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 59 fertilization clients:
Each client required six applications throughout the year and was billed $44.00 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 5,400 pounds of Type I fertilizer at $0.57 per pound and 10,400 pounds of Type II fertilizer at $0.44 per pound. Actual usage amounted to 3,790 pounds of Type I and 8,000 pounds of Type II.
A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $11.90 per hour because of a very tight labor market; the employee logged a total of 173 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:
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?
The business of Sal Amato is to operate residential landscaping.
Number of clients during the first year of operation = 59
Number of applications required by each client throughout the year = 6 numbers
Among the 6 applications, 2 applications involved type 1 fertilizer and remaining 4 contain type II fertilizer.
Charge for each application (Revenue) = $44
Actual units produced,
Fertilizer I = 59*2 =118
Fertilizer II = 59*4 = 236
Total units produced = 118+236 = 354
Details to compute variances.
I. Material Variances
Direct material price variance = (Actual price per unit -
Standard price per unit) * Actual Quantity of material used
Quantity variance = (Actual quantity used - Standard quantity
used)* standard price per unit
Purchase price variance = (Actual price per unit - Standard price
per unit) * Actual Quantity of material purchased
Standard quantity = Std quantity of direct material per unit*Actual units produced
Therefore, Direct material price variance = Actual Quantity (Actual price - Standard price)
II. Labour variances
Rate variance = Actual hours worked (Actual rate per hour - Standard rate per hour)
Efficiency variance = Standard rate (Standard hour - Actual hour)
Particulars | Type I | Type II | ||
---|---|---|---|---|
Actual quantity purchased during the period (in pounds) i | 5,400 | 10,400 | ||
Actual price per pound (in $) ii | 0.57 | 0.44 | ||
Actual usage of fertilizers (in pounds) iii | 3,790 | 8,000 | ||
Standard price per pound (in $) iv | 0.54 | 0.46 | ||
Standard usage of fertilizers (in pounds) v | 5,192 | 10,384 | ||
Purchase price variance vi = (ii - iv) * i | 162 | Adverse | 208 | Favourable |
Price variance vii = (ii - iv) * iii | 113.7 | Adverse | 160 | Favourable |
Quantity variance viii = (iii-v) *iv | 757.08 | Favourable | 1,096.64 | Favourable |
Total material variance = vii + viii | 643.38 | Favourable | 1,256.64 | Favourable |
2. Labour Variances
Particulars | Amount |
---|---|
Actual rate per hour (i) | $ 11.9 |
Actual hours (ii) | 173 |
Standard rate per hour (iii) | $ 9.4 |
Standard time per application (iv) | 40 minutes |
Number of applications (v) | 6 |
Number of operations (vi) | 59 |
Standard hours (vii) = v*vi*iv/60 | 236 |
Rate variance (viii) = (i - iii) *ii | 1,614.3 Adverse |
Efficiency variance (ix) = (iv-ii ) *iii | 592.2 Favourable |
Total Labour variance (x) = viii + ix | 1,022.1 Favourable |
3a. Actual cost the client applications
Actual material cost = Actual quantity purchased * actual price
per unit
= (5,400*0.57) + (10,400 *0.44) = 3,078 +4,576 = 7,654
Actual labour cost = Actual hours worked *Actual rate per
hour
= 173*11.9 = 2,058.7
Total cost = 7,654 + 2,058.7 = $9,712.7
3b. Profit/ loss of sale of fertilizers
Total income = Total units produced * price per unit
= 354 * $44 p.u. = $15,576
Total cost = $9,712.7
Profit = Total income - total cost
= 15,576 - 9,712.7 = $5,863.3
4. Total variance
Total material variance + labour cost variance
= 643.38 +1,256.64 +1,022.1 = 2,922.12
5. This is operation is profitable. Hence the Company can continue the operation to next year.
Sal Amato operates a residential landscaping business in an affluent suburb of St. Louis. In an...
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