Question

Sam Johnson, the kitchen manager for Pleasant Town Chili, is very concerned. The new owner is starting to use variance analysis to evaluate his performance, and the first report is looking dire. Sam is confused, since he thought the month went well. Cold weather had pushed sales higher than expected, and he adjusted the recipe to include a bit less meat to offset the rising cost of ground beef. Sam has asked you to help figure out why the report looks so bleak.

Pleasant Town Chili is a small restaurant in the local mall’s food court. Its main product is a serving of chili. The only direct material in this process is the meat—beans and other shelf-stable ingredients are included in the variable overhead which is allocated based on direct labor hours. The February budget, based on standard costs, was:

• Sales 2,500 chili servings

• Direct materials: $1,250 (1/4 pound @ $2.00 per pound, times 2,500 servings)

• Direct labor: 3,237.50 (0.14 DLH per bowl @ $9.25 per DLH, times 2,500 servings)

• Variable overhead: $507.50 (VOH allocated at $1.45 per DLH, times 350 DLH budgeted)

Actual February performance of the Riverside Mall restaurant was:

• Sales 2,800 servings

• 588 lbs of meat, for a total cost of $1,310.00

• 395 DLH, for a direct labor cost of $3,685.35

• Variable overhead expenses of $551.50

In early March, Sam received the following financial performance report:

PLEASANT TOWN CHILI
Kitchen Performance Report
For the Month of February
	Actual	Budget	Variance
Meat	$1,310.00	$1,250.00	$60.00 U
Direct labor	$3,685.35	$3,237.50	$447.85 U
Variable OH	$551.50	$507.50	$44.00 U
Total	$5,546.85	$4,995.00	$551.85 U

Sam needs your help to understand this variance analysis – he’s counting on getting a raise next year, which will be unlikely if his performance is as bad as this report indicates.

Required:

Prepare a memo addressed to Sam with your analysis of the current performance report, and his individual performance. In your memo, answer the following questions. Include a supporting document showing Sam the calculations you refer to in your memo.

1. Prepare a more useful variance analysis. Your analysis should include the total budget variance as well as its price/rate/spending and quantity/efficiency component. The following format might be helpful:

Account	Actual     cost	Flexible budget	Total Budget Variance	Price/Rate    Variance	Qty/Efficiency Variance
Meat	$1,310.00
Direct labor	$3,685.35
Variable OH	$551.50
Total	$5,546.85

           

3. Summarize your findings(s) from the performance report prepared in part a (i.e., what does your report suggest about Sam’s performance).

Answer 1

Account	Actual cost	Flexible budget (AQ*SR)	Total budget variance (AQ*AP)- ( SQ*SP)	Price/rate variance (AP-SP) AQ	Quantity/Efficiency variance ( AQ-SQ) SP
Meat	$1,310.00	$1,176	$ 61.24 UF	$ 135.24 UF	$ 74 F
Direct labor	$3,685.35	$3,653.75	$ 447.85 UF	$ 31.6 UF	$ 416.25 UF
Variable overhead	$551.50	$572.75	$ 43.92 UF	$ 21.33 F	$ 65.25 UF
Total	$5,546.85	$ 5,402.5	$ 553.01 UF	$ 145.51 UF	$ 407.5 UF

a) Table shown above is the variance analysis report of pleasant town chilli. The variance analysis of direct material, direct labor and variable overhead is presented. F denotes favorable variance and UF denotes unfavorable variance.

c) while evaluating the performance of the firm, it can be seen that the total variance for direct material; meat is unfavorable due to unfavorable material price variance but the quantity variance is favorable. Both rate variance and efficiency variance if direct labor is unfavorable which caused the total variance to be unfavorable. The actual rate of direct material and direct labor was higher than the budgeted rates. The actual direct labor hours employed was higher than the standard hours allowed. But the actual direct material quantity used was lower than the budgeted which caused the direct material quantity variance to be favorable. The variance analysis shows that the performance of the company failed in meeting the standards, so there is a need to undergo a thorough analysis on the part of management to find the reasons of these variances and take measures to correct those variances.