Price and efficiency variances

Peterson Foods manufactures pumpkin scones. For January 2014, it budgeted to purchase and use 15,000 pounds of pumpkin at $0.89 a pound. Actual purchases and usage for January 2014 were 16,000 pounds at $0.82 a pound. Peterson budgeted for 60,000 pumpkin scones. Actual output was 60,800 pumpkin scones.

Required:
1. Compute the flexible-budget variance.
2. Compute the price and efficiency variances.
3. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.

1. The key information items are:
Actual Budgeted
Output units (scones)
Input units (pounds of pumpkin)
Cost per input unit 60,800
16,000
$ 0.82 60,000
15,000
$ 0.89

Peterson budgets to obtain four pumpkin scones from each pound of pumpkin.
The flexible-budget variance is $408 F.

Actual
Results
(1) Flexible-
Budget
Variance
(2) = (1) – (3)
Flexible
Budget
(3)
Sales-Volume Variance
(4) = (3) – (5)
Static
Budget
(5)
Pumpkin costs $13,120a $408 F $13,528b $178 U $13,350c

a 16,000 × $0.82 = $13,120
b 60,800 × 0.25 × $0.89 = $13,528
c 60,000 × 0.25 × $0.89 = $13,350

2.
Actual Costs
Incurred
(Actual Input Qty.
× Actual Price)

Actual Input Qty.
× Budgeted Price Flexible Budget
(Budgeted Input
Qty. Allowed for
Actual Output
× Budgeted Price)
$13,120a $14,240b $13,528c

$1,120 F $712 U
Price variance Efficiency variance
$408 F
Flexible-budget variance
a 16,000 × $0.82 = $13,120
b16,000 × $0.89 = $14,240
c 60,800 × 0.25 × $0.89 = $13,528

3. The favorable flexible-budget variance of $408 has two offsetting components:
(a) favorable price variance of $1,120––reflects the $0.82 actual purchase cost being lower than the $0.89 budgeted purchase cost per pound.
(b) unfavorable efficiency variance of $712––reflects the actual materials yield of 3.80 scones per pound of pumpkin (60,800 ÷ 16,000 = 3.80) being less than the budgeted yield of 4.00 (60,000 ÷ 15,000 = 4.00). The company used more pumpkins (materials) to make the scones than was budgeted.

One explanation may be that Peterson purchased lower quality pumpkins at a lower cost per pound.