Question

8.59 Calculating and interpreting materials and labor flexible budget variances (LO2, LO3). SpringFresh provides commercial laundry and linen services to local hospitals, hotels, and restaurants. SpringFresh charges its customers $1.50 per pound laundered, regard- less of the items to be cleaned (e.g., sheet, towel, garment, tablecloth). SpringFresh budgets to launder 70,000 pounds each month and, for each pound laundered, budgets to spend $0.10 on materials and $0.40 cents on labor. For the most recent month, Spring Fresh actually laundered 60,000 pounds and spent $5,000 on ma- terials and $20,000 on labor. Required: a. What are the materials and labor-related flexible budget variances for the most re- cent month? b. In the absence of any other information, does it appear that Spring Fresh's manage- ment has done a good job controlling costs in the most recent month? c. Assume that in recent months, SpringFresh has received numerous complaints about the quality of their services. Specifically, several customers have complained that their laundry is not as clean as it used to be" and, even worse, that some of their items have come back stained. Does this information cast the favorable variances and management's performance in a different light?

Answer 1

A. Material & Labour Related Variances

1. Material Price Variance = (Actual Price - Standard Price) * Actual quantity

= (Actual Price * Actual Quantity) - (Standard Price * Actual Quantity)

= 5000 - (0.10*60,000) (Note: Actual expenditure is 5000 which is given )

= 5,000 - 6,000 = (1000). Negative indicates an adverse variance.

Material Yield Variance = (Actual Unit - Standard Unit) * Standard Cost

= (60,000-70,000) * 0.1

= (1,000). Negative indicates an adverse variance.

2. Labour Rate Variance = (Actual Cost - Expected Cost) * Actual Hours

= (Actual Cost * Actual Hours) - (Expected Cost * Actual Hours)

= 20,000 - (0.4*60,000)

= 20,000-15,000 = 5,000   (Note: Actual expenditure is 20,000 which is given)

Labour Efficiency Varicane = (Actual - Standard ) * Standard Rate

= (60,000 - 70,000) * 0.4

= (4,000)

B. From the above analysis, it can be concluded that, the Net Material Variance is (2000) (Negative) which means adverse. And Net Labour Variance is 1000 (positive) which means favourable.

So, the Net Variance is (1000) (Negative) means Adverse Variance.

So, it appears that Spring Fresh's management has not done a good job in controlling cost.

C. No, as only the labour rate variance is favourable, so it can be seen that management has only cosidered about its favourable rate variance of the labour. Also we are receiving the complaints from the customer regarding the quality of the services. So it can be said that the variance are good as adverse and it can be identified fromt the feedback as well.