Question

Bottoms Up approach
P5.12   A fast food restaurant uses a standard cost approach to aid in controlling its food cost.   The

             Following are the standard costs, selling prices and quantities sold of each of the five items

             Featured on the menu during a particular week:

            

Item         Cost         Selling Price            Quantity Sold

                  1             1.80                      3.95                               260

                  2             2.10                      4.95                               411

                  3             4.20                      8.95                               174

                  4             3.05                      6.95                              319

                  5             1.40                      3.95                              522

             Total actual cost for the week was $3,804.10 and total actual sales revenue was $8,873.40.

            

1.   Calculate total standard cost, total standard sales revenue and cost of sales percentages.

Comment on the results.

2.   The following week, with no change in menu or standard costs and selling prices, there was

   a change in the sales mix.   Although quantities sold of Items 2, 3 and 5 were virtually the

   same, many more of Item 4 and many less of Item 1 were sold.   As a result of this, would

   you expect the overall standard cost percentage to increase or decrease?   Explain your

   answer.

Answer 1

a)

Item	Cost	Quantity Sold	Total Standard Cost(Cost*qty)	Selling Price	Total Standard Sales Revenue (Selling Price*Qty)	Cost of Sales Percentage{(Standard Cost/Sales Revenue)*100}
1	1.8	260	468	3.95	1027	45.57
2	2.1	411	863.1	4.95	2034.45	42.42
3	4.2	174	730.8	8.95	1557.3	46.93
4	3.05	319	972.95	6.95	2217.05	43.88
5	1.4	522	730.8	3.95	2061.9	35.44
Total	3765.65		8897.7	42.32

There is variance between standard and actual cost as well as sales revenue.

Sales Revenue Variance=Standard Sales Revenue- Actual Sales Revenue

=8897.7-8873.40= -24.3

i.e Actual sales revenue is less by $24.3 from standard sales revenue

Cost Variance=Standard Cost- Actual Cost

=3765.65-3804.10 = -38.45

i.e Actual Cost is more by $ 38.45 from standard cost.

Overall Cost of Sales Percentage Actual=(3804.10/8873.4)*100=42.87%

There is almost negligible variance between Actual and Standard Cost of Sales Percentage.

b) Due to change in sales mix many less of item 1 i.e item having standard cost of sales percentage of 45.57% were sold and many more of item 4 i.e item having standard cost of sales percentage of 43.88% were sold. This will result in decrease in overall cost of sales percentage as item having high cost of sales percentage i.e item no 1 is sold less and item having comparatively low cost of sales percentage i.e item no 4 is sold more.