PROBLEM 10.
33 (35 minutes) Calculation of variance, analysis: service
company
1 Type I fertiliser:
Price variance:
Actual quantity purchased actual price
5000 kilograms $ 0.53 $2 650
Actual quantity purchased standard price
5000 kilograms $ 0.50 2 500
Direct material price variance $ 150 Unfavourable
Quantity variance:
Actual quantity used standard price
3700 kilograms $ 0.50 $1 850
Standard quantity allowed standard price
4400 kilograms* $ 0.50 2 200
Direct material quantity variance $ 350 Favourable
* 40 kilograms 55 clients 2 applications
Type II fertiliser:
Price variance:
Actual quantity purchased actual price
10 000 kilograms $ 0.40 $4 000
Actual quantity purchased standard price
10 000 kilograms $ 0.42 4 200
Direct material price variance $ 200 Favourable
Quantity variance:
Actual quantity used standard price
7800 kilograms $ 0.42 $3 276
Standard quantity allowed standard price
8800 kilograms* $ 0.42 3 696
Direct material quantity variance $ 420 Favourable
* 40 kilograms 55 clients 4 applications
2 Direct labour variances:
Rate variance:
Actual hours used actual rate
165 hours $34.50 $5 692.50
Actual hours used standard rate
165 hours $27.00 4 455.00
Direct labour rate variance $ 1 237.50 Unfavourable
Efficiency variance:
Actual hours used standard rate
165 hours $27.00 $4 455.00
Standard hours allowed standard rate
220 hours* $27.00 5 940.00
Direct labour efficiency variance $ 1 485.00 Favourable
* 2/3 hours 55 clients 6 applications
3 Actual cost of applications:
Type I fertiliser:
Actual quantity used actual price (3 700 kilograms $ 0.53) $1 961.00
Type II fertiliser:
Actual quantity used actual price (7 800 kilograms $ 0.40) 3 120.00
Direct labour:
Actual hours used actual rate (165 hours $34.50) 5 692.50
Total actual cost $10 773.50
Yes, the service was a financial success. George charged clients $40 per
application, generating revenue of $13 200 (55 clients 6 applications
$40). With costs of $10773.50, the fertilisation service produced a profit of
$2426.50.
4 (a) Yes, the service was a success. Overall costs were controlled as indicated by a
total favourable variance of $1067.50. In addition, each of the three cost
components (Type I fertiliser, Type II fertiliser and direct labour) produced a
net favourable variance. George did have a sizable unfavourable labour rate
variance as a result of his having to pay $34.50 per hour when a more typical
wage rate would have been $27.00 per hour. This inflated rate is attributable
to the tight labour market, which is beyond his control. ( Note: Part of the variance
may have been caused by a standard rate that was set too low, especially given the fact that this is
a new service.)
Type I fertiliser:
Price variance $150.00 Unfavourable
Quantity variance 350.00 Favourable
Type II fertiliser:
Price variance 200.00 Favourable
Quantity variance 420.00 Favourable
Direct labour:
Rate variance 1 237.50 Unfavourable
Efficiency variance 1 485.00 Favourable
Total material and labour variances $1 067.50 Favourable
(b) In this case, several of the favourable variances may have come back to haunt
George. The favourable labour efficiency variance means that less time is
being spent on the job than originally anticipated. This may indicate that the
part-time employee is rushing and doing sloppy work. Also, the use of less
fertiliser than budgeted (i.e. favourable quantity variances for both Type I and
Type II) would likely give rise to an increased occurrence of weeds as well as
a lack of greening in the lawn.
5 This is a management judgement for George to make. If the service is continued,
George should consider hiring a full-time employee and insisting on the standard
amount of fertiliser being applied to each lawn.
