Oven Grime to Shine Ltd

Oven Grime to Shine Ltd (OGS) provides a domestic oven cleaning service in the English Midlands, specialising in student properties. OGSs unique selling point is the Wizzoclean cleaning liquid that it uses on all its jobs. OGS does not advertise and gets most of its work from recommendations from satisfied customers. Most of these customers are landlords who own multiple properties.

OGS has a number of technicians who each cover a different geographical area. The technicians work alone and OGS uses a standard costing system as part of its control system, with variance analysis reports generated on a monthly basis.

The standard cost card for a cleaning job (based on a typical oven) is shown below:

	$/job
Selling price	80.00
Wizzoclean (1.5 litres x $19/litre)	28.50
Direct labour (0.75 hours x $16/hour)	12.00
Variable overhead (0.75 hours x $10/hour)	7.50
Standard contribution	32.00

OGS operate a marginal costing system and fixed overhead is budgeted to be $47,500 per month.

A new Operations Manager was appointed in August and she has constantly emphasised to the technicians the need to improve efficiency, although she has not provided any training or guidance on how jobs can be completed to the same standard while using a lower level of resources. She was pleased to see that as a result of the emphasis placed on efficiency the company had generated large favourable material usage and labour efficiency variances in September and October.

In November the jobs completed generated sales revenue of $232,725. The actual costs for the month, along with selected variances that have already been calculated, are shown below:

Actual results for November

Wizzoclean (3,950 litres) Direct labour (1,740 hours)

Variable overhead Fixed overhead

$75,350 $27,600 $18,500

$46,250

Selected variances for November

Sales volume Sales price Variable overhead expenditure Variable overhead efficiency

Fixed overhead expenditure

$27,200 (A) $725 (F) $1,100 (A) $4,350 (F)

$,250 (F)

The Sales Manager has become increasingly concerned about the volume of sales, as they have fallen below the budgeted level of 3,750 jobs per month in both October

and November.

Required

a) Calculate the direct material variances and direct labour variances for November.

b) Identify and explain the most likely reasons for the fall in OGSs sales volume in October and November, using information in the scenario and the variances calculated in part a (if appropriate) to support your answer.