Chapter 10, Problem 37P

Santa Rosa Industries uses a standard-costing system to assist in the evaluation of operations. The company has had considerable trouble in recent months with suppliers and employees, so much so that management hired a new production supervisor, Frank Schmidt. The new supervisor has been on the job for five months and has seemingly brought order to an otherwise chaotic situation.

The vice president of manufacturing recently commented that “… Schmidt has really done the trick. The change to a new direct-material supplier and Schmidt’s team-building/morale-boosting training exercises have truly brought things under control.” The VP’s comments were based on both a plant tour, where he observed a contented workforce, and a review of the following data, which was excerpted from a performance report:

These variances are especially outstanding, given that the amounts are favorable and small. (Santa Rosa’s budgeted material and labor costs generally each average about $350,000 for similar periods.) Additional data follow.

• The company purchased and consumed 45,000 pounds of direct materials at $7.70 per pound, and paid $16.25 per hour for 20,900 direct-labor hours of activity. Total completed production amounted to 9,500 units.
• A review of the firm’s standard cost records found that each completed unit requires 4.2 pounds of direct material at $8.80 per pound and 2.6 direct-labor hours at $14 per hour.

Required:

1. 1. On the basis of the information contained in the performance report, should Santa Rosa be concerned about its variances? Why?
2. 2. Calculate the company’s direct-material variances and direct-labor variances.
3. 3. On the basis of your answers to requirement (2), should Santa Rosa be concerned about its variances? Why?
4. 4. Are things going as smoothly as the vice president believes? Evaluate the company’s variances and determine whether the change to a new supplier and Schmidt’s team-building/morale-boosting training exercises appear to be working. Explain.
5. 5. Is it possible that some of the company’s current problems lie outside Schmidt’s area of responsibility? Explain.