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 6,400 pounds of Type I fertilizer at $0.51 per pound and 11,400 pounds of Type II fertilizer at $0.41 per pound. Actual usage amounted to 5,110 pounds of Type I and 8,500 pounds of Type II.

• A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $12.90 per hour because of a very tight labor market; the employee logged a total of 193 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, $0.64; Type II, $0.42
• Fertilizer usage: 54 pounds per application
• Typical hourly wage rate of landscape personnel: $9.30
• 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. 1. Compute Sal’s direct-material variances for each type of fertilizer.

2. 2. Compute the direct-labor variances.

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

4. 3-b. Calculate the profit or loss of Sal’s new lawn fertilization service.

5. 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?

6. 5. Should the fertilizer service be continued next year?

Answer 1

1	Type I:
	Material price variance=AQ*(SR-AR)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	AQ=Actual material purchased=6400 pounds
	SR=Standard Rate=$ 0.64 per pound
	AR=Actual rate=$ 0.51 per pound
	Material price variance=6400*(0.64-0.51)=832=$ 832 Favorable
	Material Quantity variance=SR*(SQ-AQ)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	SR=Standard Rate=$ 0.64 per pound
	SQ=Standard Quantity=Total clents*standard application required per client*Fertilizer usage per application=57*2*54=6156 pounds
	AQ=Actual material used=5110 pounds
	Material Quantity variance=0.64*(6156-5110)=669.4=$ 669 Favorable
	Type II:
	Material price variance=AQ*(SR-AR)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	AQ=Actual material purchased=11400 pounds
	SR=Standard Rate=$ 0.42 per pound
	AR=Actual rate=$ 0.41 per pound
	Material price variance=11400*(0.42-0.41)=114=$ 114 Favorable
	Material Quantity variance=SR*(SQ-AQ)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	SR=Standard Rate=$ 0.42 per pound
	SQ=Standard Quantity=Total clents*standard application required per client*Fertilizer usage per application=57*4*54=12312 pounds
	AQ=Actual material used=8500 pounds
	Material Quantity variance=0.42*(12312-8500)=1601=$ 1601 Favorable
2	Labor rate variance=ALH*(SR-AR)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	ALH=Actual labor hours=193 Hours
	SR=Standard labor rate per hour=$9.30
	AR=Actual labor rate per hour=$12.90
	Labor rate variance=193*(9.30-12.90)=-695=$ 695 Unfavorable
	Labor efficiency variance=SR*(SLH-ALH)
	If the answer is positive,variance is favorable.Otherwise,unfavorable
	Where
	SR=Standard labor rate per hour=$9.30
	SLH=Standard labor hours=Total clients*Standard application per client*labor time per application=57*6*(40/60)=228
	ALH=Actual labor hours=193 Hours
	Labor efficiency variance=9.30*(228-193)=325.5=$ 326 Favorable
3-a.	Actual cost of client applications:
					$
	Type I Fertilizer		(5110*0.51)		2606.1
	Type II Fertilizer		(8500*0.41)		3485
	Labor cost		(193*12.90)		2489.7
	Total				8580.8
3-b.	Profit or (loss):
				$
	Revenue	(57*6*42)		14364
	Less: Cost			8580.8
	Profit			5783.2
4	It was not a success from an overall cost-control perspective since labor rate variance is unfavorable
5	fertilizer service should be continued next year since it provides a profit of $ 5783.2