In: Accounting
Sal Amato operates a residential landscaping business in an affluent suburb of St. Louis. In an effort to provide quality service, he has concentrated solely on the design and installation of upscale landscaping plans (e.g., trees, shrubs, fountains, and lighting). With his clients continually requesting additional services, Sal recently expanded into lawn maintenance, including fertilization.
The following data relate to his first year’s experience with 56 fertilization clients:
Each client required six applications throughout the year and was billed $41.00 per application.
Two applications involved Type I fertilizer, which contains a special ingredient for weed control. The remaining four applications involved Type II fertilizer.
Sal purchased 5,100 pounds of Type I fertilizer at $0.54 per pound and 10,100 pounds of Type II fertilizer at $0.41 per pound. Actual usage amounted to 3,210 pounds of Type I and 7,850 pounds of Type II.
A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $11.60 per hour because of a very tight labor market; the employee logged a total of 167 hours at client residences.
Based on previous knowledge of the operation, articles in trade journals, and conversations with other landscapers, Sal established the following standards:
Fertilizer purchase price per pound: Type I, $0.51; Type II, $0.45
Fertilizer usage: 41 pounds per application
Typical hourly wage rate of landscape personnel: $9.10
Labor time per application: 40 minutes
The operation did not go as smoothly as planned, with customer complaints actually much higher than expected.
4. On the basis of the variances that you computed in parts (1) and (2) was the new service a success from an overall cost-control perspective?
What is the total variance???
Standard | Actual | ||||||
SQ | SR | Total | AQ Purch. | AQ Used | AR | Amount | |
Direct Material | |||||||
TYPE 1 | 4,592 | 0.51 | 2,341.92 | 5,100 | 3,210 | 0.54 | 1,733.40 |
TYPE 2 | 9,184 | 0.45 | 4,132.80 | 10,100 | 7,850 | 0.41 | 3,218.50 |
Direct Labor | 224 | 9.10 | 2,038.40 | 167 | 11.60 | 1,937.20 | |
SQ - Direct Material | |||||||
Type 1 = 56 Clients X 2 Applications X 41 pounds = 4,592 Pounds | |||||||
Type 2 = 56 Clients X 4 Applications X 41 pounds = 9,184 Pounds | |||||||
Labor Time = 56 Clients X 6 Applications X 2/3 Hours = 224 Hours | |||||||
Answer 1. | |||||||
Direct Material Price Variance = (SR - AR) X AQ Purchased | |||||||
Type 1 = ($0.51 - $0.54) X 5,100 Pounds = $153 (U) | |||||||
Type 2 = ($0.45 - $0.41) X 10,100 Pounds = $404 (F) | |||||||
Total Direct Material Price Variance = 251 (F) | |||||||
Direct Material Quantity Variance = (SQ - AQ Used) X SR | |||||||
Type 1 = (4,592 Pounds - 3,210 Pounds) X $0.51 = $704.82 (F) | |||||||
Type 2 = (9,184 Pounds - 7,850 Pounds) X $0.45 = $600.30 (F) | |||||||
Total Direct Material Quantity Variance = $1,305.12 (F) | |||||||
Answer 2. | |||||||
Direct Labor Rate Variance = (SR - AR) X AH | |||||||
Direct Labor Rate Variance = ($9.10 - $11.60) X 167 Hrs | |||||||
Direct Labor Rate Variance = $417.50 (U) | |||||||
Direct Labor Efficiency Variance = (SH - AH) X SR | |||||||
Direct Labor Efficiency Variance = (224 Hrs - 167 Hrs) X $9.10 | |||||||
Direct Labor Efficiency Variance = $518.70 (F) | |||||||
Answer 3-a. | |||||||
Calculation of Actual Costs of the Client Application: | |||||||
Direct Material: | |||||||
Type 1 - 3,210 Pounds X $0.54 | 1,733.40 | ||||||
Type 2 - 7,850 Pounds X $0.41 | 3,218.50 | ||||||
Direct Labor - 167 Hrs X $11.60 | 1,937.20 | ||||||
Total Actual Costs | 6,889.10 | ||||||
Answer 3-b. | |||||||
Revenue - 56 Clients X $41 X 6 Applications | 13,776.00 | ||||||
Less: Actual Costs | 6,889.10 | ||||||
Profit (Loss) | 6,886.90 | ||||||
Answer 4. | |||||||
Yes, the service was a success. Overall costs were controlled as indicated by a total favorable variance of $1,657.32. In addition, each of the two fertilizers (Type I & Type II and direct labor) produced a net favorable variance. Sal did have a sizable unfavorable labor-rate variance as a result of his having to pay $11.60 per hour when a more typical wage rate would have been $9.10 per hour. This inflated rate is attributable to the tight labor market, which is beyond his control. | |||||||
Direct Material Price Variance | 251.00 | (F) | |||||
Direct Material Quantity Variance | 1,305.12 | (F) | |||||
Direct Labor Rate Variance | 417.50 | (U) | |||||
Direct Labor Efficiency Variance | 518.70 | (F) | |||||
Total Material & Labor Variance | 1,657.32 | (F) |