Concept explainers
Variances in the service sector. Derek Wilson operates Clean Ride Enterprises, an auto detailing company with 20 employees. Jamal Jackson has recently been hired by Wilson as a controller. Clean Ride’s previous accountant had done very little in the area of variance analysis, but Jackson believes that the company could benefit from a greater understanding of his business processes. Because of the labor-intensive nature of the business, he decides to focus on calculating labor variances.
Jackson examines past accounting records, and establishes some standards for the price and quantity of labor. While Clean Ride’s employees earn a range of hourly wages, they fall into two general categories: skilled labor, with an average wage of $20 per hour, and unskilled labor, with an average wage of $10 per hour. One standard 5-hour detailing job typically requires a combination of 3 skilled hours and 2 unskilled hours.
Actual data from last month, when 600 detailing jobs were completed, are as follows:
Skilled (2,006 hours) | $39,117 |
Unskilled (944 hours) | 9,292 |
Total actual direct labor cost | $ 48,409 |
Looking over last month’s data. Jackson determines that Clean Ride’s labor price variance was $1,151 favorable, but the labor efficiency variance was $1,560 unfavorable. When Jackson presents his findings to Wilson, the latter is furious. “Do you mean to tell me that my employees wasted $1,560 worth of time last month? I’ve had enough. They had better shape up, or else!” Jackson tries to calm him down, saying that in this case the efficiency variance doesn’t necessarily mean that employees were wasting time. Jackson tells him that he is going to perform a more detailed analysis, and will get back to him with more information soon.
- 1. What is the budgeted cost of direct labor for 600 detailing jobs?
- 2. How were the $1,151 favorable price variance and the $1,560 unfavorable labor efficiency variance calculated? What was the company’s flexible-
budget variance ? - 3. What do you think Jackson meant when said that “in this case the efficiency variance doesn’t necessarily mean that employees were wasting time”?
- 4. For the 600 detailing jobs performed last month, what is the actual direct labor input mix percentage? What was the standard mix for labor?
- 5. Calculate the total direct labor mix and yield variances.
- 6. How could these variances be interpreted? Did the employees waste time? Upon further investigation, you discover that there were some unfilled vacancies last month in the unskilled labor positions that have recently been filled. How will this new information likely impact the variances going forward?
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
- Big Apple Design Company specializes in designing commercial office space in Chicago. The firm’s president recently reviewed the following income statement and noticed that operating profits were below her expectations. She had a hunch that certain customers were not profitable for the company and asked the controller to perform a customer-profitability analysis showing profitability by customer for the month of March. Required: Put yourself in the position of Big Apple’s controller and write a memo to the president to accompany the customer-profitability graph. Comment on the implications of the customer-profitability analysis and raise four or more questions that should be addressed by the firm’smanagement team.arrow_forwardThe following situations describe decision scenarios that could use managerial accounting information: The manager of High Times Restaurant wishes to determine the price to charge for various lunch plates. By evaluating the cost of leftover materials, the plant manager of a precision tool facility wishes to determine how effectively the plant is being run. The division controller of West Coast Supplies needs to determine the cost of products left in inventory. The manager of the Maintenance Department of a large manufacturing company wishes to plan next year’s anticipated expenditures. For each situation, discuss how managerial accounting information could be used. b) What are the major differences between managerial accounting and financial accounting?arrow_forwardWolk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor for this company is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete customer orders. From time order is placed to time order received by manufacturing 18.0 days From time order is received by manufacturing to time production begins 9.0 days Inspection time 3.5 days Process (manufacturing) time 7.0 days Move time 4.5 days What is the production (manufacturing) lead time for this order? Multiple Choice 34 days. 16…arrow_forward
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- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning