Question

Katharine Austen is the owner of Best Bikes, a company that produces high quality cross-country bicycles. Best Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price. (Click the icon to view the standard and actual information.)

Answer 1

Answer is given below

1 Material Price Variance Efficiency variance $8,900 $24,000 $8,900 Note: Price variance is recorded based of quantity purchased Price variance -= (Standard price - Actual price ) * Actual quantity of raw material used ($24-$23)*8,900 Efficiency variance = ( Standard quantity for actual production - Actual quantity) * standard rate ((800*8)-7,400)*24 2 price variance is caused 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 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