Variance Example 1: Horngern, 12 th ed. Pr. 7-42

Cookies Etc. bakes cookies fro retail stores. The company’s best selling cookie is Dream Chocolate which sells for $ 8 per pound. The standard monthly production level is 400.000 pounds and the standard inputs and costs per pound are:

Quantity per pound of Cookie / Standard Unit costs
Direct material
Cookie mix / 10 oz. / $0.02 per oz.
Milk chocolate / 5 oz. / $15 per oz
Almonds / 1 oz. / $0.50 per oz
Direct Manufacturing labor a
Mixing / 1 min / $14.40 per DLH
Baking / 2 min / $18.00 per DLH
Variable overhead b / 3 min / $32.40 per DLH
a. Direct manufacturing labor rates include employee benefits.
b. Allocated on the basis of direct manufacturing labor hours.

Karen Blair, the company’s management accountant, prepares monthly budget reports based on these standard costs. Molly Cates, the company president, is disappointed with the April results shown here:

Performance Report, April 2007
Actual / Budget / Variance
Units (pounds) / 450.000 / 400.000 / 50.000 / F
Revenues / $3.555.000 / $3.200.000 / 355.000 / F
Direct materials / 865.000 / 580.000 / 285.000 / U
Direct manufacturing labor / 348.000 / 336.000 / 12.000 / U

Cates notes that despite a sizable difference increase in the pounds of cookies sold in April, Dream Chocolate’s contribution to the company’s overall profitability has been lower than expected. Blair gathers the following information to help analyze the situation:

Quantity / Actual Cost
Direct material
Cookie mix / 4.650.000 oz / $93.000
Milk chocolate / 2.660.000 oz. / 532.000
Almonds / 480.000 oz / 240.000
Direct Manufacturing labor a
Mixing / 450.000 min / 108.000
Baking / 800.000 min / 240.000

Compute the following variances. Comment on the variances, with particular attention to the variances that may be related to each other and the controllability of each variance:

1. selling-price variance

2. direct materials price variance

3. direct materials efficiency variance

4. direct manufacturing labor efficiency variance