Question

The food and beverage manager of the Glitz Hotel just got a great deal on beverages for the bar. Instead of buying large 5L containers for $25 each, they instead were able to purchase 1,000 cases of 12-packs of 500ml cans for $26,640. Beverages are served in 500ml servings. Usually, they sell 800 beverages over a weekend, but they actually sold 900 this past weekend. However, 20 customers had to be refunded due to problems with the cans.

Direct labour costs are driven by the number of beverages served. A typical weekend requires four servers each working two 8-hour shifts at $12/hour. At the end of the weekend, actual labour costs were $816.50 for 71 hours.

Required:

A   Calculate the following variances:

Material rate

Material quantity

Direct Labour rate

Direct labour efficiency

B   Briefly explain the variances to the hotel manager, and explain if the variances are somehow interlinked. Assess the special purchase and identify other factors that should be considered.

Answer 1

1 case contains 12, 500 ml cans = 6 litre per case

so for 1000 cases quantity = 6 x 1000 = 6000 litre = 12000 servings ( because each serving is 500ml)

cost = $26640

Actual cost per serving ( 500 ml) = 26640/6000 = 4.44per litre = 2.22 per 500 ml

standard cost per 500 ml = 25/(5x2) = $2.5

material rate variance = (Actual unit cost - Standard unit cost) * Actual Quantity Purchased.

material rate variance = (2.22 - 2.5) x 12000 = 3360 (Favourable)

material quantity variance = [(standard quantity – actual quantity) X standard price].

standard quantity for (900 -20 = 880) sales is 880, 500 ml servings

however we actually used 900 servings

material quantity variance = (880 - 900) x 2.5

material quantity variance = 20 x 2.5 = 500 (adverse)

standard labour hours = 4 x 8 x 2 = 64 labour hours

standard cost per hour = $12

actual labour hours = 71

actual labour cost = $816.5

therefore actual labour cost per hour = 816.5/71 = 11.5

Direct labour rate variance

= 11.5 x 71 - (71 x 12)

Direct labour rate variance = 35.5 favourable

Direct labour efficiency variance

= 71 x 12 - (64 x 12)

= 852 - 768

Direct labour efficiency variance = 84 ( adverse)

B

material rate Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost due to the per serving rate.

a favourable variance shows that we are receiving the goods cheaper and can save $3360 due to that.

material quantity variance gives an idea of the difference between the actual amount of materials used per serving and what is actually used.

an adverse variance shows we used more quantity of beer than what should have been used and the monetary loss due to the same is $500

Direct labour rate variance measures the difference between the actual and expected cost of labor.  

So a favourable variance shows us that we paid $35.5 less than what we expected for the 71 hours of labour

Direct labour efficiency variance

it indicates if we used more or less hours for the same amount of work.

An adverse labor efficiency variance indicates worse productivity of direct labor during a period.

Since the special purchase helps us receive the material at a lower price as seen in a favourable material rate variance, it is a good offer.

However, other considerations include:

Qualiy of the bottle : As 20 customers needed a refund and it thus increased the quantity variance.