Question

Case #2

In 2017, Olivia started Sandwich Booth as a producer of fresh sandwiches sold in grocery stores throughout the Avalon Peninsula. While she produces a variety of sandwiches, her roast chicken with grilled peppers and goat cheese continues to be her most popular product line. Each sandwich sells for $10.00 and, by 2018, Olivia’s sandwiches were so popular that she could no longer keep up with demand. That year, Olivia hired two friends, Aria and Nico, to help with food production and allow her to focus her efforts on marketing and distribution.

To help Olivia understand the cost of operating her business, she implemented a standard costing system. Standard costs are updated monthly and the standard cost sheet used for July production (previous month) of the chicken sandwich product line is as follows:

	Standard Price/Kg	Standard Usage/Sandwich
Roast chicken	$3.50	0.55 kg
Grilled peppers	$8.70	0.24 kg
Goat cheese	$42.20	0.05 kg
* Direct labour	$14.80 per hour	0.10 hrs
** Variable overhead	$2.00	0.02 hrs
** Fixed overhead	$0.40	0.05 hrs

* This rate is per hour (not per kilogram).

                        ** Based on direct labour hours.

Olivia also gathered actual production activity for the roast chicken sandwiches for the month of July:

Actual production of roast chicken sandwiches	3,335
Roast chicken	$4.52
Grilled pepper were purchased at (per kg)	$8.64
Goat cheese was purchased at (per kg)	$43.12
Direct labour:
Direct labour total cost	$4,487
Direct labour hours used	300

Olivia estimates practical activity to be 3,250 chicken sandwiches per month. Ingredients are purchased throughout each month. Inventory data regarding raw materials for July is provided below.

Raw Material	Beginning Inventory	Ending Inventory	Inventory Used
Roast chicken	260 kg	310 kg	1,868 kg
Grilled peppers	385 kg	180 kg	767 kg
Goat cheese	15 kg	87 kg	200 kg

Generally speaking, Olivia is pleased with the performance of Aria and Nico. They have both been enthusiastic and pleasant employees to have working for the company. Recently, Nico provided Olivia with a sample of a roast chicken sandwich made with his grandmother’s traditional family recipe. Although Olivia found it too salty for her tastes, she agreed to have Nico prepare sandwiches using the family recipe. In July, Olivia thought she noticed the roast sandwiches prepared using Nico’s family recipe were the first to sell out and, overall, was pleasantly surprised to find that roast chicken sandwich sales were more than 400 units higher than in June.

Required:

1. Olivia’s goal is to maintain a minimum net profit of 10% on the roast chicken sandwiches. Determine whether the current standard cost of the chicken sandwiches will generate the required net profit.

2. Calculate the raw material price and usage variance, the direct labour rate and efficiencies variances, and indicate whether each variance is favourable or unfavourable. Please note that there are three raw material inputs (i.e., roast chicken, grilled peppers, and goat cheese). Thus, you will need to compute three material price variances and three materials usage variances.

3. Olivia has set a control limit of plus or minus $75 on each of the raw material inputs and $100 for direct labour, for both the individual price (rate) and usage (efficiency) variances. Based on the material and labour variances you computed, which variances should be investigated?

4. Based on your variance analysis above, could the variances have any connection to Nico, one of the two new hires? If so, should Nico’s employment be terminated?

Answer 1

1. Yes as per the statement given below:

	Standard price/kg	Standard Usage/Sandwich	Total StandardCost in $
				Roast chicken	$3.50	0.55 kg	1.925
				Grilled peppers	$8.70	0.24 kg	2.088
Goat cheese	$42.20	0.05 kg	2.11
* Direct labour	$14.80 per hour	0.10 hrs	1.48
** Variable overhead	$2.00	0.02 hrs	0.04
** Fixed overhead	$0.40	0.05 hrs	0.02
Total Cost			7.663
Minimum Net profit required 10%	7.663x10%		0.7663
Minimum sellig price required			8.4293
Actual Selling price			10

	Actual Production of roast chicken	3335
	Roast Chicken	4.52
	Grilled Pepper price per kg	8.64
	Goat Cheese price	43.12
	Direct labour	4487
	Direct llabour hours used	300
1	Raw material price variance
	Roast Chicken ($3.50-$4.52) x 1868	$ 1905.36	unfavourable
	Grilled Pepper($8.70-$ 8.64) x 767	$46.02	Favourable
	Goat Cheese ($42.20-$43.12) x 200	$184	unfavourable
2	Raw material usage variance
	Roast Chicken (1834.25- 1868) x $3.5	118.125	unfavourable
	Grilled Pepper(800.40- 767) x $8.70	290.58	Favourable
	Goat Cheese (166.75- 200) x 42.20	1403.15	unfavourable

** for sub question C & D more than two sub questions and characters above the limit