George Siam runs a landscaping business in a wealthy suburb of Wellington. He provides a high quality service and focuses on the design and installation of top of the market landscaping plans that include fountains, trees, paving, lighting and exotic plants. However, his clients are continually requesting new services. Therefore, he has recently introduced a range of lawn maintenance services, including fertilization.
The following data relates to the first year of his landscaping service, when he serviced 55 clients. Each client needs six applications of fertilizer during the year and was charged Sao for each application. For each client, two applications involve Grade A fertilizer, which contains a special ingredient for weed control. The remaining four applications are with Grade B fertilizer.
Based on prior knowledge of the operation and after advice from other landscapers, George estimated the following:
■ Typical wage rate per employee: $27 per hour.
■ Labour time per application of fertilizer: 40 minutes.
■ Purchase price of fertilizer per kilogram: Grade A. $0.50; and. Grade B. San.
■ Fertiliser usage: 40 kilograms per application.
George purchased 5000 kilograms of Grade A fertilizer at $0.53 per kilogram and 10 000 kilograms of Grade B fertilizer at $0.40 per kilogram. Actual usage amounted to 3700 and Moo kilograms respectively.
A new part-time employee, Fred, was hired to spread the fertilizer. George Found he had to pay Fred $34.50 per hour due to the very tight market for fertilizer specialists, and Fred worked a total of 165 hours during the year. Unfortunately. George% new service did not go smoothly, and customers’ complaints were much higher than expected.
1. Calculate the direct material variances for each typo of fertilizer.
2. Calculate direct labour variances.
3. Calculate the total actual cost of the new service. Was it a financial success? Explain.
4. Consider the variances that you calculated in requirements 1 and 2.
(a) Was the new service a success from an overall cost-control perspective?
(b) What seems to have happened that gave rise to customer complaints?
5. In view of the complaints, should the fertilizer service continue to be offered next year? Why?