BUS 5110: Managerial Accounting- Written Assignment Unit 5

Written Assignment Unit 5:

Business Administration, University of the People

BUS 5110: Managerial Accounting

Instructor: Larry Lettau

March 03, 2022

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Introduction

Variance Analysis is assessed by comparing actual firm performance to projected results. To

deliver a product, a company’s management must budget a per-unit cost which is known as

Standardized cost. For this paper, we would be using Papaya Partners, a distributor of papayas

company as a case study. We would be looking at variances, their calculations, and their root

causes. In conclusion, we would also state which variance may require management’s attention,

with recommendations on how to correct them. Please note that for the purpose of this paper, some

terms would be abbreviated during calculation.

 Standard Cost per unit(cartoon)

By dividing the total budgeted value of papayas sold by the budgeted value per carton,

the number of papayas sold can be calculated, as shown here:

$500,000 /$25=20,000 cartons of papayas sold

To get the standard cost (SC) per unit, Managers must know that this can only be

obtained by diving the budgeted total cost (BTC), by the number of fruits sold in cartons.

I.e., SC per unit carton = BTC÷ Number of cartons of sold fruits

SC per unit carton = $300,000 ÷ 20,000 = $15

 Actual cost (AC) per unit:

To get the Actual cost per unit cost of fruit @ 10 pounds per carton

= 244,200 ÷20,000 = $12.21

To get the Actual cost per unit (carton), we must divide the total cost by the number

of cartons of sold fruits.

I.e., AC per unit (carton) = 405,200 ÷ 20,000

AC per unit (carton) = $ 20.26

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 Direct materials price variances (DMPV):

The difference between the actual quantity of materials used in the production and the

budgeted materials that should have been utilized is known as the materials quantity

variance (Heisinger, 2012).

DMPV = Actual direct material cost -Budgeted direct material cost

Actual direct material cost = Cost of fruit @ 10 pounds per carton + Cost of packaging

@ .55 pound per carton = 244,200 +11,000 =$255,200

(Note: Cost of packaging @ .55 pound per carton=20,000 x .55 =11,000 pounds)

Budgeted direct material cost = Cost of fruit @ 10 pounds per carton + Cost of

packaging @ 1 pound per carton =200,000 + 10,000 = $210,000

Therefore,

DMPV = 255,200 - 210,00 = 45,200

 Direct materials usage variance (DMUV):

According to Heisinger 2012, direct material usage variance is the difference between

the actual quantity of materials used in production and the amount budgeted (Heisinger,

2012). Budgeted direct material usage = 20, and Actual direct material usage =20

Therefore,

DMUV = 20- 20 = 0

Also, DMUV @ .55pound of actual cost of packaging

= 20,000 -11,000 =9,000 pounds

 Direct labor rate variance (DLRV):

The gap between actual direct labor costs and anticipated expenditures based on

standards is known as the labor rate variance. The difference between the actual number
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of direct labor hours performed and the budgeted direct labor hours that should have

been worked based on the criteria is the labor efficiency variance (Brown, 2019).

Labor rate @ .5hr/carton = .5 × 20,00 = 10,000hrs

Labor cost @ 10,000hrs = 20,000 × 4.5 =$ 90,000

Budgeted labor cost per hour= 90,000 ÷ 10,000 = $9

Actual labor rate @ .75hr/carton =20,000 × .75 = 15,000 hours

Labor cost @ 15,000hrs = 150,000 ÷ 15,000 =$10

Actual labor cost @ a rate of $9 = 15,000 × 9 =$ 135,000

Therefore,

Direct labor rate variance =$150,000 -$135,000 = $15,000

 Direct labor efficiency variance (DLEV):

DLEV = Actual direct labor hours – Budgeted labor hours

DLEV = 150,000 – 135,000 =45,000hours

 Reasons for variance:Labor costs are higher, making it the most unfavorable option.

Conclusion/ Recommendations:

As can be seen from the unfavorable variances, Papaya partners must be aware of both price

and labor differences. I'd consult with the purchasing manager to see if the papayas may be

purchased from a different vendor to keep within the planned price range. I'd bring up the increased

labor expense with Human Resource Management, as it was significantly higher than the planned

amount. I would suggest improving time management to control labor costs, switching fruit

suppliers to cut costs, and looking for alternate packaging materials to cut packing costs.
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References

Brown, M. (2019, July 25). Direct Labor Efficiency Variance. https://www.double-

entry  bookkeeping.com/c

Heisinger, K., & Hoyle, J. B. (2012). Accounting for Managers. (1.0). Creative Commons by-

nc  sa 3.0. Retrieved from https://2012books.lardbucket.org/books/accounting-

for  managers/index.html