Question

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:

Budget
Cost of fruit @ 10 pounds per carton	$ 200,000
Cost of packaging @ 1 pound per carton	$ 10,000
Labor 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
Labor costs @ .75 hours per carton	$ 150,000
Gross Profit	$ 405,200
Unfavorable variance	$105,200.00

Please calculate and explain:

• 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

Answer 1

ANSWER

Explanation:
Let's calculate one-by-one:

1.Standard Cost:

It is the budgeted cost of producing one unit of product. The standard cost 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:

It is calculated all the 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 amount spent 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

workings-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 because the actual spent on purchasing the material is higher than the standard price of direct materials. The purchase department should be consulted in order to determine the reason of unfavorable variance.

4.Direct material usage variance:

It is the difference between the actual material usage and budgeted material usage. It is 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:

It is difference between the standard cost of direct labor for standards hours and the standards cost of actual hours. It is 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 (usually production supervisor) is to concerned for the inquiries about labor rate variance.

Workings-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

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