09/24/2011
Analysis
Professor Dr. Julie Hertenstein
COST ANALYSIS FOR STRATEGIC CHANGE: ACCT 6291
Prasanna Gopalakrishnan
Q#1. See Exhibit 1 for the detailed data on Flexible budget. Q#2. Variances associated with Frame Assembly: (See Exhibit 2 for detailed steps)
Usage or Efficiency Variance (162,000.00) 500.00 (117,000.00)
Total Variance Frame assembly: Steel tubing Paint Labor Total Variance (Frame Assembly) 8,100.00 1,187.00 (91,950.00) (82,663.00)
F/U U U F F
F/U U U U
F/U F U F
Variances associated with Wheel Assembly (see Exhibit 2 for detailed steps)
Price or rate Variance 21,600.00 25,000.00 2,750.00 Usage or Efficiency Variance 0.00 0.00 1,300.00
Total Variance Wheel assembly: Parts Rework parts Labor Total Variance (wheel Assembly) 21,600.00 25,000.00 4,050.00 50,650.00
F/ U U U U U
F/U U U U
F/U U U U
Variances associated with Final Assembly ( See Exhibit 2 for detailed steps)
Price o rate r Variance 183,600.00 45,000.00 4,000.00 U ag or s e E fficiency Variance 0.00 0.00 (1,400.00)
T otal Varian ce Final as em s bly: Parts R ork parts ew Labor To Variance (F al tal in As b s em ly) 183,600.00 45,000.00 2,600.00
F/ U U U U
F/U U U U
F/U U U F
231,200.00
Variances associated with Overhead Costs (See exhibit 2 for detailed steps)
Q#3. Yes. Bob Moyer should be concerned about the performance of Mile High Cycles since based on his Actual cost data, it appears that Mile High Cycles incurred an additional cost of $18.81 per bike than what Bob had originally budgeted for. This translates to an unexpected loss of $203,187 towards its profits. (See Exhibit 3 for the calculations).
and Labor rates are the biggest drivers for variances between Bobs Actual costs and Budgeted costs.
Final Assembly area is quite higher than what he had budgeted for. It increased from $350 to $367 per unit (4.87% higher). Similarly the costs
for parts used by Frame Assembly and Wheel Assembly had also increased. The Labor costs have also increased slightly for all the various
areas of his plant. Overall, Bob needs to pay attention to the Material and Labor costs.
area where the efficiencies had helped generate a favorable variance. In spite of the efficiencies gained, due to price variances on material
Overhead costs: Rent Office staff Depreciation Other costs Total Variance (Overhe
After calculating his Flexible budget, it appears that Material prices The cost of parts especially in the On the positive side, his plant has been utilizing the
3
and labor, Mile High Cycles incurred additional costs compared to what was budgeted. The increase in Material and Labor costs might be related to market conditions in 2004. In order to keep his material costs stable, Bob should work out contracts with his suppliers to lock in the rates of the components so that he can get a stable material rate and possibly even get a better rate as a result of confirming his intent to do bulk orders from his supplier. If he had retained his budgeted material and labor rates,
based on his sales revenue of $13,000,000, Mile High Cycles would have achieved a gross margin of 9.92% vs. a gross Margin of 7.72% it
Budget - # of Bikes = 10,000 per bike usage = Standard Qty / # of Standard Standard bikes) Qty rate Cost 110000 $30 11.00 $3,300,000 $25,000 1250 $20 0.13 $1,500,000 100000 $15 10.00
Flexible budget - # of Bikes = 10,800 Standard rate (same as the Flexible budget Flexible Cost = explanation of original Qty(F) = per bike Flexible Budget Qty calculation for budget) usage x 10,800 x Standard Rate Flexible cost 118800 $3,564,000 =118800*30 $30 $20 1350 $27,000 =1350*20 $15 108000 $1,620,000 =10,800 *15 = sum(3,564,000 , 27,000 , 228150 $5,211,000 1,620,000) 10800 0 5400 16200 $1,296,000 $0 $70,200 $1,366,200 = 10800 * 120 = 0*0 = 5400*13 = sum(1,296,000 , 0 , 70,200)
Total frame Wheel assembly: Parts Rework parts Labor Total wheel Final assembly: Parts Rework parts Labor
$3,500,000 $105,000
10800 0 8100
$3,780,000 $0 $113,400
Total final assembly Total Variable Variable cost per bike = total variable costs / # of bikes Overhead costs: Rent Office staff Depreciation
$3,605,000 $9,695,000
18900
$969.50 $250,000 $100,000 $100,000 $25 $10 $10 0.00 $23 0.00 $9 0.00 $9
$3,893,400 $10,470,600 Note: Fixed costs do not change $250,000 $100,000 $100,000
Note: The variable portion of "other costs" = 2/3 x 750,000 = 500,000 The fixed portion of the "other costs" = 1/3 x 750,000 = 250,000 Per bike rate for the variable portion of the "other costs" = 500,00/10,000 = 250,000 (fixed portion of "other costs" + per bike rate * 10,800
$750,000 $1,200,000
$75
1 10800
$790,000 $1,240,000
$10,895,000
0.00
$11,710,600
Flexible budget - # of Bikes = 10,800 Standar d rate Flexible Flexible Cos t (same budget = Flexible as the Qty(F) = per Budget Qty x original bike us age Standard budget) x 10,800 Rate 118800 $3,564,000 $30 $20 1350 $27,000 $15 108000 $1,620,000
Actual - # of bikes = 10,800 Per bike usage = (Actual Qty / # of bikes ) 10.50 0.13 9.28
Total Variance = Actual costs Flexible budget costs 8,100 1,187 (91,950)
F/ U
F/ U
Usage or Efficiency Variance (Actual Qty - Flexible budget qty) x Standard Rate
F/U
Total frame Wheel assembly: $120 Parts Rework parts Labor $0 $13
explanation of calculation for Flexible cost =118800*30 =1350*20 =10,800 *15 = sum(3,564,000 , 27,000 , 1,620,000) = 10800 * 120 = 0*0 = 5400*13 = sum(1,296,000 , 0 , 70,200)
U U F
U U U
F U F
$5,128,337 $122.00 $2.31 $13.50 10800 10800 5500 $1,317,600 25,000 74,250 1.00 1.00 0.51
Total wheel Final as sembly: Parts $350 Rework parts Labor $0 $14
$1,366,200
$1,416,850
50,650
10800 0 8100
$3,780,000 $0 $113,400
U U U
U U U
0 0 (1,400)
U U F
$3,893,400
$4,124,600
231,200
$23 $9 $9
$79 10800
60,000 (4,000)
U U (60,000) U 56,000 (Budget overhead rate ($120) * Actual Qty (10,800) ) Flexible Ov erhead costs ($1,240,000 ) F
Exhibit 3 Cost per bike calculations: Budgeted Total cost : $10,895,00 ; Total # of Bikes = 10,000 Cost per bike (Budgeted) = 10895000/10000 = $1,089.50 Actual Total cost: $11,969,787; Total # of bikes = 10,800
Cost per bike (Actual) = 11969787/10800 = $1,108.31 Difference in cost per bike = 1108.31 1089.50 = $18.81 Additional cost incurred = $18.81 * 10,800 = $203,187.00
Gross Margin Revenue Total Annual Actual costs Profits (Revenue Total Actual costs) Gross Margin (Actual)
$13,000,000 $11,969,787
Revenue Total Annual Flexible budget costs Profits (Revenues total Annual Flexible budget costs) Gross Margin (Flexible Budget)
$1,289,400 9.92%