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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 12lb. 8lb. $7.25
Sugar 10lb. 14lb. 1.40
Standard labor time 0.50 hr. 0.60 hr.  
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

 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:

Direct materials price variance = [(Actual priceStandard price)× Actual quantity]=[($7.33$7.25)×140,300 lb.]=$0.08× 140,300 =$11,224

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

Direct materials price variance = [(Actual priceStandard price)× Actual quantity]=[($1.35$1.40)×188,000 lb.]=$(0.05)× 188,000=$(9,400)

Therefore, the 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:

Direct materials quantity variance = [(Actual quantityStandard quantity (1))× Standard price]=[(140,300 lb.140,000 lb.)× $7.25]=$300×$7.25=$2,175

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

Direct materials quantity variance = [(Actual quantityStandard quantity (2))× Standard price]=[(188,000 lb.190,000 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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