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. 8 lbs. $7.25 Sugar 10 lbs. 14 lbs. 1.40 Standard labor time 0.50 hr. 0.60 hr. Dark Chocolate Light Chocolate Planned production 4,700 cases 11,000 cases Standard labor rate $15.50 per hr. $15.50 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) 5,000 10,000 Actual Price per Pound Actual Pounds Purchased and Used Cocoa $7.33 140,300 Sugar 1.35 188,000 Actual Labor Rate Actual Labor Hours Used Dark chocolate $15.25 per hr. 2,360 Light chocolate 15.80 per hr. 6,120 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. 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, direct materials quantity variance, and total variance. b. Direct labor rate variance, direct labor time variance, and total variance. 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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Flexible
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. | 8 lbs. | $7.25 | |||
| Sugar | 10 lbs. | 14 lbs. | 1.40 | |||
| Standard labor time | 0.50 hr. | 0.60 hr. |
| Dark Chocolate | Light Chocolate | |||
| Planned production | 4,700 cases | 11,000 cases | ||
| Standard labor rate | $15.50 per hr. | $15.50 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) | 5,000 | 10,000 | ||
| Actual Price per Pound | Actual Pounds Purchased and Used | |||
| Cocoa | $7.33 | 140,300 | ||
| Sugar | 1.35 | 188,000 | ||
| Actual Labor Rate | Actual Labor Hours Used | |||
| Dark chocolate | $15.25 per hr. | 2,360 | ||
| Light chocolate | 15.80 per hr. | 6,120 |
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. 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, direct materials quantity variance, and total variance.
b. Direct labor rate variance, direct labor time variance, and total variance.
| 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.
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