BUS 5110 - Managerial Accounting

Written Assignment Unit 5

9 December - 15 December
Dr. Angela Palmer
Professor
Instructions for submission

Case Study:

Papaya Partners is a distributor of papayas. They purchase papayas from individual growers and package them in 10-
pound cartons for delivery to their various customers, generally supermarkets. Last month, they budgeted to sell
$500,000 worth of cartons at a price of $25 each. Actual sales met a budget of $500,000 at $25 per carton.

Management has received cost information based on actual performance and needs to understand the drivers of the
overall variance from the budget. They have asked you, as an analyst in their management accounting department, to
calculate and explain the variances. The following data has been provided:

Specifically, management needs to know the:

Standard cost per unit (carton)

Actual cost per unit
Direct materials price variances
Direct materials usage variances
Direct labor rate variance
Direct labor efficiency variance

In addition, they would like to understand how the variances are calculated and what caused them. They would also
like a recommendation on what might be done to improve the variances.

For this assignment, compute all required amounts and explain how the computations were performed. Describe
whom you would work with to determine the causes of the variances and hypothesize on what caused the variances.
Based on your analysis, recommend actions that management could take to improve the variances.
 INTRODUCTION

According to Bragg (2018), Cost variance analysis “is a control system that is designed to detect and

correct variances from expected levels. It is comprised of the following steps: 1) Calculate the difference

between an incurred cost and an expected cost; 2) Investigate the reasons for the difference; 3) Report this

information to management; 4) Take corrective action to bring the incurred cost into closer alignment with

the expected cost”. Bragg (2018) goes on to say that “The simplest form of cost variance analysis is to subtract

the budgeted or standard cost from the actual incurred cost and reporting on the reasons for the difference”.

Standard costing establishes a standard against which subsequent expenditures may be assessed.

Managers use cost-benefit analysis to ascertain the disparity between specified pricing and the real cost of

offering those prices (Heisinger, 2012). It is used to make comparisons between actual and standard pricing

and to conduct research on actual costs.

Standard costing typically goes through a few procedures

● Setting standard costs

● Recording actual costs
● Comparing standard and actual costs
● Identify variances
● Recommend solutions

A typical price is often determined by examining similar previous transactions or industry norms.

Actual costs often surpass previously defined standard costs, resulting in disparities between the two estimates.

These changes may be positive or negative in character and are referred to be favorable or unfavorable

variances based on their magnitude. This company's three main expenditures are direct material costs, direct

labor costs, and overhead.

CASE ANALYSIS

Computation:

1. Standard Cost: It is the budgeted cost of producing one unit of product. The standardcost will be:

Fruit: 200,000/20,000 = 10/carton

Packaging: 10,000/20,000 = 0.5/carton
Labor: 90,000/20,000 = 4.5
Standard Cost = 15/carton (10 + 0.5 + 4.5)
 2. Actual cost per unit: Computed as all actual costs that are incurred in producing on unit(carton).

Fruit: 244,200/20,000 = 12.21/Carton

Packaging: 11,000/20,000 = 0.55/carton
Labor: 150,000/20,000 = 7.5/carton
Actual cost per carton = 20.26/carton

3. Direct Materials Price Variance: It is the difference between the actual amountspent on

direct materials and the standard cost of direct materials.

Standard cost of direct materials: Fruit + Packaging: (200,000 x 1) + (11,000 x 0.50) (standard cost x actual
quantity)
Actual amount spent on direct materials Fruit + Packaging : (200,000 x 1.221) + (11,000 x 1) (Actual price x
actual quantity)
Variance: 255,200 - 205,500 = 49,700 unfavorable

Working Calculations:1. (The information will be used for material price & usage variance)

Fruit:
Standard cost: 20,000 x 10 = 200,000 Pounds; 200,000 Pounds x 1 = $200,000
Standard cost = 1
Standard quantity = 200,000
Actual cost: 20,000 x 10 = 200,000 Pounds; 200,000 x 1.221 = $244,200
Actual cost = 1.221
Actual quantity = 200,000
Packaging:

Standard cost: 20,000 x 1 = 20,000 Pounds x 0.5 = 10,000

Standard rate = 0.5
Standard quantity = 20,000
Actual cost: 20,000 x 0.55 = 11,000 Pounds x 1 = 11,000
Actual rate = 1
Actual Quantity = 11,000

The variance is unfavorable due to the fact that the actual spent on purchasing the material is
higher than the standard price of direct materials. The purchasing department should be consulted to determine
the reason of unfavorable variance.
4. Direct material usage variance: Difference between the actual materialusage and budgeted

material usage.

Calculated as: (Standard Usage - Actual usage) x Standard cost per unit.
Actual usage: 11,000
Standard Usage: 20,000
Standard price: 0.50
Variance: (20,000 - 11,000) x 0.50 = $4,500 favorable

The usage variance is favorable as actual usage is lower than standard usage, this means that production
department is working efficiently and a good quality of packaging in bought by the purchasing department.
There is no usage variance in fruit usage as 10 pounds per carton is used under budgeted and actual.

5. Direct Labor rate variance: This is the difference between the standard cost of direct labor for
 standards hours and the standards cost of actual hours. Calculated as:

Actual Hours x Standard rate: 15,000 x 9 = 135,000

Actual Hours x Actual rate: 15,000 x 10 = 150,000
Variance: 15,000 unfavorable

Standards hours x standard rate:

Production department should be concerned for the inquiriesabout labor rate variance.

Working Calculations:2. Will be used for labor rate & efficiency variance
Standard cost: 20,000 x 0.50 = 10,000 hours; 10,000 x 9 =
90,000
Standard rate = 9/hr
Standard Hours = 10,000
Actual Cost: 20,000 x 0.75 = 15,000 hours; 15,000 x 10 =
150,000
Actual rate = 10/hour Actual hours = 15,000

6. Direct labor efficiency variance: Computer as Actual hours less standard hours multiplied by

standard rate.

(Actual Hours - Standard Hours) x standard rate: (15,000 - 10,000) x 9 = 45,000 unfavorable

Due to the fact that more hours are spent in activity therefore it is an unfavorable variance.
Production managers should be consulted to understand the reason of the unfavorable variance.
Additionally, the purchasing depart ment should also be consulted about the quality
of material as processing poor quality, material might take more time in
production.

CONCLUSION

In terms of statistical significance, the changes in labor efficiency and direct material variability are

the most dramatic. Given that both of these deviations imply inefficiencies in the manufacturing process,

management should engage with the production department to determine how to improve the manufacturing

process. Additionally, management should enquire about the quality of the material, since bad materials

result in lower labor and material efficiency. The fall in labor rates shows that the industrial sector is

confronted with another source of inefficiency.... Finally, management should make every effort to ensure

that the quality of materials obtained, the production department's performance, and the manufacturing

equipment are all reviewed and validated on a regular basis.

 REFERENCES

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Heisinger, K., & Hoyle, J. (2012). Managerial Accounting. Saylor Foundation.

Hutchinson, E. (2017). Principles of Microeconomics (Uvic).

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