Question

Penray uses a standard costing system in evaluating production operations .The company has had a number of problems with suppliers and employees in recent times so they hired a new production supervisor, David Smith. David Smith has been working for the company for three months now and the employees appear much happier with the company.

The director of manufacturing commented that employeesappear happier after Smith had been there for the last three months and with the changes in suppliers of material and various morale boosting activities the overall total labour and material variances being low he seemed to have transformed the companyand to have considerably improved its performance from a company which has always struggled to achieve its cost targets and achieve positive material and labour variances.

The following additional information is provided:

- The company purchased and consumed 90,000 kilograms of direct materials at $7.90 per kilogram and paid $15.50 per hour for 42,000 direct labour hours
- Total units produced were 19,200
-The company's standard costs show that each completed unit required 4.4 kilograms of direct materials at $8.50 per kilogram and 2.5 direct labour hours at $14 per hour.

Required :

1. Calculate the direct material and the direct labour variances.

2. Based on your answer to part 1 should the management of Penray be concerned about its variances? Explain why.

3. Are things going as smoothly as the director of manufacturing believes? Evaluate the company's variances and determine whether or not the changes in suppliers and the morale boosting activities appear to be working.Explain why.