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
Direct manufacturing labor
Indirect manufacturing labor
Factory insurance and utilities
Depreciation – machinery and factory
Repairs and maintenance – factory
Selling, marketing and distribution expenses
General and administrative expenses
Variable cost and volume data
Raw materials = 0.25 lbs x $2.00/lb.
Direct labor = 0.025 hr x $10/hr.
Volume in units
Sales per unit are $2.65.
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
Direct labor = 12,000 hrs. incurred
Volume in units
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.