Going into 2004, Bob Moyer planned to produce 10,000 bicycles at Mile High Cycles. Construction of his bicycles includes the utilization of three departments, frames, wheel assembly, and final assembly. During this year, Mile High Cycles ended up actually producing 10,800 bicycles to meet higher than expected demand. Bob is curious as to whether or not he was successful in maintaining costs to meet these higher levels of demand.
1. Bob Moyer provided us with his 2004 production budget and production costs. The production budget can be viewed as his master/static budget based on his predicted production of 10,000 bicycles. The production costs he provided us with represent the actual budget based on the 10,800 bicycles produced (Exhibit
…show more content…
These differences in part prices result in a total unfavorable variance of $537,787. To find quantity variance, the standard price is held constant while the quantity of each part varies, to show how total cost is impacted by the difference in the quantity of parts used. Therefore this variance compares standard price x actual quantity (SP*AQ) to standard price x standard quantity (SP*SQ) (Exhibit E). Quantity variance, unlike price variance, actually resulted in a favorable variance of $278,600. You can check that these two variances are correct because when added together they result in an overall unfavorable variance of $259,187, the same as what we originally calculated as the total variance. Breaking the overall variance down into the price and quantity parts shows us that the variances between the flexible and actual costs are mostly due to price variances. Prior to 2004, Bob underestimated most of the prices he would be paying for labor and materials. Going forward he will need to adjust his estimates.
2. We don’t think Bob Moyer should be concerned about Mile High Cycles’s performance. Even though his actual costs were $11,969,787, $1,074,787 higher than he had originally budgeted and even $259,187 higher than the flexible budget at the same level of production, 10,800 bicycles, we aren’t worried for the future of his company. In 2004, Mile High Cycles was able to generate $13 million in sales revenue, even with higher than expected costs, this still