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BUS 5110 - Written Assignment Unit 5

This document analyzes variances in the budget of Papaya Partners, a papaya distribution company. It calculates variances in direct materials price and usage, direct labor rate and efficiency. Direct materials price variance was $45,200 unfavorable likely due to late purchase or high demand increasing price. Direct materials usage variance was $4,500 favorable possibly from using quality materials. Direct labor rate variance was $15,000 unfavorable likely from overtime pay. Direct labor efficiency variance was $45,000 unfavorable possibly from worker fatigue or low quality materials. The document recommends addressing procurement practices, production management, and material quality to reduce unfavorable variances.

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Yusuf Gbenga Ayodele
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139 views5 pages

BUS 5110 - Written Assignment Unit 5

This document analyzes variances in the budget of Papaya Partners, a papaya distribution company. It calculates variances in direct materials price and usage, direct labor rate and efficiency. Direct materials price variance was $45,200 unfavorable likely due to late purchase or high demand increasing price. Direct materials usage variance was $4,500 favorable possibly from using quality materials. Direct labor rate variance was $15,000 unfavorable likely from overtime pay. Direct labor efficiency variance was $45,000 unfavorable possibly from worker fatigue or low quality materials. The document recommends addressing procurement practices, production management, and material quality to reduce unfavorable variances.

Uploaded by

Yusuf Gbenga Ayodele
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BUS 5110 – Managerial Accounting

Written Assignment Unit 5

Term 2

Submitted To: The University of the People

December, 2021
Introduction

In every organization, budgeting is very important as it gives a proposed revenue and


expenditure to be made. It must be noted that in most cases, their will be variations in what is
budgeted for and the actual position of things. These variances can be due to several factors
which may be due to changes in the cost of production. The case to be examined is Papaya
Partners which major in papaya distribution. Several variances have been seen in its record
and I will be calculating the various variances and the probable reasons that can be adduced
to it.

Total units of papayas = $500,000/$25 = 20,000

1.Standard Cost (Standard costs are costs that management expects to incur to provide a
good or service) = Total cost of fruits divided by the total number of Units

Fruit: 200,000/20,000 = 10/carton

Packaging: 10,000/20,000 = 0.5/carton

Labour = Total labour cost/total units of production = 90,000/20,000 = $4.5/carton

Standard Cost = Summation of (Fruits + Packaging + Labour) per carton = 10+0.5+4.5=


$15/carton

2. Actual cost per unit: Actual cost per unit is the actual cost divided by the total units

Fruit: $244,200/20,000 = $12.21/Carton

Packaging: 11,000/20,000 = 0.55/carton

Labour: 150,000/20,000 = 7.5/carton

Actual cost per carton = 12.21 + 0.55 + 7.5 = $20.26/carton

3. Direct Materials Price Variance: indicates the difference between the actual cost of
direct materials and the standard cost of direct materials

Standard direct material cost per carton = 10+0.5 = $10.5/carton

Actual direct material cost per carton = 12.21 + 0.55 = $12.76/carton


Materials price variance = (Actual direct material cost - Standard direct material cost)*
Actual quantity of material purchases = ( 12.76-10.5)*20000 = 2.26*20000 = $45200
unfavourable direct material price variance

The price variance might have resulted from late purchase or when demand for the product is
actually high which result in price hike by the producer or change to a more quality material

4. Direct material usage variance: indicates the difference between the standard cost of
direct materials that should have been used (standard quantity times standard cost) for the
good output and the actual quantity of direct materials used at their standard cost.

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 which may be due to using quality
material and hence bulk of materials proposed are not consumed.

5. Direct Labour rate variance: It is difference between the standard cost of direct labour
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 unfavourable direct labour variance. Since the actual hour is higher than
the standard hour, the unfavourable direct labour variance might have been the payment for
the overtime of workers for the extra hours.

6. Direct Labour Efficiency Variance = Actual hours of direct labour – Standard hours of
direct labour for actual level of activity)*Standard rate for direct labour = (15000-
10000)*9000 = $45000 Unfavourable labour efficiency. This have result from fatigue of
workers or as a result of low quality material which the production manager is answerable to
in this case.
Recommendations

1. For the direct materials price difference, the procurement department should be called
upon for explanation on what actually went wrong and if it were to be as a result of
late purchase, efforts must be in place so that such won’t be the case next time.
2. We can as well observe unfavourable labour variance and unfavourable labour
efficiency variance. The production department should be called upon and the
manager should give clear explanation of what is responsible and the possible
prevention in future production.
3. The materials to be used must be adequately checked to ensure its nothing less than
the best so that it wouldn’t affect the efficiency of the production department.

Conclusions

Looking at the Direct Materials Price Variance of $45200, Direct Labour rate variance of
$15000 and Direct Labour Efficiency Variance of $45000 which are all unfavourable and
hence affects the production rate. Management must as a matter of urgency look into the
issue of the direct materials price variance and the Labour efficiency variance which are on
the high side from the standard.

All formulas for calculation were gotten from the deductions of (Heisenger & Hoyle 2012)
REFERENCES

Heisinger, K., & Hoyle, J. B. (2012). Accounting for Managers. Retrieved from
https://my.uopeople.edu/pluginfile.php/358446/mod_resource/content/1/accounting-for-
managers.pdf

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