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.(Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Round your intermediate calculations and final answers to 2 decimal places.)

	Direct-Material Type I Type II Price variance Quantity variance Purchase price variance

2. Compute the direct-labor variances.(Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations and round your final answer to 2 decimal places.)

	Direct-Labor Rate variance Efficiency variance

3-a. Compute the actual cost of the client applications. (Note: Exclude any fertilizer in inventory, as remaining fertilizer can be used next year.)(Do not round intermediate calculations. Round your answer to 2 decimal places.)

3-b. Calculate the profit or loss of Sal’s new lawn fertilization service.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

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?

(Indicate the effect of each variance by selecting "Favorable" or "Unfavorable". Select "None" and enter "0" for no effect (i.e., zero variance). Do not round intermediate calculations. Round your answer to 2 decimal places.

5. Should the fertilizer service be continued next year?(yes or no)

Answer 1

1). Direct material price variance at the time of purchase = (Std rate - Actual rate ) * Actual purchases
Type 1 = (0.57 - 0.60)*5700 = 171 U
Type 2 = (0.49 - 0.47)*10700 = 214 F

Direct Material price variance = (Std rate - Actual rate)*Actual qty used
Type 1 = (0.57 - 0.60)*4000 = 120 U
Type 2 = (0.49 - 0.47)*8150 = 163 F

Direct Material Qty variance = (Std Qty for Actual use - Actual Qty)*Std price
Type 1 = Std Qty for Actual use = 47 pounds * 2 applications * 56 clients = 5264 pounds
Type 2 = Std Qty for Actual use = 47 pounds * 4 applications * 56 clients = 10528 pounds
Type 1 = (5264-4000)*0.57 = 720.48 F
Type 2 = (10528 - 8150)*0.49 = 1165.22 F

2). Direct Labour rate variance = (Std rate - Actual rate)*Actual hrs
(9.70 - 12.20)*179 = 447.50 U

Direct labour efficiency variance = (Std hrs - Actual hrs)*Std rate
= (224 - 179)*9.7 = 436.50 F
Std hrs = 40 minuts * 6 Applications * 56 clients = 13440 minuts / 60 = 224 hrs

3a). Actual costs of client applications:
Fertilizer cost = (4000*0.60) + (8150*0.47) = 6230.5
Labour Cost = 179 hrs * 12.20 = 2183.8
Total Costs = 6230.5 + 2183.80 = 8414.3

3b). Revenue from service = 56 clients * 6 Applications * $41 = $13776
Cost of services = $8414.30
Net Profit = 13776 - 8414.30 = $5361.7

4). Calculation of Total variances:
Direct Material = -120+163+720.48+1165.22 = 1928.7 F
Direct Labour = -447.5+436.50 = 11 U
Net Favourable Variance = 1928.7 - 11 = 1917.7 F
Hence it can be said, the new service was a overall sucess from cost control perspective.

5). Yes, fertilizer serivce should be continued next year because it resulted in profit.