Mile High Cycles

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

Price or rate Variance 170,100.00 687 25,050.00

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.

materials more efficiently and it is especially evident in the Frame Assembly

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

achieved in 2004. (See Exhibit 4 for details)

Exhibit 2. Variance between Flexible budget and Actual budget:

Frame assembly: Steel tubing Paint Labor

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

$4,825,000 $1,200,000 $0 $65,000 $1,265,000 10000 $120 0 $0 5000 $13

1.00 $120 0.00 $0 0.50 $13

$3,500,000 $105,000

10000 $350 7500 $14

1.00 $350 0.00 $0 0.75 $14

10800 0 8100

$3,780,000 $0 $113,400

= 10800 * 350 = 0*0 = 8100*14 = sum( 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

Other costs Total overhead

$750,000 $1,200,000

$75

50.00 $73 0.00

1 10800

$790,000 $1,240,000

Total Annual Costs

$10,895,000

Cost per bike = total annual costs / # of bikes $1,089.50

0.00

$11,710,600

Cost per bike = total annual costs / # of bikes $1,084.31

Frame Assembly: Steel tubing Paint Labor

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

Price or rate Variance (Actual Rate Standard Rate) x Actual Qty

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

$5,211,000 10800 0 5400 $1,296,000 $0 $70,200

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)

Actual rate $31.50 $20.50 $15.25

Actual Qty 113400 1375 100200

Actual costs $3,572,100 28,187 $1,528,050

U U F

170,100 687 25,050

U U U

(162,000) 500 (117,000)

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

(82,663) 21,600 25,000 4,050

F U U U 21,600 25,000 2,750 U U U 0 0 1,300 U U U

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

= 10800 * 350 = 0*0 = 8100*14 = sum( 3,780,000 , 0 , 113,400)

$367.00 $4.17 $14.50

10800 10800 8000

$3,963,600 45,000 116,000

1.00 1.00 0.74

183,600 45,000 2,600

U U U

183,600 45,000 4,000

U U U

0 0 (1,400)

U U F

Total final ass embly

$3,893,400

$4,124,600

231,200

U Spending Variance Overhead Volume Variance

Overhead cos ts: Rent $23 Office staff $9

$250,000 $100,000 $100,000

$23 $9 $9

$250,000 100,000 100,000

0 0 0 Note: Budget Over head rate = 1,200,000 / 10,000 =$120

Depreciation Other costs Total overhead

$9 $73 1 10800 $790,000 $1,240,000

= 250,000 (fixed portion of "other

$79 10800

850,000 $1,300,000 1.00

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

Flexible Overhead ($1,240,00) Actual overhead ($1,300,000)

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

Exhibit 4: - Gross Margin for Actuals vs. Flexible budget

Gross Margin Revenue Total Annual Actual costs Profits (Revenue Total Actual costs) Gross Margin (Actual)

$13,000,000 $11,969,787

$1,030,213 7.92% $13,000,000 $11,710,600

Revenue Total Annual Flexible budget costs Profits (Revenues total Annual Flexible budget costs) Gross Margin (Flexible Budget)

$1,289,400 9.92%