Question

(Click the icon to view the employee information.) Jennifer Bailey has run Cleaning Maids, a specialty cleaning service for medical and dental offices, for the past 10 years. Her static budget and actual results for April 2017 are shown below. (Click the icon to view the actual and budgeted income statements.) Read the requirements. Requirement 1. How many offices, on average, did Bailey budget for each employee? How many offices did each employee actually clean? Determine the formula to show how many offices, on average, the employees cleaned. (X = number of offices cleaned by experienced employee, Y = number of offices cleaned by both less experienced employees) (Click the icon for information regarding the formula selections.) ( E x x )+( F X Y = B Next, calculate the budgeted and actual number of offices for each employee type. Budgeted Actual number of offices number of offices Experienced employee Less experienced employees

Answer 1

1. This sub-question can be solved through simultaneous equations since there are two unknowns, X & Y.
X = Number of Offices cleaned by the experienced employee
Y = Number of Offices cleaned by the less experienced employees each

This can be written as,
(a) Budgeted --> X + 2Y = 280 ... (i)
$30X + (2*$15)Y = $6,720
Therefore, 30X + 30Y = 6,720 ...(ii)
Multiplying equation (i) by 15 15X + 30Y = 4,200 ...(iii)

Subtracting equation (iii) from equation (i), we get 15X = 2520
Therefore, X = 2520 / 15 = 168
Substituting X = 168 in equation (i),
168 + 2Y = 280
Therefore, 2Y = 112
Y = 56

(b) Actual ---> X + 2Y = 320 ... (iv)
$30X + (2*$15)Y = $8,400
Therefore, 30X + 30Y = 8,400... (v)
Multiplying equation (iv) by 15 15X + 30Y = 4,800... (vi)

Subtracting equation (vi) from equation (v), we get 15X = 3,600
Therefore, X = 3,600/15 = 240
Substituting X = 240 in equation (iv),
240 + 2Y = 320
2Y = 80
Therefore, Y = 40

Summarising the answer for sub-question 1 in the below table

	Budgeted Number of Offices	Actual number of Offices
Experienced Employee	168	240
Less experienced Employees each	56	40

Budgeted and Actual offices cleaned by each employee type

	Budgeted Number of Offices	Actual number of Offices
Experienced Employee	168	240
Less experienced Employees	112	80

2.  We'll prepare a Flexible Budget for April 2017 for 3 levels of activity (offices cleaned); 280, 300 and 320; with the help of per unit values given in Static budget for 280 offices cleaned.

Flexible Budget for April 2017 is given below
Activity Level

Particulars	$ per office (budgeted)	280 offices	300 offices	320 offices
Revenue	150	42,000	45,000	48,000
Variable Costs:
Costs of Supplies	4.5	1,260	1,350	1,440
Labour - Experienced	30	5,040	5,400	5,760
Labour - Inexperienced	15 per employee	1,680	1,800	1,920
Total Variable Cost	NA	(7,980)	(8,550)	(9,120)
Contribution Margin		34,020	36,450	38,880
Fixed Costs	NA	(9,300)	(9,300)	(9,300)
Operating Income		24,720	27,150	29,580

3. (a) Sales Price Variance:
Budgeted Sales Price = $42,000 / 280 = $150
Actual Sales Price = $57,600 / 320 = $180


Therefore,
Sales Price Variance = (Actual Sales Price - Budgeted Sales Price) * Actual number of Offices Cleaned
= ($180 - $150) * 320
= $9,600(F) ... F = Favorable

Sales PriceVariance = (Actual Rate - Budgeted Rate) x Actual Quantity

(b) Labor Efficiency Variance:
- For experienced employee:
Standard number of Offices expected to be cleaned by experienced employee as per Actual number of offices cleaned
= 168 * (320 / 280) = 192
Actual number of Offices cleaned by experienced employee = 240
Labour Efficiency Variance = (Actual Offices Cleaned - Budgeted Offices Cleaned) * Budgeted Rate
= (240 - 192) *  $30
= $1,440 (U) ... U = Unfavorable

  - For inexperienced employees:
  Standard number of Offices expected to be cleaned by inexperienced employees as per Actual number of offices cleaned
= 112 * (320/280) = 128
  Actual number of Offices cleaned by inexperienced employees = 80
   Labour Efficiency Variance = (80 - 128) * 15$
= $780(F)

Labour Efficiency Variance for Each type summarised in below table

Experienced Employee	$1,440(U)
Inexperienced Employees	$720(F)

4. In addition to the information provided in the income statements, Bailey should keep a track of the number of hours actually spent by each employee in each office since as per the standard time required to clean an office as per the given information (2 hours), the inexperienced employees should be cleaning much more offices than they are actually cleaning. Bailey should also take a look at the Sales prices charged for each hour spent on cleaning an office (per hour rate), at the moment it looks like the per hour price charged for offices cleaned by Inexperienced employee is very low and hence efforts should be made to increase this rate.