Global Cooling Company produces fruit-flavored frozen desserts. The company's most popular product is blackberry sherbet. Global Cooling uses a standard costing system to budget manufacturing costs and to evaluate the performance of manufacturing activities.
Blackberries are measured in quarts and are the major category of direct materials. Blackberries must be sorted by hand because of imperfections in the berries.
Direct labor workers sort out bad blackberries from the good berries and then blend the good berries with the other ingredients.
Variable overhead costs are incurred in (1) forming the sherbet (sorting and blending) and (2) packaging the sherbet. Variable overhead in the "forming" cost pool varies directly with direct labor hours worked. "Packaging" costs vary with the number of batches of sherbet produced.
The static budget and actual data for July were:
Batches produced 6,000 7,000
Blackberries purchased and used
(45,000 quarts budgeted; 58,275 quarts actual)
(1,800 DLH budgeted;2,280 DLH actual) $16,200 $20,064
Variable overhead costs--forming $18,000 $22,500
Variable overhead costs--packaging $48,000 $58,000
Fixed overhead costs $ 8,000 $ 8,200
A. Compute the following components of Global Cooling's total flexible budget variance:
1. the price and efficiency variances for blackberries
2. the price variance for direct labor
3. the efficiency variance for variable overhead-forming
4. the total overhead flexible budget variance
B. Suppose the purchasing manager of Global Cooling decided to buy a shipment of blackberries that she knew had a higher than usual percentage of bad berries. In addition to the obvious favorable price variance for the berries, identify three other variances you would expect to result from the purchasing manager's decision. (1) Name them (be specific), (2) state whether you would expect them to be favorable or unfavorable, and (3) explain why. Assume that the use of these berries had no effect on the quality of blackberry sherbet produced by Global Cooling; the good berries in this shipment are as good as the good berries in a typical shipment.
C. Refer to Requirement B. Again assume that the purchasing manager's decision had no effect on the quality of blackberry sherbet produced by Global Cooling. Under what circumstance would the manager's decision be profitable for the company?
The solution explains the calculation of flexible budget variances