Case #2
In 2017, Olivia started Sandwich Booth as a producer of freshsandwiches sold in grocery stores throughout the Avalon Peninsula.While she produces a variety of sandwiches, her roast chicken withgrilled peppers and goat cheese continues to be her most popularproduct line. Each sandwich sells for $10.00 and, by 2018, Olivia’ssandwiches were so popular that she could no longer keep up withdemand. That year, Olivia hired two friends, Aria and Nico, to helpwith food production and allow her to focus her efforts onmarketing and distribution.
To help Olivia understand the cost of operating her business,she implemented a standard costing system. Standard costs areupdated monthly and the standard cost sheet used for Julyproduction (previous month) of the chicken sandwich product line isas follows:
| Standard Price/Kg | Standard Usage/Sandwich |
Roast chicken | $3.50 | 0.55 kg |
Grilled peppers | $8.70 | 0.24 kg |
Goat cheese | $42.20 | 0.05 kg |
| | |
* Direct labour | $14.80 per hour | 0.10 hrs |
** Variable overhead | $2.00 | 0.02 hrs |
** Fixed overhead | $0.40 | 0.05 hrs |
* This rate is per hour (not perkilogram).
** Based on direct labour hours.
Olivia also gathered actual production activity for the roastchicken sandwiches for the month of July:
Actual production of roast chicken sandwiches | 3,335 |
Roast chicken | $4.52 |
Grilled pepper were purchased at (per kg) | $8.64 |
Goat cheese was purchased at (per kg) | $43.12 |
| |
Direct labour: | |
Direct labour total cost | $4,487 |
Direct labour hours used | 300 |
Olivia estimates practical activity to be 3,250 chickensandwiches per month. Ingredients are purchased throughout eachmonth. Inventory data regarding raw materials for July is providedbelow.
Raw Material | Beginning Inventory | Ending Inventory | Inventory Used |
Roast chicken | 260 kg | 310 kg | 1,868 kg |
Grilled peppers | 385 kg | 180 kg | 767 kg |
Goat cheese | 15 kg | 87 kg | 200 kg |
Generally speaking, Olivia is pleased with the performance ofAria and Nico. They have both been enthusiastic and pleasantemployees to have working for the company. Recently, Nico providedOlivia with a sample of a roast chicken sandwich made with hisgrandmother’s traditional family recipe. Although Olivia found ittoo salty for her tastes, she agreed to have Nico preparesandwiches using the family recipe. In July, Olivia thought shenoticed the roast sandwiches prepared using Nico’s family recipewere the first to sell out and, overall, was pleasantly surprisedto find that roast chicken sandwich sales were more than 400 unitshigher than in June.
Required:
- Olivia’s goal is to maintain a minimum net profit of 10% on theroast chicken sandwiches. Determine whether the current standardcost of the chicken sandwiches will generate the required netprofit.
- Calculate the raw material price and usage variance, the directlabour rate and efficiencies variances, and indicate whether eachvariance is favourable or unfavourable. Please note that there arethree raw material inputs (i.e., roast chicken, grilled peppers,and goat cheese). Thus, you will need to compute three materialprice variances and three materials usage variances.
- Olivia has set a control limit of plus or minus $75 on each ofthe raw material inputs and $100 for direct labour, for both theindividual price (rate) and usage (efficiency) variances. Based onthe material and labour variances you computed, which variancesshould be investigated?
- Based on your variance analysis above, could the variances haveany connection to Nico, one of the two new hires? If so, shouldNico’s employment be terminated?
