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	9 lb.		6 lb.		$5.3
Sugar	7 lb.		11 lb.		0.6
Standard labor time	0.3 hr.		0.4 hr.

	Dark Chocolate		Light Chocolate
Planned production	5,200 cases		11,400 cases
Standard labor rate	$13 per hr.		$13 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)	4,900		11,900
	Actual Price per Pound		Actual Pounds Purchased and Used
Cocoa	$5.4		116,100
Sugar	0.55		161,100
	Actual Labor Rate		Actual Labor Hours Used
Dark chocolate	$12.5 per hr.		1,340
Light chocolate	13.5 per hr.		4,880

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	$fill in the blank 1	FavorableUnfavorableUnfavorable
	Direct materials quantity variance	$fill in the blank 3	FavorableUnfavorableUnfavorable
	Total direct materials cost variance	$fill in the blank 5	FavorableUnfavorableUnfavorable
b.	Direct labor rate variance	$fill in the blank 7	FavorableUnfavorableUnfavorable
	Direct labor time variance	$fill in the blank 9	FavorableUnfavorableFavorable
	Total direct labor cost variance	$fill in the blank 11	FavorableUnfavorableUnfavorable

2. The variance analyses should be based on the

actualstandardstandard

amounts at

actualstandardactual

volumes. The budget must flex with the volume changes. If the

actualstandardactual

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

actualstandardactual

production. In this way, spending from volume changes can be separated from efficiency and price variances.

Feedback

Unfavorable variances can be thought of as increasing costs (a debit). Favorable variances can be thought of as decreasing costs (a credit).

Review how actual production is analyzed by using standard amounts.