BUS 5110-01: Managerial Accounting – AY2022-T3

Budgets - Operations and Flexible: Written Assignment Unit 5

Kunal Kumar Singh

Guided by Dr. Rebecca Attah (Instructor)

University of the People

Problem Statement:

Please describe the circumstances of the following case study and recommend a course of action.
Explain your approach to the problem, perform relevant per unit calculations and analysis, and
formulate a recommendation. Ensure your work and recommendation are thoroughly supported.
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
 Labour costs @ .5 hours 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
 Labour costs @ .75 hours per carton $ 150,000
 Total Cost $ 405,200
 Unfavourable variance $ 105,200

Specifically, management needs to know the:

1. Standard cost per unit (carton)

2. Actual cost per unit
3. Direct materials price variances
4. Direct materials usage variances
5. Direct labour rate variance
6. Direct labour 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. Superior papers will:

 Perform all per unit calculations correctly.

 Articulate how the calculations were performed.
 Assess the variances computed and evaluate the operational results (i.e., is performance
better or worse than budgeted?).
 Explain with whom you would work to identify the root causes of the variances.
 Propose well-thought-out causes for each variance.
 Conclude on which variances require management’s attention and recommend action.
1. Standard Cost: It is the estimated cost per unit of the product. It includes Material, labour and
manufacturing overhead cost.

Total Carton Sales: = $500,000

Carton Sales price per unit = $25

So, Total number of Cartons sold = Total Cartons sales/Sales price per unit

= $500,000/$25

= 20,000 units

Fruit cost per Carton: = $200,000/20,000

= $10 per Carton

Packaging cost per Carton = $10,000/20,000

= $0.50 per Carton

Labour cost per Carton = $90,000/20,000

= $4.50 per Carton

Standard Cost = (Fruit cost+ Packaging cost+ Labour cost) per

carton

= $10 + $0.50 + $4.50

= $15 per Carton

2. Actual Cost per Unit: It is calculated based on all the actual costs that are incurred in producing
one unit. In this case it is a Carton.

Actual Carton Sales: = $500,000

Actual Carton Sales price per unit = $25

So, Actual number of Cartons sold = Total Cartons sales/Sales price per unit

= $500,000/$25

= 20,000 units

Fruit cost per Carton: = $244,200/20,000

= $12.21 per Carton

Packaging cost per Carton = $11,000/20,000

= $0.55 per Carton

Labour cost per Carton = $150,000/20,000

= $7.50 per Carton

Actual Cost per unit = (Fruit cost+ Packaging cost+ Labour cost) per
carton
 = $12.21 + $0.55 + $7.50

= $20.26 per Carton

3. Direct Materials Price Variance: The materials price variance is the difference between actual
costs for materials purchased and budgeted costs based on the standards (Heisinger, 2010). 

Standard cost of direct materials:

Fruit + Packaging = (20,000 x $10) + (20,000 x $0.50)

= $200,000 + $10,000

= $210,000

Actual amount spent on direct materials

Fruit + Packaging = (20,000 x $12.21) + (20,000 x $0.55)

= $255,200

Direct materials price Variance = $255,200 - $210,000

= $45,200

The actual cost on buying materials is higher than the standard budgeted price of materials. It is
unfavourable situation.

4. Direct Material Usage Variances: The materials quantity variance is the difference between the
actual quantity of materials used in production and budgeted materials that should have been used
in production based on the standards (Heisinger, 2010).

Mathematically it is (Actual Usage – Standard Usage) X Packaging cost per Carton

Cost of fruits = 200,000 - (10×20,000) × $1

= No variance

Cost of packaging

Actual cost per unit = $0.55 per Carton

Actual quantity = 20,000 Carton

Actual cost = 20,000 Carton x $0.55 per Carton

= $11,000

Standard cost per unit = $1 per Carton

Standard quantity = 20,000 Carton

Standard cost = 20,000 Carton x $1 per Carton

= $20,000

Packaging cost per Carton = $0.50

Direct Material Usage Variance = ($20,000-$11,000) X $0.50

 = $9,000 X .50

= $4,500

It is favourable

5. Direct Labour Rate Variance: It is the difference between the standard cost of direct labour for
standard hours and actual hours.

Standard hours X Standard Rate = 15,000 X $9 per hour

= $135,000

Actual hours X Actual Rate = 15,000 X $10 per hour

= $150,000

Direct Labour rate variance = $150,000-$135,000

=$15,000.

This is unfavourable because of high actual labour costs.

6. Direct Labour Efficiency Variance: Mathematically, direct labour efficiency variance is defined as
(Actual Hours- Standard Hours) X Standard Labour Rate.

= (15,000-10,000) X $9 per hour

= 5,000 Hours X $9

= $45,000

It is unfavourable because it is more hours.

Conclusion:

 The direct material variances is the highest favourable variance.

 The Direct Labour Efficiency and Direct Labour Rate Variance have unfavourable variances.

Reference:

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

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

Zangre, A. (2019, March 18).How to Calculate Variance (+Why It’s Important for Your Business).
Learning Hub. https://learn.g2.com/how-to-calculate-variance