Question

Case 3: Pleasant Town Chili

Sam Johnson, the kitchen manager for Pleasant Town Chili, is very concerned. The new owner is starting to use variance analysis to evaluate his performance, and the first report is looking dire. Sam is confused, since he thought the month went well. Cold weather had pushed sales higher than expected, and he adjusted the recipe to include a bit less meat to offset the rising cost of ground beef. Sam has asked you to help figure out why the report looks so bleak.

Pleasant Town Chili is a small restaurant in the local mall’s food court. Its main product is a serving of chili. The only direct material in this process is the meat—beans and other shelf-stable ingredients are included in the variable overhead which is allocated based on direct labor hours. The February budget, based on standard costs, was:

• Sales 2,500 chili servings

• Direct materials: $1,250 (1/4 pound @ $2.00 per pound, times 2,500 servings)

• Direct labor: 3,237.50 (0.14 DLH per bowl @ $9.25 per DLH, times 2,500 servings)

• Variable overhead: $507.50 (VOH allocated at $1.45 per DLH, times 350 DLH budgeted)

Actual February performance of the Riverside Mall restaurant was:

• Sales 2,800 servings

• 588 lbs of meat, at a cost of $1,310.00

• 395 DLH, for a direct labor cost of $3,685.35

• Variable overhead expenses of $551.50

In early March, Sam received the following financial performance report:

PLEASANT TOWN CHILI
Kitchen Performance Report
For the Month of February
Meat	$1,310.00	$1,250.00	$60.00 U
Direct labor	$3,685.35	$3,237.50	$447.85 U
Variable OH	$551.50	$507.50	$44.00 U
Total	$5,546.85	$4,995.00	$551.85 U

Sam needs your help to understand this variance analysis – he’s counting on getting a raise next year, which will be unlikely if his performance is as bad as this report indicates.

REQUIRED:

Would it be appropriate for the new owner to evaluate Sam’s performance based on this variance report? Why or why not?

Answer 1

Workings:

Actual Sales Qty (Servings) - 2800

Standard Material Per Serving (Pounds)	0.50
Standard Material for 2800 servings (Pounds)	1,400
Standard Direct Labour Per Serving (Pounds)	1.295
Standard Direct Labour for 2800 servings (Pounds)	3626
Standard Variable Overhead Per Serving (Pounds)	0.203
Standard Variable Overhead for 2800 servings (Pounds)	568.4

Correct Calculation of Variance:

	Standard for 2800 servings	Actual for 2800 servings	Variance
Direct Material	1,400.00	1,310.00	90.00	Favourable
Direct Labour	3,626.00	3,685.35	(59.35)	Unfavourable
Variable Overhead	568.40	551.50	16.90	Favourable
Total	5,594.40	5,546.85	47.55	Favourable

The variances as given in the performance report does not consider the level of output (servings) of 2500 servings and 2800 servings. The standard cost for calculation of variance is taken for the level of 2500 servings while the actual cost is taken for 2800 servings. Thus it will not be appropriate to evaluate Sam's performance based on the Performance report as given in Question.

The Correct calculation of variance results is positive performance of Sam since it results in favourable variance of $47.55