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 | 10 lbs. | 7 lbs. | $5.10 | |||
Sugar | 8 lbs. | 12 lbs. | 0.60 | |||
Standard labor time | 0.3 hr. | 0.4 hr. |
Dark Chocolate | Light Chocolate | |||
Planned production | 5,800 cases | 13,800 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 | 14,400 | ||
Actual Price per Pound | Actual Pounds Purchased and Used | |||
Cocoa | $5.20 | 156,600 | ||
Sugar | 0.55 | 211,400 | ||
Actual Labor Rate | Actual Labor Hours Used | |||
Dark chocolate | $14.10 per hr. | 1,500 | ||
Light chocolate | 14.90 per hr. | 5,900 |
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.
a. | Direct materials price variance | $fill in the blank 1 | |
Direct materials quantity variance | $fill in the blank 3 | ||
Total direct materials cost variance | $fill in the blank 5 | ||
b. | Direct labor rate variance | $fill in the blank 7 | |
Direct labor time variance | $fill in the blank 9 | ||
Total direct labor cost variance | $fill in the blank 11 |
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.
1.
a. | Direct materials price variance | $ 5,090.00 | U |
Direct materials quantity variance | $ 840.00 | U | |
Total direct materials cost variance | $ 5,930.00 | U | |
b. | Direct labor rate variance | $ 2,064.00 | U |
Direct labor time variance | $ 6,525.00 | U | |
Total direct labor cost variance | $ 8,589.00 | U |
Working
Direct Material Price Variance | |||
Cocoa | Sugar | Total | |
Actual Price | $ 5.20 | $ 0.55 | |
Standard Price | $ 5.10 | $ 0.60 | |
Difference | $ 0.10 | $ -0.05 | |
Actual Quantity (Units) | 156600 | 211400 | |
Direct Material Price Variance | $ 15,660.00 | $ -10,570.00 | $ 5,090.00 |
Unfavorable | Favorable | Unfavorable | |
Dark | Light | Total Standard Quantity | |
Cocoa | 55000 | 100800 | 155800 |
Sugar | 44000 | 172800 | 216800 |
Direct Material Qunatity Variance | |||
Cocoa | Sugar | Total | |
Actual Quantity | 156600 | 211400 | |
Standard Quantity | 155800 | 216800 | |
Difference | 800 | -5400 | |
Standard Price | $ 5.10 | $ 0.60 | |
Direct Material Qunatity Variance | $ 4,080.00 | $ -3,240.00 | $ 840.00 |
Unfavorable | Favorable | Unfavorable | |
Direct Labor Rate Variance | |||
Dark | Light | Total | |
Actual Rate | $ 14.10 | $ 14.90 | |
Standard Rate | $ 14.50 | $ 14.50 | |
Difference | $ -0.40 | $ 0.40 | |
Actual Hours | 1350 | 6510 | |
Direct Labor Rate Variance | $ -540.00 | $ 2,604.00 | $ 2,064.00 |
Favorable | Unfavorable | Unfavorable | |
Direct Labor Time Variance | |||
Dark | Light | Total | |
Actual Hours | 1350 | 6510 | |
Standard Hours | 1650 | 5760 | |
Difference | -300 | 750 | |
Standard Rate | $ 14.50 | $ 14.50 | |
Direct Labor Time Variance | $ -4,350.00 | $ 10,875.00 | $ 6,525.00 |
Favorable | Unfavorable | Unfavorable |
2. The variance analyses should be based on the 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.
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