“Luxurycare Ltd” is a small company, run by two sisters Helen and Jo, which makes two hand cream products, hand cream and soft lotion aimed at the beauty salon market. The production is automated and a JIT system is used, so there is no inventory of raw materials or finished products. The production is monitored for quality throughout and output per kilo jar is counted each week. At present the company counts the quantity of 1 kilo jars it produces during the week and lists the cost of ingredients for that week to calculate a cost per jar each week. The company makes no effort to distinguish how much of the ingredients are used for each product. The recipe for the products requires the following ingredients per kilo of output: Ingredient Hand cream Soft lotion Standard Price per kg kg kg £ Water 0.3 0.25 0 Emulsifying wax 0.4 0 0.5 Shea butter 0 0.5 0.8 Olive oil 0.3 0.3 0.3 Essential oils 0.1 0.05 1.0 Total kg 1.1 1.1 For calculation purposes water should be ignored as it is free to use. The budgeted and actual production for week ending April 30th was: Hand cream 4,000 kilos Soft lotion 6,000 kilos Ingredients bought and used: Actual Usage Actual cost kg £ Emulsifying wax 1,580 805 Shea butter 3,110 2,460 Olive oil 3,240 980 Essential oils 660 600 Required:
a) Calculate the price and quantity variances for each ingredient.
b) Calculate the mix and yield variances for the week.
c) Explain the results you have provided in parts a) & b) in a way that helps Helen and Jo to be able to run their business better.
d) Explain to Helen and Jo how they could use additional records and analysis to obtain more information for monitoring and managing their costs and efficiency in order to run their operation better.
