Case Study Unit 5

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
0 pounds per carton$244,200 Cost of packaging @ .55 pound per carton$11,000 Labor costs @ .75 hours per carton$150,000 T
ance$105,200.00

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

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 Solution:

Let us define the flexible budget and the standard cost as the following:
“A flexible budget is a revised master budget that represents expected costs given actual sales.
Costs in the flexible budget are compared to actual costs to evaluate performance” (Heisinger &
Hoyle, n.d, ch.10.1).
“Standard costs are costs that management expects to incur to provide a good or service. They
serve as the “standard” by which performance will be evaluated” (Heisinger & Hoyle, n.d,
ch.10.2).
From the given information we can calculate the sold quantity by dividing the sold amount on
the unit price
Quantity = sold amount / unit price, 20,000 = 500,000 / 25
So the standard cost & the actual cos are as the following:
Standard cost Cost per 20,000 cartons Cost per unit ( 1 carton)
Cost of fruit $200,000 $10
Cost of packaging $10,000 $0.5
Labor costs $90,000 $4.5
Total cost $300,000 $15

Actual Cost per 20,000 cartons Cost per unit (1 carton)

Cost of fruit $244,200 $12.21
Cost of packaging $11,000 $0.55
Labor costs $150,000 $7.5
Total cost $405,200 $20.26

“The materials price variance is the difference between actual costs for materials purchased
and budgeted costs based on the standards” (Heisinger & Hoyle, n.d, ch.10.3).
Materials price variance = (AQ × AP) – (AQ × SP)
Fruits standard cost: 20,000 * 10 = 200,000 pounds * $1= $200,000
Fruits actual cost: 20,000 * 10 = 200,000 pounds * $1.221= $244,200
Packing standard cost: 20,000 * 1 = 20,000 pounds * $0.5 = $10,000
Packing actual cost: 20,000 * 0.55 = 11,000 pounds * 1 = $11,000
Materials Actual Actual quantity Standard Standard Variance
price (AP) (AQ) price (SP) quantity (SQ)
fruit $1.221 200,000 $1 200,000 $44,200
packaging $1 11,000 $0.5 20,000 $5,500
Total $49,700
Unfavorable material price variance is $49,700

“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 & Hoyle, n.d, ch.10.3).
Materials quantity variance = (AQU – SQU) × SP
Actual usage Standard usage Standard price Variance
(AQU) (SQU) (SP)
11,000 20,000 $0.5 $(4,500)
Favorable variance is $4,500

“The labor rate variance is the difference between actual costs for direct labor and budgeted
costs based on the standards” (Heisinger & Hoyle, n.d, ch.10.4).
Labor rate variance = (AR − SR) × AH
“The labor efficiency variance is the difference between the actual number of direct labor hours
worked and budgeted direct labor hours that should have been worked based on the standards”
(Heisinger & Hoyle, n.d, ch.10.4).
Labor efficiency variance = (AH − SH) × SR
Standard hours: 20,000 * 0.5= 10,000 hours, Standard rate: $90,000/10,000= $9 per hour
Actual hours: 20,000 * 0.75= 15,000 hours, Actual rate; 150,000/15,000= $10 per hour
Labor Actual rate Actual hours Standard rate Standard hours Variance
(AR) (AH) (SR) (SH)
Labor $10 15,000 $9 10,000 $15,000
Efficiency $45,000
Unfavorable labor rate variance is $15,000
Unfavorable efficiency variance is $45,000
For the unfavorable material price variance, we need to work with the purchase department to
know why the price of fruits is higher than anticipated, the reason could be the supplier raise the
prices or the supplier has shortage and high demand at the same time, we need to check if we can
find other suppliers with the anticipated price in the budget. For the packing why the quantity
reduced and the price is higher, the reasons could be rotten fruits, uncontrolled packing
processes, bad materials of packing that required to be used more than usual.
For the unfavorable labor rate & efficiency variance, we need to work the supervisor of the
workers to know the reason of consuming more hours than the budgeted and the reason of higher
cost, which could be less control of the supervisor, un registered absences of some workers that
lead the rest of the workers team to work overtime, new hired workers during this month.

References:

 Chegg. (2016, April 5). Static and Flexible Budgets [Video File]. Retrieved
from https://www.youtube.com/watch?v=d34RfJvymuM&feature=youtu.be
 Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved
from https://2012books.lardbucket.org/books/accounting-for-
managers/index.html