Question

P7-38 (similar to) Katharine Austen is the owner of Quality Bikes, a company that produces high quality cross-country bicycles. Quality years Quality Bikes has purchased titanium from suppliers in the supply chain. Quality Bikes uses titanium for the bio year, Quality Bikes hired Michael Berkner, a recent graduate from State University, as purchasing manager. Michael (Click the icon to view the standard and actual information.) Read the requirements. Requirement 1. Compute the direct materials price and efficiency variances. Let's begin by calculating the cost for the actual input at the budgeted price. Actual input x Budgeted price = Cost Direct materials (purchases) Direct materials (usage)

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1 Material Price Variance Efficiency variance $8,800 F $21,000 U Budgeted Input for Budgeted Price Flexible Budget Budgeted Input for actual production X $21.00 $50,400 A 2,400 (300*$8 lbs) Cost Direct material (purchase) Direct material (usage) Actual Input 4,400 3,400 Standard price $21.00 $21.00 $92,400 B $71,400C x = Actual Input 4,400 Actual Price $19.00 Cost $83,600 D Direct material (purchase) Actual | x = Price Variance Efficiency variance $8,800 $21,000 Favourable Adverse 1 B-D A-C 2 price variance is caused due to change in procurement method through online. The procurement cost has reduced Efficiency variance is caused due to the production process Variance likes labor cost and overhead cost can be affected if due to production inefficiency more labor hours are consumed 3 Switching suppliers was a not good idea from the efficiency point of view since the variance is unfavourable Price variance is favourable. But overall variance is unfavourable. Hence the new material has affected the variance in an adverse way 4 The performance of the managers should be evaluated based on both the variance If lower price of material is purchased and quality is poor it will adversely affect the production efficiency Hence solely evaluating performance of procurement manager based on price variance is not advisable Quality of material purchased affects the production efficiency. 5 Variances analysis helps in Setting standard costs Setting budget targets Cost Management through cost control and cost reduction Setting benchmarks Forecasting 6 Lower quality of titanium will adverse affect the efficiency of process and may be lead production losses It will also increase the cost of quality compliance