Question

Assume you manage your local Marble Slab Creamery ice cream parlor. In addition to selling ice cream cones, you make large batches of a few flavors of milk shakes to sell throughout the day. Your parlor is chosen to test the company's "Made-for-You" system. The system allows patrons to customize their milk shakes by choosing different flavors. Customers like the new system and your staff appears to be adapting, but you wonder whether this new made-to-order system is as efficient as the old system where you just made a few large batches. Efficiency is a special concern because your performance is evaluated in part on the restaurant's efficient use of material and labor. Assume that your superiors consider efficiency variances greater than 5% unacceptable. You decide to look at your sales for a typical day. You find that the parlor used 390 pounds of ice cream and 72 hours of direct labor to produce and sell 2,000 shakes. Assume that the standard quantity allowed for a shake is .2 pound of ice cream and .03 hours (1.8 minutes) of direct labor. Further assume that standard costs are $1.50 per pound for ice cream and $8 an hour for labor.

1.Compute the efficiency variances for direct labor and direct materials. Provide likely explanations for the variances.

2.Do you have reason to be concerned about your performance evaluation? Explain

Answer 1

Solution 1:

Standard hours for direct labor for actual production = 2000*.03 = 60 hours

Actual hours used = 72 hours

Standard rate of direct labor = $8 per hour

Direct labor efficiency variance = (SH - AH) * SR = (60 - 72) * $8 = $96 U

Standard quantity of material for actual production = 2000*0.2 = 400 pound

Actual quantity of direct material consumed = 390 pound

Standard price of direct material = $1.50

Direct material efficiency variance = (SQ - AQ) * SP = (400 - 390) * $1.50 = $15 F

Standard cost of direct labor = 60*$8 = $480

% of direct labor efficiency variance to standard labor cost = $96 / $480 = 20% Unacceptable

Standard cost of material = 400 * $1.50 = $600

% of direct material efficiency variance to standard material cost = $15 / $600 = 2.50% Acceptable

Therefore direct materrial effiicency variance is favourable and material used in shakes efficiently. However direct labor efficiency variance is unfavourable as actual time taken is excess from standard time in preparing shakes.

Solution 2:

The possible reason for unacceptable direct labour efficiency variance are as under:

1. Direct labor engaged are new joinees who recently joined and over the period of time their speed will increase and improve the efficiency variance.

2. Direct labor employed are not experinced person and their rates are lesser than standard rates. In order to improve efficiency we have to engage experienced labor.

3. Labor is ensuring efficent use of material so that actual material consumption should be lesser than standard and that's why they are working slowly and resulting in favorable direct material efficiency variance.