Question

The food and beverage manager of the Glitz Hotel just got a great deal on beverages for the bar. Instead of buying large 5L containers for $25 each, they instead were able to purchase 1,000 cases of 12-packs of 500ml cans for $26,640. Beverages are served in 500ml servings. Usually, they sell 800 beverages over a weekend, but they actually sold 900 this past weekend. However, 20 customers had to be refunded due to problems with the cans.

Direct labour costs are driven by the number of beverages served. A typical weekend requires four servers each working two 8-hour shifts at $12/hour. At the end of the weekend, actual labour costs were $816.50 for 71 hours.

Required:

A   Calculate the following variances:

Material rate

Material quantity

Direct Labour rate

Direct labour efficiency

B   Briefly explain the variances to the hotel manager, and explain if the variances are somehow interlinked. Assess the special purchase and identify other factors that should be considered.

Answer 1

Solution:-

Material rate (2.50 per 500ml in large container purchase, 2.22 per 500ml in can purchases)

Material quantity (as per order one container can have 10 servings-needs 80 to 90 times

order, in volume order will have 12,000 servings)

Direct Labour rate computed in per serving basis is $0.96 standard and $0.93 actual

when computed on labor hours is $ 12 standard and $ 11.5 actual

Direct labour efficiency has a unfavorable variance of $ 84.

Labor Rate as computed for rate variance is favorable, showing value in standard cost with higher amount than actual payout. Due to effect of increase in labor hours and some unknown internal circumstance (might be cost of refund) reducing the amount of labor paid. Further investigation of factors affecting the difference is needed to give have more specific analysis.

The purchase of Beverages in bulk (can order) will have a lot of impact on inventory. High volume of stock will cover more than half two months requirement that will translate to low inventory turnover and physical handling of materials will be an issue if storage is inssufficient or greatly eating out spaces. Still he benefit of purchasing in volume is translated in favorable decrease of $ 0.28 cost per serving.

Detailed solution:-