Chapter 10, Problem 36P

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 55 fertilization clients:

• Each client required six applications throughout the year and was billed $40 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 5,000 pounds of Type I fertilizer at $.53 per pound and 10,000 pounds of Type II fertilizer at $.40 per pound. Actual usage amounted to 3,700 pounds of Type I and 7,800 pounds of Type II.
• A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $11.50 per hour because of a very tight labor market; the employee logged a total of 165 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, $.50; Type II, $.42

  Fertilizer usage: 40 pounds per application

  Typical hourly wage rate of landscape personnel: $9

  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 of each type of fertilizer.
2. 2. Compute the direct-labor variances.
3. 3. Compute the actual cost of the client applications. (Note: Exclude any fertilizer in inventory, as remaining fertilizer can be used next year.) Was the new service a financial success? Explain.
4. 4. Analyze the variances that you computed in requirements (1) and (2).
   1. a.      Was the new service a success from an overall cost-control perspective? Briefly discuss.
   2. b.      What seems to have happened that would give rise to customer complaints?
5. 5. In view of the complaints, should the fertilizer service be continued next year? Why?

To determine

Calculate the direct material variances of Company S for each type of fertilizer.

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

Standard cost: In the accounting records, the term standard cost refers to the practice of replacement of an expected cost for an actual cost. Then the difference between the expected costs and actual costs showing the variance are also recorded periodically. A standard costs is also known as target cost or predetermined cost.

Calculate the direct material variances of Company S for each type of fertilizer as follows:

Type I-Fertilizer:

Particulars	Amount in ($)
Price variance:
Actual price for actual quantity $\left(\text{3,700 pounds }\times \text{ \$0}\text{.53}\right)$	$ 1,961
Less: Standard price for actual quantity $\left(\text{3,700 pounds }\times \text{ \$0}\text{.50}\right)$	$1,850
Direct-material price variance	$111 Unfavorable
Quantity variance:
Standard price for actual quantity used $\left(\text{3,700 pounds }\times \text{ \$0}\text{.50}\right)$	$ 1,850
Less: Standard price for standard quantity allowed $\left(\text{4,400 pounds (1)}\times \text{ \$0}\text{.50}\right)$	$2,200
Direct-material quantity variance	$350 Favorable
Purchase price variance:
Actual price for Actual quantity purchased $\left(\text{5,000 pounds }\times \text{ \$0}\text{.53}\right)$	$ 2,650
Less: Standard price for actual quantity purchased $\left(\text{5,000 pounds }\times \text{ \$0}\text{.50}\right)$	$ 2,500
Direct-material purchase price variance	$150 Unfavorable

Table (1)

Type II-Fertilizer:

Particulars	Amount in ($)
Price variance:
Actual price for actual quantity $\left(\text{7,800 pounds }\times \text{ \$0}\text{.40}\right)$	$ 3,120
Less: Standard price for actual quantity $\left(\text{7,800 pounds }\times \text{ \$0}\text{.42}\right)$	$3,276
Direct-material price variance	$156 Favorable
Quantity variance:
Standard price for actual quantity used $\left(\text{7,800 pounds }\times \text{ \$0}\text{.42}\right)$	$ 3,276
Less: Standard price for standard quantity allowed $\left(\text{8,800 pounds (2)}\times \text{ \$0}\text{.42}\right)$	$3,696
Direct-material quantity variance	$420 Favorable
Purchase price variance:
Actual price for Actual quantity purchased $\left(\text{10,000 pounds }\times \text{ \$0}\text{.40}\right)$	$ 4,000
Less: Standard price for actual quantity purchased $\left(\text{10,000 pounds }\times \text{ \$0}\text{.42}\right)$	$ 4,200
Direct-material purchase price variance	$200 Favorable

Table (2)

Working note (1):

Calculate the standard quantity allowed for Type I fertilizer.

$\begin{array}{c}\begin{array}{l}\text{Standard quantity allowed}\\ \text{ for Type I fertilizer}\end{array}\}=\left(\begin{array}{l}\text{Fertilizer usage }\times \\ \text{Number of clients}\times \\ \text{Number of applications}\end{array}\right)\\ =40\text{ pounds}\times \text{55 clients}\times 2\text{ applications}\\ \text{=4,400 pounds}\end{array}$

Working note (2):

Calculate the standard quantity allowed for Type II fertilizer.

$\begin{array}{c}\begin{array}{l}\text{Standard quantity allowed}\\ \text{ for Type II fertilizer}\end{array}\}=\left(\begin{array}{l}\text{Fertilizer usage }\times \\ \text{Number of clients}\times \\ \text{Number of applications}\end{array}\right)\\ =40\text{ pounds}\times \text{55 clients}\times 4\text{ applications}\\ \text{=8,800 pounds}\end{array}$

To determine

Calculate the direct labor variances of Company S.

Explanation of Solution

Calculate the direct labor variances of Company S as follows:

Particulars	Amount in $
Rate variance:
Actual labor rate for actual hours $\left(\text{165 hours × \$11}\text{.50}\right)$	$ 1,897.50
Less: Standard labor rate for actual hours $\left(\text{165 hours × \$9}\text{.00}\right)$	1,485.00
Direct-labor rate variance	$412.50 Unfavorable
Efficiency variance:
Standard rate for actual hours $\left(\text{165 hours × \$9}\text{.00}\right)$	$ 1,485.00
Less: Standard rate for standard hours allowed $\left(\text{220 hours × \$9}\text{.00}\right)$	1,980.00
Direct-labor efficiency variance	$495.00 Favorable

Table (3)

To determine

Calculate the actual cost of the client applications and explain whether the new service has a financial success or not.

Explanation of Solution

Calculate the actual cost of the client applications and explain whether the new service has a financial success or not as follows:

Particulars	Amount in $
Actual direct material cost for Type I fertilizer $\left(\text{3,700 pounds }\times \text{ \$0}\text{.53}\right)$	$1,961.00
Add: Actual direct material cost for Type II fertilizer $\left(\text{7,800 pounds }\times \text{ \$0}\text{.40}\right)$	$3,120.00
Add: Actual direct labor cost $\left(\text{165 hours × \$11}\text{.50}\right)$	$1,897.50
Total actual cost	$6,978.50

Table (4)

Yes, the new service has a financial success, because Company S has incurred $13,200 $\left(55\text{ clients }\times \text{ 6 applications}\times \text{40 per applications}\right)$ revenue with the cost of $6,898.50, and the new service has produced a profit of $6,221.50$\left(\$13,200-\$6,978.50\right)$.

To determine

Explain whether the new service is considered as a successful service from an overall cost control perspective.

Explanation of Solution

Explain whether the new service is considered as a successful service from an overall cost control perspective as follows:

In this case, the new service is considered as a successful service from an overall cost control perspective because total material and labor variance of Company S is $897.50 F (3), and favorable variance indicates that Company S is more efficient to keep the actual costs within the standard.

Working note (3):

Calculate the total material and labor variances.

Particulars	Amount in ($)
Type I fertilizer:
Price variance	-111.00 U
Quantity variance	350.00 F
Type II fertilizer:
Price variance	156.00 F
Quantity variance	420.00 F
Direct labor:
Rate variance	-412.50 U
Efficiency variance	495.00 F
Total material and labor variances	$897.50 F

Table (5)

To determine

Explain the reason why the customer complaints are increasing.

Explanation of Solution

Explain the reason why the customer complaints are increasing as follows:

The favorable variance indicates that the less time is spent for the job than the standard, and the part-time employees is rushing and doing sloppy work, at the same time fertilizers are used less than the budgeted. These would reduce the quality of fertilizer and quality might be main reason for the customer complaints.

To determine

Explain whether the fertilizer service should be continued for next year or not.

Explanation of Solution

Explain whether the fertilizer service should be continued for next year or not as follows:

In this case, it is fully depend upon the management judgement, if the service is continued, then Company S should consider to hiring full time employee and should increase the standard amount of fertilizer in order to increase the quality.