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Written Assignment Unit 5

University of the People

BUS 5110 - Managerial Accounting

Dr. Jamal Boubetana

July 20, 2021

Introduction

Papaya Partners’ management detected variances from the budget and requested an analysis.

Methodology and Results

I will first calculate the quantity of units sold.

Sales revenues / Sales price = Units sold $500,000 / $25 = 20,000 cartons

1. Standard cost per unit (carton) 2. Actual cost per unit (carton)

Cost of fruit per $200,000 / 20,000 Cost of fruit per $244,200 / 20,000 =
carton = $10 carton $12.21

Cost of packaging $10,000 / 20,000 = Cost of packaging $11,000 / 20,000 = $0.55

Labor costs per $90,000 / 20,000 = Labor costs per $150,000 / 20,000 = $7.5
carton $4.5 carton

Standard cost per $15 (10+0.5+4.5) Actual cost per $20.26 (12.21+0.55+7.5)
carton carton

3. Direct materials price variances

“The materials price variance is the difference between actual costs for materials purchased and

budgeted costs based on the standards” (Heisinger & Hoyle, n.d.).

I will first calculate the standard and actual direct materials (fruit + packaging) price per carton.

Standard direct materials price per carton = $10.5 (10+0.5)

Actual direct materials price per carton = $12.76 (12.21+0.55)

Materials price variance = (Actual price of materials – Standard price of materials) × Actual

quantity of materials purchased

($12.76 - $10.5) x 20,000 = 2.26 x 20,000 = $45,200 Unfavorable materials price variance

4. Direct materials usage variances

The direct materials usage variance is the difference between the actual quantity of the materials

used and the budgeted standard quantity.

I will first calculate the standad and the actual quantity of materials used for the production.

Standard materials usage = 1 pound x 20,000 cartons = 20,000 pounds

Actual materials usage = 0.55 pounds x 20,000 cartons = 11,000 pounds

Materials quantity variance = (Actual quantity of materials used in production – Standard

quantity of materials for actual level of activity) × Standard price of materials

(11,000 - 20,000) x $0.5 = -9,000 x 0.5 = $(4,500) Favorable materials quantity variance

5. Direct labor rate variance

The labor rate variance is the difference between the actual rates payed for the production and

the budgeted standard rates.

I will start by calculating the standard and actual lador rates, along with the standard hours of

direct labor for the actual level of activity.

Standard labor rate = $90,000 / (0.5 hours x 20,000) = $90,000 / 10,000 = $0.9

Actual labor rate = $150,000 / (0.75 hours x 20,000) = $150,000 / 15,000 = $10
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Standard hours of direct labor for actual level of activity = 20,000 / 0,5 = 10,000 hours

Labor rate variance = (Actual rate incurred for direct labor −

Standard rate for direct labor) × Standard hours of direct labor for

actual level of activity

($0.10 - $0.9) x 15,000 = $0,1 x 15,000 = $1,500 Unfavorable labor rate variance

6. Direct labor efficiency variance

“The direct labor efficiency variance is the difference between the standard or budget labor hours

allocated and the actual labor hours consumed for the production” (“What is Direct”, 2020).

Labor efficiency variance = (Actual hours of direct labor − Standard hours of direct labor for

actual level of activity) × Standard rate for direct labor

(15,000 - 10,000) x $9 = 5,000 x $9 = $45,000 Unfavorable labor efficiency variance

Discussion

Unfavorable material price variance could be caused by a number of reasons. For example a

rise of market prices, a last minute purchase in higher rates, a higher quality material purchase, a

change of suppliers, etc. Favorable materials usage variance could be caused by higher quality

materials, staff training, improper use of materials, changes in the design, etc.

Favorable materials usage variance in combination with unfavorable material price variance

could indicate the “purchase of materials of higher quality than the standard” (“Direct material”,
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2020). These variances should be further investigated in collaboration with the Purchasing

department manager.

Unfavorable labor rate variance could be caused by payments for overtime, understaffing,

higher wages, need for more skilled hires, etc. Unfavorable labor efficiency variance could be

caused by low quality materials, outdated equipment, inexperience, low motivation, poor

supervision, etc. Both unfavorable labor rate variance and unfavorable labor efficiency variance,

indicate issues in the production department and should be further investigated with the

Production manager.

Conclusion

The management of Papaya Partners should meet with the Purchase manager and the Production

manager, and thoroughly examine the reasons for these variances. Feedback from the workers

representatives would be useful. Also a market research for material prices. Once the specific

causes are detected, a suitable course of action should be carefully planned and implemented.
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References

Direct Material Usage Variance. (2020, September 7). Accounting Simplified.

https://accounting-simplified.com/management/variance-analysis/material/usage/

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers.

https://2012books.lardbucket.org/books/accounting-for-managers/index.html

What is Direct Labor Efficiency Variance?. (2020, October 28). Accounting Hub.

https://www.accountinghub-online.com/what-is-direct-labor-efficiency-variance/