Managerial Accounting Unit 6

Abstract

Variance analysis is a tool used by managers to compare planned and actual performance. It is a qualitative analysis “used to maintain control over a business (AccountingTools, 2018).” Through the use of a revised master budget called a flexible budget using standard costing, companies can analyze where financial expectations are met or fall short and take action based on that information. Once standard prices and quantities are established, those numbers can be compared to actual numbers to establish favorable or unfavorable performance. While companies can perform variance analysis on many different factors, it is really only necessary to do so in the areas that most affect the business.

Keywords: variance analysis

VARIANCE ANALYSIS FOR PAPAYA PARTNERS

Papaya Partners is a wholesaler who purchases from individual growers, repackages the fruit and sells the packages primarily to supermarkets. (University of the People, 2019) As is standard practice every year, managers wants to review the company’s actual performance against the budget and understand where any variances are coming from.

Variance analysis has been performed to determine the following:

standard cost per carton = std cost of fruit + std cost of labor + std cost of packaging ($10+$4.50+$.50=$15)

standard cost of fruit = direct materials $ fruit / total units sold ($200,000/20,000=$10)

standard cost of packaging = direct packaging $ / total units sold ($10,000/20,000=$.50

standard cost of labor = direct labor $ / total units sold ($90,000/20,000=$4.50)

actual cost per carton = actual cost fruit + actual cost of labor + actual cost of packaging

($12.21+$.55+$7.50=$20.26)

actual cost of fruit = actual direct materials $ fruit / total units sold ($244,200/200,00=$12.21)

actual cost of packaging = actual direct materials $ packaging / total units sold ($11,000/20,000=$.55)

actual cost of labor = actual direct labor $ / total units sold ($150,000/20,000=$7.50)

direct materials price variance = actual cost - standard cost ($255,200-$210,000=$45,200)

actual cost = (actual cost fruit + actual cost packaging) x units sold (($12.21+$.55)x20,000=$255,200)

standard cost = (std cost fruit + std cost packaging) x units sold (($10+$.50)x20,000=$210,000)

direct materials usage variance = (actual usage - standard usage) x standard cost ((20,000-20,000)x$.50=0)

direct labor rate variance = (actual rate x actual hours) - (standard rate x actual hours) ($150,000-$135,000=$15,000)

actual labor hours = 20,000 x .75 = 15,000

actual rate = $150,000/15,000 = $10, 15,000 x $10 = $150,000

standard labor hours = 20,000 x .5 = 10,000

standard rate = $90,000 / 10,000 = $9, 15,000 x $9 = $135,000

direct labor efficiency rate = (actual hours - standard hours) x standard rate ($15,000-$10,000)x$9=$45,000

CONCLUSIONS

The direct materials price variance, direct labor rate variance and direct labor efficiency variance are all unfavorable which indicates that Papaya Partners needs to take a closer look as what is causing these inefficiencies.

The unfavorable direct materials price variance stems from the purchase of packaging materials. The actual price spent on materials is greater than the standard price. The purchasing manager should be tasked with investigating where the overage comes from. Were more materials purchased than expected or was the price of the materials higher than planned? If the issue of the overage is due to waste, employees should be trained on how to cut back or eliminate being wasteful. If it’s a pricing issue, the company should either negotiate a better rate with the supplier, consider purchasing from a new supplier or determine if they can package the papayas in a way that takes fewer materials.

The manager who oversees the employees processing the papayas and Human Resources should be asked to take a look at why the actual rate of labor exceeded the standard rate. This could be caused by more experienced workers were hired at a higher rate or a larger workforce than planned for. In either case, one would think this would mean great efficiency, which the efficiency variance contradicts. The company should review the rate of pay for the employees and ensure that it is inline with their experience and with other similar positions in the area.

This same manager should take a look at why employees were less efficient packaging the papaya. Looking at the numbers, it appears that the issue lay in the time to process a carton, .75 hours per carton actual versus .5 hours per carton standard. This could be due to the fact that there are new employees on the line who aren’t as efficient or perhaps the time to process a carton was underestimated. One solution could be additional training for employees.

Variance analysis is extremely valuable in identifying areas of improvement within a company. Taking action on the issues in a timely manner can keep a company running efficiently and successfully.

REFERENCES