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Assignment 5

Papaya Partners sells cartons of papayas to supermarkets. Last month, their budget projected $500,000 in sales at $25 per carton, which was met. Actual total costs were $405,200, an unfavorable variance of $105,200 from the budgeted $300,000. Management needs an analysis of cost variances. The standard cost per carton was $15, but actual was $20.21 due to higher direct material and labor costs. The $44,200 direct material price variance was due to higher per pound fruit costs. There was a $10,000 direct labor rate variance and $45,000 efficiency variance from higher actual labor hours.

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Assignment 5

Papaya Partners sells cartons of papayas to supermarkets. Last month, their budget projected $500,000 in sales at $25 per carton, which was met. Actual total costs were $405,200, an unfavorable variance of $105,200 from the budgeted $300,000. Management needs an analysis of cost variances. The standard cost per carton was $15, but actual was $20.21 due to higher direct material and labor costs. The $44,200 direct material price variance was due to higher per pound fruit costs. There was a $10,000 direct labor rate variance and $45,000 efficiency variance from higher actual labor hours.

Uploaded by

ayodikelvin
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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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:

Budget
$
Cost of fruit @ 10 pounds per carton
200,000
$
Cost of packaging @ 1 pound per carton
10,000
$
Labor costs @ .5 hour per carton
90,000
$
Total Cost
300,000

Actual
$
Cost of fruit @ 10 pounds per carton
244,200
Cost of packaging @ .55 pound per $
carton 11,000
$
Labor costs @ .75 hour per carton
150,000
$
Total Cost
405,200

Unfavorable variance $105,200.00

Specifically, management needs to know the:


Standard cost per unit (carton)
To arrive at standard cost per unit, we have divided elements in the budget by the number of units
sold (20 000) thus arriving at the different costs per units
Standard Cost Per
Unit
Direct Materials 10

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(10 Pounds per Carton at $1 per Pound)
Cost of Packaging
(1 pound per carton at $0.5 per pound) 0.5
Direct Labor ( 0.5 hours at $9 per hour) 4.5

Actual cost per unit


To compute actual costs per unit, we divided values in actuals by the number of units sold (20 000)
Actual Cost Per Unit
Direct Materials
(10 Pounds per Carton at $1.221 per Pound) 12.21
Cost of Packaging (0.55 pound per cartoon at $1 per
pound) 0.55
Direct Labor ( 0.75 hours at $10 per hour) 7.5

Direct materials price variances


To compute this, we use equation (Heisinger & Hoyle)
(Actual Price - Standard Price) x Actual Quantity
Direct Material price variance is = (12.21- 10) x 20 000 = 44 200
Direct materials usage variances
To compute direct material usage variance we use equation
(Actual Quantity – Standard Quantity) x Standard Price
However, before using equation we need to come up with below table
Sales Volume 20 000
Direct Materials Purchased 200 000
Cost of Direct Material Purchased 244 200
Direct Materials used in production 200 000
As we infer from this table, there is no direct material variances in this situation. The variance comes
only from the price of the direct materials is increasing.
Direct labor rate variance
For labor rate variance we use equation
(Actual Rate – Standard Rate) x Actual Hours worked
= (10-9) x 10 000 = 10 000
Direct labor efficiency variance
(Actual Hours – Standard Hours) x Standard Rate
= (15 000 – 10 000) x 9 = 45 000
It is clear that we have labor efficiency issue as labor is way over the budgeted hours.

References
Heisinger, & Hoyle. (n.d.). Accounting for Managers. Creative Commons.

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