Question

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

A.

sales 3335*$10per sandwich    33350

cost

roast chicken 1868kg*$3.50    6538

grilled peppers 767kg*$8.70 6672

goat cheese 200kg*$42.20 8440

direct labour hours 300*$14.80    4440

varible overhead 0.02*3335*2    333.5

fixed overhead 0.05*04*3335 66.7

total cost 26490.2

10% profit    2649

profit earned 33350-26490 6860

therefore profit target of 10% is achieved .

A.

meterial usuage variance

roast chicken    grilled peppers    goat cheese

3335sandwiches should use 3335*0.55 3335*0.24    3334*0.05

1834kg    800.kg 166.kg

actual used 1868 kg 767kg    200kg

variance in kg    34kg    33kg 34kg

standard cost 3.5    8.7    42.2

variance    119 287    1435

   unfavourable    favourable    unfavourable

material price variance

   roast chicken    grilled pepppers goat gheese

actual quantity    1868    767    200

standard cost    3.5    8.7    42.2

should cost    6538 6673 8440

actual cost    4.52    8.64 43.12

but actual cost 8443 6627 8624

variance 1505 46    184

   unfavourable    favourable unfavourable

Direct labour rate

300hours should cost *$14.80 4440

but did cost 4487

variance $ 47 unfavourable

direct labour effieciency

3335sandwich should take 0.10hrs 333.5hrs

but actual hours 300

variance in hours    33.5

variance *$14.8 $496 favourable

A.

Material usuage variance of roast chicken,peppergrilled,goat cheese variance should be investigated as if the control limit is applied ,there will be variance on all these material

material price varaiance    of roast chicken and goat cheese variance should be investigated because when contol limit of $75 is applied there will be variance left.

direct labour rate variance - they is no need to investigate direct labour rate efficency as it cancels when control limit is applied.

direct labour efficiciency variance - even thought it is favourable variance and when control variance is applied it doesnt cancels so there should be investigation.

A.

Yes there is connection for Nico

Although there is increase in sales quantity there is increase in price variance of material and their usages.

Although there is variance it is not necesary to terminate Nico and inform him about the material variances and object him to control it.