5.2 Variance Analysis of A Fruits Company

 

Variance analysis is the process of analyzing the standard and actual cost differences. The analysis is done by management accountants to analyze the direct materials, labor and manufacturing variances (Heisinger & Hoyle, n.d). In this case, the company 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.

Based on the available data and the above information, we can do the following calculation and articulation:

Table 1: Variance analysis calculation of the fruit company (wrong calculation of direct material price variance. The correction is explained in no 3.)

1.     Standard cost per unit is the specific cost per unit. While the budgeted costs are the total cost given a certain activity level (Heisinger & Hoyle, (n.d.)).

Standard cost of unit of carton (SP): budgeted unit cost of fruit + budgeted unit cost of package + budgeted unit cost of labor = $10.00 + $0.50 + $4.50 = $15.00

2.     Actual cost per unit of carton (AP) : actual unit cost of fruit + actual unit cost of package + actual unit cost of labor = $12.21 + $0.55 + $7.50 = $20.26

3.     Direct material price variance, AQ^P definition is on the table.      

= (AQ^P)*(AP-SP) = 211000*($20.26 - $15.00) = $1,109,860.00 (This value was                     wrong and need correction)

Direct materials are consumed supplies and materials during the product manufacture (Bragg, 2021).

4.     Direct material usage variance =  (Actually used quantity - Standard usage quantity) x Standard cost per unit (Bragg, 2021) = ((AQ^U) – (SQ))*SP

The problem does not specifically mention the used materials in production. This assume the purchased materials are also totally used. Since we also know that SQ is standard quantity of materials for actual level of activity. Therefore, AQ^U = AQ^P = SQ giving the result that the direct material usage variance is zero

5.     Direct labor rate variance

= ((actual labor cost per carton/actually spent hours per carton)-(budgeted labor cost per carton/budegetedly spent hours per carton))*actually spent hours per carton* (#Units of carton)

= (Actual Rate – Standard Rate) × Actual Hour = (AR-SR) x AH

= (($7.50 /0.75)-($4.50/0.5))*0.75*20000 = $15,000.00

6.     Direct labor efficiency variance   

= (AH − SH) × SR = (actual hour – standard hour) *# Units of cartons* standard rate = (Actual hour – Standard hour)*# Units of cartons* (budgeted labor cost per carton / budgetedly spent hour per carton) (budgeted labor cost per carton / budgetedly spent hour per carton)

= (0.75-0.5) hour *20000*($4.50 / 0.5 hour) = $45,000.00 

To assess whether the actual performance is better than budgeted expectation, we can analysis the above data one by one.  The actual and standard cost variance giving the difference of AP-SP = $20.26 - $15.00 = $5.26 meaning that the actual price is greater than the budgeted one. This is not a good performance due to the fact that customers of the fruit company tend to find lower prize. This variance in budgeted and actual price also impacts the direct material variance. Since (Actual Price – Standard Price) > 0 and the variance of direct material is proportional to the price difference then the actual direct material price is greater than the budgeted one. For the company this is unfavorable due to the need to decrease the cost as much as possible. Direct material usage having the zero variance means that all purchased materials are totally used telling the optimum performance of the company. The value of direct labor rate variance which is greater than zero means the actual rate is greater than budgeted one. This condition is also unfavorable since the company needs to pay more for the labor rate. Lastly, the greater variance of labor efficiency is also unfavorable due to inefficient labor cost of actual case.

In the real work, we are to discuss with some involved individuals in root cause identification of the variances. As the company’s owner, we should contact the production manager who should be responsible for the root cause of the actual and standard price variance, direct material price and usage variances. We also should contact the human resource development manager who should be responsible for the root cause of labor rate and labor efficiency variances. Overall, the involved managerial accounting professionals can be asked for further verification and discussion about the causes of each variances.    

As usual, to propose the well thought causes of each variances. We should start from the first root cause which is the actual and standard price variance. That variance comes as a result of the fail prediction of the fruit price in the market or from the first plant grower. At that time the price increase to the certain predicted amount. Other factors can be the increase of the price of the fertilizer for the fruit plants. In the material price variance, the actually used package weight less than the budgeted one with the greater price in the actual one. The difference is $1000. This variance is a result of the increase in the price of packaging materials. The manager must have failed again in predicting the price. This can happen if the company has less interaction with survey of market price for the materials. Labor rate and efficiency variances with greater value in the actual one can happen as a matter of fact that the actual performance require more time to produce which expects the company to pay more for the labor salaries.           

In conclusion, the greater values of actual performance than the budgeted expectation require the strong attention of the management to the actual and standard price variance, direct material price variance, labor rate and efficiency variances. In this matter, we suggest some courses of action:

1.     The CFO with the budget committee should do well-established digital and direct quantitative and qualitative survey of the market price for the available fruits if they are going to buy it from grower.

2.     If they are going to have their own plants to grow and sell their own fruits. They should make sure to make a good way of farming using state of the art technology such as using the IoT (internet of things) to control the farming process until to market it in such a way that they can have qualified fruits affordable for the customers and profitable for them as the producers and suppliers.

3.     The company should thing on the best brand of the company to be put in the package. As usual the package process should be optimally done by the state of the art IoT technology letting them have the best in class package and reduced cost of packaging.

4.     To reduce spent time or working hours, the company should thing of investing in buying the good technology to help the human employers such us the use of robotic machine which can do more precisely effective jobs with the most time efficient

 

References

Heisinger, K., & Hoyle, J. B. (n.d.). Explain how standard costs are established. Standard costs. Retrieved October 5, 2021, from https://2012books.lardbucket.org/books/accounting-for-managers/s14-02-standard-costs.html  

Bragg, S. (2021, April 16). Direct materials definition. AccountingTools. Retrieved October 6, 2021, from https://www.accountingtools.com/articles/what-are-direct-materials.html. 

Bragg, S. (2021, April 16). Direct material usage variance. AccountingTools. Retrieved October 6, 2021, from https://www.accountingtools.com/articles/what-is-the-direct-material-usage-variance.html.

Official solution : 

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