Mile High Cycles Case

2924 Words Dec 1st, 2013 12 Pages
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 A).
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Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.
To determine the causes of the variances, price variances and quantity variances can be calculated separately for each aspect of bicycle construction. Price variance and quantity variance are the two parts that make up the total variance between the flexible budget and the actual budget, which we found to be $259,187. To find price variance, the actual quantity of each part used must be held constant while price per part varies. This will show how the total cost is impacted by the difference in part price. Therefore this…