Question

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 5,700 pounds of Type I fertilizer at $0.60 per pound and 10,700 pounds of Type II fertilizer at $0.47 per pound. Actual usage amounted to 4,000 pounds of Type I and 8,150 pounds of Type II.

A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $12.20 per hour because of a very tight labor market; the employee logged a total of 179 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, $0.57; Type II, $0.49

Fertilizer usage: 47 pounds per application

Typical hourly wage rate of landscape personnel: $9.70

Labor time per application: 40 minutes

The operation did not go as smoothly as planned, with customer complaints actually much higher than expected.

Required:

1. Compute Sal’s direct-material variances for each type of fertilizer.

2. Compute the direct-labor variances.

3-a. Compute the actual cost of the client applications. (Note: Exclude any fertilizer in inventory, as remaining fertilizer can be used next year.)

3-b. Calculate the profit or loss of Sal’s new lawn fertilization service.

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?

5. Should the fertilizer service be continued next year?

Answer 1

	Standard			Actual
	SQ	SR	Total	AQ Purch.	AQ Used	AR	Amount
Direct Material
TYPE 1	5,264	0.57	3,000.48	5,700	4,000	0.60	2,400.00
TYPE 2	10,528	0.49	5,158.72	10,700	8,150	0.47	3,830.50
Direct Labor	224	9.70	2,172.80		179	12.20	2,183.80
SQ - Direct Material
Type 1 = 56 Clients X 2 Applications X 47 pounds = 5,264 Pounds
Type 2 = 56 Clients X 4 Applications X 47 pounds = 10,528 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 = ($0.57 - $0.60) X 5,700 Pounds = $171 (U)
Type 2 = ($0.49 - $0.47) X 10,700 Pounds = $214 (F)
Total Direct Material Price Variance = 43 (F)
Direct Material Quantity Variance = (SQ - AQ Used) X SR
Type 1 = (5,264 Pounds - 4,000 Pounds) X $0.57 = $720.48 (F)
Type 2 = (10,528 Pounds - 8,150 Pounds) X $0.49 = $1,165.22 (F)
Total Direct Material Quantity Variance = $1,885.70 (F)
Answer 2.
Direct Labor Rate Variance = (SR - AR) X AH
Direct Labor Rate Variance = ($9.70 - $12.20) X 179 Hrs
Direct Labor Rate Variance = $447.50 (U)
Direct Labor Efficiency Variance = (SH - AH) X SR
Direct Labor Efficiency Variance = (224 Hrs - 179 Hrs) X $9.70
Direct Labor Efficiency Variance = $436.50 (F)
Answer 3-a.
Calculation of Actual Costs of the Client Application:
Direct Material:
Type 1 - 4,000 Pounds X $0.60			2,400.00
Type 2 - 8,150 Pounds X $0.47			3,830.50
Direct Labor - 179 Hrs X $12.20			2,183.80
Total Actual Costs			8,414.30
Answer 3-b.
Revenue - 56 Clients X $41 X 6 Applications			13,776.00
Less: Actual Costs			8,414.30
Profit (Loss)			5,361.70
Answer 4.
Yes, the service was a success. Overall costs were controlled as indicated by a total favorable variance of $1,91770. 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 $12.20 per hour when a more typical wage rate would have been $9.70 per hour. This inflated rate is attributable to the tight labor market, which is beyond his control.
Direct Material Price Variance		43.00	(F)
Direct Material Quantity Variance		1,885.70	(F)
Direct Labor Rate Variance		447.50	(U)
Direct Labor Efficiency Variance		436.50	(F)
Total Material & Labor Variance		1,917.70	(F)
Answer 5.
This is a management judgment for Sal to make. If the service is continued, Sal should consider hiring a full-time employee and insisting on the standard amount of fertilizer being applied to each lawn.