Direct and Overhead Cost Variance Analysis

Swiss Chocolate’s U.S. division is experiencing an increase in demand for the month of October due to the upcoming holiday season. The following fact pattern forms the basis for the static budget:

Swiss Chocolate Manufacturing Company	Variable costs total	Fixed costs total
Raw materials	$ 200,000
Direct manufacturing labor	$ 100,000
Indirect manufacturing labor		$ 52,500
Factory insurance and utilities		$ 31,500
Depreciation – machinery and factory		$ 38,500
Repairs and maintenance – factory		$ 14,000
Selling, marketing and distribution expenses	$ 20,000	$ 40,000
General and administrative expenses		$ 60,000


Variable cost and volume data	Milk chocolate
Raw materials = 0.25 lbs x $2.00/lb.	$ 0.50
Direct labor = 0.025 hr x $10/hr.	$ 0.25
Volume in units	400,000

Sales per unit are $2.65.

Required:

In good form, prepare the static budget operating income in contribution format.
Suppose sales demand increases to 500,000 units for October. Prepare the flexible budget for October in contribution format.
Compute and reconcile the sales volume variance. Indicate whether the variance is favorable or unfavorable.
Presume the following:

Total direct costs incurred for October
Raw materials = 135,000 lbs. used	$ 300,000
Direct labor = 12,000 hrs. incurred	$ 112,600
Volume in units	515,000

Using the three-pronged method to present your calculations, compute the direct materials price variance, the direct materials efficiency variance, the labor price variance, and the labor efficiency variance. Indicate whether these are favorable or unfavorable.

Appraise the outcome of the direct cost variance and give one possible explanation for each of the variances. Be sure that your explanation is interrelated and provides a complete picture of performance for the Swiss Chocolate Manufacturing Company for October.

11 years ago

Report issue

Direct and Overhead Cost Variance Analysis

NOT RATED

Purchase the answer to view it

direct_and_overhead_cost_variance_analysis.xlsx