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:
Direct-material variances, favorable $ 4,620
Direct-labor variances, favorable 6,175
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.
Calculate the company's direct-material variances and direct-labor variances. Indicate whether each variance is favorable or unfavorable.