You are the controller of VexTek, Inc., which 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, Hector Letcher. 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 to you: That Hector Letcher has really done the trick. The change to a new direct material supplier and Hectors team-building and morale-boosting training exercises have truly brought things under control. The VPs comments were based on both a plant tour, where he observed a contented work force, and a review of a performance report prepared by Hector Letcher. Included in the report were the following variances: direct material, $4,620 favorable; and direct labor, $6,175 favorable. These variances are especially outstanding, given that the amounts are favorable and small, continued the vice president. Our budgeted material and labor costs generally each average about $350,000 for similar periods.

As controller of the company, you obtained additional data as follows:

The company purchased and consumed 45,000 pounds of direct material 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 firms 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.

Instructions:

1. Calculate the companys direct material variances and direct labor variances.

2. On the basis of your answers to the above, what would you say to VexTeks VP of manufacturing concerning Hector Letchers actual production-related results?

3. Are things going as smoothly as the vice president believes? Evaluate the companys direct material and direct labor variances and determine whether the change to a new supplier and Hectors team-building/morale-boosting training exercises appear to be working. Explain.