Miles High Cycles

Katherine Roland and John Connors

1.) Determine the direct cost and overhead variances. What might be causing each of the variances to occur?

Direct Cost Variance

Planned Budget Flexible Budget Actual Production Variance

10,000 bicycles 10,800 bicycles 10,800 bicycles
produced produced produced
Frames:
Steel Tubing $3,300,000.00 $3,564,000.00 $3,572,100.00 -$8,100.00
Paint $25,000.00 $27,000.00 $28,187.00 -$1,187.00
Labor $1,500,000.00 $1,620,000.00 $1,528,050.00 $91,950.00
Total Frame $4,825,000.00 $5,211,000.00 $5,128,337.00 $82,663.00
Wheels:
Parts $1,200,000.00 $1,296,000.00 $1,317,600.00 -$21,600.00
Re-work Parts $0.00 $0.00 $25,000.00 -$25,000.00
Labor $65,000.00 $70,200.00 $74,250.00 -$4,050.00
Total Wheel $1,265,000.00 $1,366,200.00 $1,416,850.00 -$50,650.00
Final Assembly:
Parts $3,500,000.00 $3,780,000.00 $3,963,600.00 -$183,600.00
Re-work Parts $0.00 $0.00 $45,000.00 -$45,000.00
Labor $105,000.00 $113,400.00 $116,000.00 -$2,600.00
Total Final Assembly $3,605,000.00 $3,893,400.00 $4,124,600.00 -$231,200.00
Total Direct Costs $9,695,000.00 $10,470,600.00 $10,669,787.00 -$199,187.00

Overhead Cost Variance

Planned Budget Flexible Budget Actual Production Variance

10,000 bicycles 10,800 bicycles 10,800 bicycles
produced produced produced
Rent $250,000.00 $250,000.00 $250,000.00 $0.00
Office staff $100,000.00 $100,000.00 $100,000.00 $0.00
Depreciation $100,000.00 $100,000.00 $100,000.00 $0.00
Other costs (variable) $500,000.00 $540,000.00 $600,000.00 -$60,000.00
Other costs (fixed) $250,000.00 $250,000.00 $250,000.00 $0.00
Total Overhead $1,200,000.00 $1,240,000.00 $1,300,000.00 -$60,000.00

Total Costs $10,895,000.00 $11,710,600.00 $11,969,787.00 -$259,187.00

The variances are caused by higher direct material and direct labor usage than what was originally budgeted. This
could be because of poor planning upfront that led to wrong estimations or it could be because of mistakes in the
manufacturing process that led to more materials and labor being used to remake bicycle parts. That is where the re-
work parts come into play. If measurements were more carefully done in the beginning stages then the re-work parts
would not have been necessary.

2.) Should Bob Moyer be concerned about Mile High Cycle's performance? Where should he be prepared to direct his
attention? What additional information should he try to obtain?
Yes, Bob Moyer should be concerned about Mile High Cycle's performance. The overall variance is unfavorable and more par
labor are being used than what should be. He should diect most of his attention to the costs of the materials and the labor. Mo
materials and labor are being used than what should be but the actual costs are higher than the budgeted costs at every level.
specifically, he should look at the cost for kits in the final assembly step because the actual is $17 higher than bugeted, which
problem when you consider that 10,800 bicycles are being made. This is something that should be able to be more controlled
overtime hours and more accurate costing research to find cheaper raw materials. Raw material purchasing could be done in b
isn't already, and bulk prices compared to normal purchasing is some additional information that Moyer could try to obtain.

3.) Are there any purposes for which a total, per unit variance would be more useful than a series of functional varianc
so, for what?

A per unit variance could be useful when trying to determine what level of production would be the most profitable for Mile High
variance for each unit was given then we could see at what point it would no longer be worth it to create more overtime hours t
more request. For the most part the functional variances are more useful for a company because they show what part of the p
costing too much money and exactly what needs to be adjusted to decrease costs. In a per unit variance, the cost of steel tubi
go up, leading to higher frame assembly costs, and a higher perunit cost but it would not be readily obvious to the company wh
increase in price came from, only that it did increase.
rs
h of the variances to occur?

Favorable or
Unfavorable

U
U
F
F

U
U
U
U

U
U
U
U
U

Favorable or
Unfavorable

-
-
-
U
-
U

as originally budgeted. This

because of mistakes in the
cle parts. That is where the re-
stages then the re-work parts

e should he be prepared to direct his

 l variance is unfavorable and more parts and
costs of the materials and the labor. More raw
than the budgeted costs at every level. Most
tual is $17 higher than bugeted, which is a huge
at should be able to be more controlled with less
material purchasing could be done in bulk, if it
ation that Moyer could try to obtain.

ful than a series of functional variances? If

ould be the most profitable for Mile High. If the

worth it to create more overtime hours to fulfill
y because they show what part of the process is
per unit variance, the cost of steel tubing could
ot be readily obvious to the company where the