hour) × 4920 Hours= $1476 UF

Calculation of direct labor efficiency variance:

= (standard hours required for actual production - actual hours used) × standard rate

= (0.40 Hour × 12000 Unit - 4920) × $16.50 = $1980 U F

Total LAbour Rate Variance= $393 F+ $1476 UF= $1083 UF

Total Labour Efficiency Variance= $2145F+$1980 UF=$165 F

Total Labour Cost Variance = $1083 UF+ $165F=$918 UF

The variance analyses should be based on the standard 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.