Chapter 22, Problem 22.2APR

### Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307

Chapter
Section

### Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307
Textbook Problem

# Flexible budgeting and variance analysisI 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 Chocolates Light Chocolates 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 Chocolates $15.25 per hr. 2,360 Light Chocolates 15.80 per hr. 6,120 Instructions 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, quantity, and total variance. B. Direct labor rate, time, and total variance. 2. Why are the standard amounts in part (1) based on the actual production for the year instead of the planned production for the year? (1) (A) To determine Direct labor variances: The difference between the actual labor cost in the production and the standard labor cost for actual production is known as direct labor cost variance. The direct labor variance can be classified as follows: • Labor rate variance. • Labor time variance. Direct material variances: The difference between the actual material cost per unit and the standard material cost per unit for the direct material purchased is known as direct material cost variance. The direct material variance can be classified as follows: • Direct materials price variance. • Direct materials quantity variance. To prepare: Direct materials price variance, direct materials quantity variance, and the total direct material cost variance. Explanation • The direct materials price variance for cocoa is determined as follows: DirectÂ materialsÂ priceÂ varianceÂ =Â [(ActualÂ priceâˆ’StandardÂ price)Ã—Â ActualÂ quantity]=[($7.33âˆ’$7.25)Ã—140,300Â lb.]=$â€‰0.08Ã—Â 140,300Â =$â€‰11,224 • The direct materials price variance for sugar is determined as follows: DirectÂ materialsÂ priceÂ varianceÂ =Â [(ActualÂ priceâˆ’StandardÂ price)Ã—Â ActualÂ quantity]=[($1.35âˆ’$1.40)Ã—188,000Â lb.]=$â€‰(0.05)Ã—Â 188,000=$â€‰(9,400) Therefore, total direct materials price variance is ($11,224U+$(9,400)F)$(1,824) and it is an unfavorable variance.

• The direct materials quantity variance for cocoa is determined as follows:

DirectÂ materialsÂ quantityÂ varianceÂ =Â [(ActualÂ quantityâˆ’StandardÂ quantityÂ (1))Ã—Â StandardÂ price]=[(140,300Â lb.âˆ’140,000Â lb.)Ã—Â $7.25]=$â€‰300â€‰â€‰Ã—$7.25=$â€‰2,175

• The direct materials quantity variance for sugar is determined as follows:

DirectÂ materialsÂ quantityÂ varianceÂ =Â [(ActualÂ quantityâˆ’StandardÂ quantityÂ (2))Ã—Â StandardÂ price]=[(188,000Â lb.âˆ’190,000Â lb

(2)

To determine

To explain: The reason that the standard amounts in part (1) based on the actual production for the year instead of the planned production for the year.

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