Sam Johnson, the kitchen manager for Pleasant Town Chili, is very concerned. The new owner is starting to use variance analysis to evaluate his performance, and the first report is looking dire. Sam is confused, since he thought the month went well. Cold weather had pushed sales higher than expected, and he adjusted the recipe to include a bit less meat to offset the rising cost of ground beef. Sam has asked you to help figure out why the report looks so bleak.

Pleasant Town Chili is a small restaurant in the local mall's food court. Its main product is a serving of chili. The only direct material in this process is the meatbeans and other shelf-stable ingredients are included in the variable overhead which is allocated based on direct labor hours. The February budget, based on standard costs, was:

Sales 2,500 chili servings

Direct materials: $1,250 (1/4 pound @ $2.00 per pound, times 2,500 servings)

Direct labor: 3,237.50 (0.14 DLH per bowl @ $9.25 per DLH, times 2,500 servings)

Variable overhead: $507.50 (VOH allocated at $1.45 per DLH, times 350 DLH budgeted)

Actual February performance of the Riverside Mall restaurant was:

Sales 2,800 servings

588 lbs of meat, for a total cost of $1,310.00

395 DLH, for a direct labor cost of $3,685.35

Variable overhead expenses of $551.50

In early March, Sam received the following financial performance report:

PLEASANT TOWN CHILI

Kitchen Performance Report

For the Month of February

Actual

Budget

Variance

Meat

$1,310.00

$1,250.00

$60.00U

Direct labor

$3,685.35

$3,237.50

$447.85U

Variable OH

$551.50

$507.50

$44.00U

Total

$5,546.85

$4,995.00

$551.85U

Sam needs your help to understand this variance analysis - he's counting on getting a raise next year, which will be unlikely if his performance is as bad as this report indicates.

Required:

Prepare a memo addressed to Sam with your analysis of the current performance report, and his individual performance. In your memo, answer the following questions. Include a supporting document showing Sam the calculations you refer to in your memo.

a.Would it be appropriate for the new owner to evaluate Sam's performance based on this variance report? Why or why not?

b.Prepare a more useful variance analysis. Your analysis should include the total budget variance as well as its price/rate/spending and quantity/efficiency component. The following format might be helpful:

Account

Actualcost

Flexible budget

Total Budget Variance

Price/Rate Variance

Qty/Efficiency Variance

Meat

$1,310.00

Direct labor

$3,685.35

Variable OH

$551.50

Total

$5,546.85

c.Summarize your findings(s) from the performance report prepared in part b (i.e., what does your report suggest about Sam's performance).