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 hour per carton

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90,000

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$

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Total Cost
300,000

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Actual
rs e
ou urc
$
Cost of fruit @ 10 pounds per carton
244,200
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Cost of packaging @ .55 pound per $

aC s

carton 11,000
vi y re

$
Labor costs @ .75 hour per carton
150,000

$
Total Cost
ed d

405,200
ar stu

Unfavorable variance $105,200.00

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Specifically, management needs to know the:

Standard cost per unit (carton)
To arrive at standard cost per unit, we have divided elements in the budget by the number of units
sh

sold (20 000) thus arriving at the different costs per units
Standard Cost Per
Unit
Direct Materials 10

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 (10 Pounds per Carton at $1 per Pound)
Cost of Packaging
(1 pound per carton at $0.5 per pound) 0.5
Direct Labor ( 0.5 hours at $9 per hour) 4.5

Actual cost per unit

To compute actual costs per unit, we divided values in actuals by the number of units sold (20 000)
Actual Cost Per Unit
Direct Materials
(10 Pounds per Carton at $1.221 per Pound) 12.21
Cost of Packaging (0.55 pound per cartoon at $1 per
pound) 0.55

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Direct Labor ( 0.75 hours at $10 per hour) 7.5

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Direct materials price variances

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To compute this, we use equation (Heisinger & Hoyle)
ou urc
(Actual Price - Standard Price) x Actual Quantity
Direct Material price variance is = (12.21- 10) x 20 000 = 44 200
o

Direct materials usage variances

aC s

To compute direct material usage variance we use equation

vi y re

(Actual Quantity – Standard Quantity) x Standard Price

However, before using equation we need to come up with below table
ed d

Sales Volume 20 000

ar stu

Direct Materials Purchased 200 000

Cost of Direct Material Purchased 244 200

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Direct Materials used in production 200 000

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As we infer from this table, there is no direct material variances in this situation. The variance comes
only from the price of the direct materials is increasing.
Direct labor rate variance
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For labor rate variance we use equation

(Actual Rate – Standard Rate) x Actual Hours worked
= (10-9) x 10 000 = 10 000
Direct labor efficiency variance

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 (Actual Hours – Standard Hours) x Standard Rate
= (15 000 – 10 000) x 9 = 45 000
It is clear that we have labor efficiency issue as labor is way over the budgeted hours.

References
Heisinger, & Hoyle. (n.d.). Accounting for Managers. Creative Commons.

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