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 57 fertilization clients:

Each client required six applications throughout the year and was billed $42.00 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 7,000 pounds of Type I fertilizer at $0.57 per pound and 12,000 pounds of Type II fertilizer at $0.47 per pound. Actual usage amounted to 6,090 pounds of Type I and 8,800 pounds of Type II.

A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $13.50 per hour because of a very tight labor market; the employee logged a total of 205 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, $0.70; Type II, $0.48

Fertilizer usage: 60 pounds per application

Typical hourly wage rate of landscape personnel: $9.90

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

1. Type I fertilizer:

Price variance:

Actual quantity purchased x actual price

7,000 pounds x $ .57……………………………… $3,990

Actual quantity purchased x standard price

7,000 pounds x $ .70……………………………… 4,900

Direct-material price variance………………………. $ 910 favorable

Quantity variance:

Actual quantity used x standard price

6,090 pounds x $ .70……………………………… $4,263

Standard quantity allowed x standard price

6,840 pounds* x $ .70…………………………….. 4,788

Direct-material quantity variance…………………… $ 525 Favorable

* 60 pounds x 57 clients x 2 applications

Type II fertilizer:

Price variance:

Actual quantity purchased x actual price

12,000 pounds x $ .47……………………………. $5,640

Actual quantity purchased x standard price

12,000 pounds x $ .48……………………………. $5,760

Direct-material price variance………………………. $ 120 Favorable

Quantity variance:

Actual quantity used x standard price

8,800 pounds x $ .48……………………………… $4,224

Standard quantity allowed x standard price

13,680 pounds* x $ .48…………………………….. $6,566.40

Direct-material quantity variance…………………… $ 2,322.40 Favorable

* 60 pounds x 57 clients x 4 applications

2.Direct-labor variances:

Rate variance:

Actual hours used x actual rate

205 hours x $13.50…………………….. $2,767.50

Actual hours used x standard rate

205 hours x $9.90……………………… 2,029.50

Direct-labor rate variance………………… $ 738.00 Unfavorable

Efficiency variance:

Actual hours used x standard rate

205 hours x $9.90………………………. $2,029.50

Standard hours allowed x standard rate

228 hours* x $9.90……………………... 2,257.20

Direct-labor efficiency variance…………. $ 227.70 Favorable

* 2/3 hours(40 mins/60 mins) x 57 clients x 6 applications

3.Actual cost of applications:

Type I fertilizer:

Actual quantity used x actual price (6,090 pounds x $ .57)…. $3,471.30

Type II fertilizer:

Actual quantity used x actual price (8,800 pounds x $ .47)…... 4,136.00

Direct labor:

Actual hours used x actual rate (205 hours x $13.50)………... 2,767.50

Total actual cost……………………………………................... $10,374.80

Sales (57 clients x 6 applications x $42 per application)........$14,364

less:actual cost.......................................................................$10,374.80

profit........................................................................................$3,989.20

Yes, the service was a financial success.

4.(a) Yes, the service was a success. Overall costs were controlled as indicated by a total favorable variance of $3,367.10. In addition, each of the three cost components (Type I fertilizer, Type II fertilizer, and direct labor) produced a net favorable variance. Amato did have a sizable unfavorable labor-rate variance as a result of his having to pay $13.50 per hour when a more typical wage rate would have been $9.90 per hour. This inflated rate is attributable to the tight labor market, which is beyond his control. Note: Part of the variance may have been caused by a standard rate that was set too low, especially given the fact that this is a new service.

Type I fertilizer:

Price variance………………………………….. $910.00 favorable

Quantity variance……………………………… 525.00 Favorable

Type II fertilizer:

Price variance………………………………….. 120.00 Favorable

Quantity variance……………………………… 2322.40 Favorable

Direct labor:

Rate variance…………………………………… 738.00 Unfavorable

Efficiency variance…………………………… 227.70 Favorable

Total material and labor variances...................$3,367.10 Favorable

(b)The favorable labor efficiency variance means that less time is being spent on the job than originally anticipated. This may indicate that the part-time employee is rushing and doing sloppy work. Also, less fertilizer used than budgeted (i.e., favorable quantity variances for both Type I and Type II) would likely give rise to an increased occurrence of weeds as well as a lack of greening in the lawn.  

5.This is a management judgment for Amato to make. If the service is continued, Amato should consider hiring a full-time employee and insisting on the standard amount of fertilizer being applied to each lawn.