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 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:

• Fertilizer purchase price per pound: Type I, $0.54; Type II, $0.46
• Fertilizer usage: 44 pounds per application
• Typical hourly wage rate of landscape personnel: $9.40
• 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. Compute Sal’s direct-material variances for each type of fertilizer.

Type Type II Direct-Material Price variance Quantity variance Purchase price variance

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?

Answer 1

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)

1. Direct Material Variances

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.