Sal Amato operates a residential landscaping business in an affluent suburb of S

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 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 $0.53 per pound and 10,000 pounds of Type II fertilizer at $0.40 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, $0.50; Type II, $0.42
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. Compute Sal’s direct-material variances of each type of fertilizer.
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?

Explanation / Answer

1) Direct Material Variance (Standard Quantity X Standard Price) - (Actual Quantity X Actual Price) Standards: Particulars Type I Type II Purchase Price 0.5 0.42 Fertiliser Usage per application 40 40 No. of application 2 4 Fertiliser Usage 80 160 No. of Clients 55 55 Total Fertilizer Usage 4400 8800 Standard Quantity 4400 8800 Standard Price 0.5 0.42 Total Standard Price 2200 3696 Actuals: Purchase Price 0.53 0.4 Total Fertilizer Usage 3700 7800 Actual Quantity 3700 7800 Actual Price 0.53 0.4 Total Actual Price 1961 3120 Direct Material Variance ( TYPE I) Standard Price - Actual Price 2200 - 1961 = 239 Favourable Direct Material Variance ( TYPE II) Standard Price - Actual Price 3696 - 3120 = 576 Favourable 2) Direct Labour Variance (Standard Rate X Standard hours ) - (Actual Rate X Actuals Hours) Standards: Particulars Standard Rate per hour 9 Labour Time per application 40 minutes No. of applications 6 Total time for 6 applications 240 minutes No. of Clients 55 Total Time required for all clients 13200 minutes Total number of Hours (13200 /60) 220 hours Standard Hours 220 Standard Rate 9 Total Standard Cost 1980 Actuals: Actual Rate per hour 11.5 Actual hours worked 165 Total Actual Cost 1897.5 Direct Labour Variance Standard Rate - Actual Rate 1980 - 1897.50                           82.50 Favourable 3-a) Actual Cost of Client Applications: Particulars Type I Type II Total Purchase Price 0.53 0.4 Actual Usage 3700 7800 Total Fertilizers cost 1961 3120 5081 Labour 1897.5 Total Cost 6978.5 3-b) Calculation of profit or Loss Service Revenue 55*6*40 13200 Total Cost 6978.5 Profit 6221.5 4) As the Material Variance and Labour variance was favourable , the new service was a success as per cost perspective. 5) Yes, as the new service is profit making this should be continued but should also try to reduce the complaints of the clients to maintain ang grow in the new business.

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