Flexible Budgeting and Variance Analysis
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
2.
Transcribed Image Text: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
Cocoa
Sugar
Standard labor
time
Planned production
Standard labor rate
Actual production (cases)
Cocoa
Sugar
Dark chocolate
Light chocolate
Required:
Dark
Chocolate
12 lb.
10 lb.
0.4 hr.
a.
b.
Light
Chocolate
9 lb.
14 lb.
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
5,000 cases
$13.5 per hr.
0.5 hr.
Dark Chocolate
4,800
Actual Price per Pound
$4.4
0.55
Actual Labor Rate
$13.1 per hr.
13.9 per hr.
Standard Price per
Pound
Direct materials price variance
Direct materials quantity variance
Total direct materials cost variance
Direct labor rate variance
Direct labor time variance
Total direct labor cost variance
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:
a. Direct materials price variance, direct materials quantity variance, and total
variance.
b. Direct labor rate variance, direct labor time variance, and total variance.
Light Chocolate
12,500
Actual Pounds Purchased and Used
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.
$4.3
0.6
$
Light Chocolate
12,000 cases
$13.5 per hr.
$
$
$
171,000
217,400
Actual Labor Hours Used
1,750
6,410
$
Unfavorable V
Unfavorable ✔
Unfavorable V
Unfavorable ✔
Favorable V
Unfavorable ✔
2. 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.
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