But the likely cause here is that the lower priced

This preview shows page 28 - 31 out of 43 pages.

including inexperienced workers and machine malfunctions. But the likely cause here is that the lower-priced titanium was lower quality or less refined, which led to more waste. The labor efficiency variance could be affected if the lower quality titanium caused the workers to use more time.3.Switching suppliers was not a good idea. The $12,000 savings in the cost of titanium was outweighed by the $20,000 extra material usage. In addition, the $20,000U efficiency variance does not recognize the total impact of the lower quality titanium because, of the 6,000 pounds purchased, only 5,000 pounds were used. If the quantity of materials used in production is relatively the same, Better Bikes could expect the remaining 1,000 lbs to produce 100 more units. At standard, 100 more units should take 100 × 8 = 800 lbs. There could be an additional unfavorable efficiency variance of (1000 ×$20)(100 × 8 × $20)$20,000$16,000$4,000U4.The purchasing manager’s performance evaluation should not be based solely on the price variance. The short-run reduction in purchase costs was more than offset by higher usage rates. His evaluation should be based on the total costs of the company as a whole. In addition, the production manager’s performance evaluation should not be based solely on the efficiency variances. In this case, the production manager was not responsible for the purchase of the lower-quality titanium, which led to the unfavorable efficiency scores. In general, it is important for Stanley to understand that not all favorable material pricevariances are “good news,” because of the negative effects that can arise in the production process from the purchase of inferior inputs. They can lead to unfavorable
efficiency variances for both materials and labor. Stanley should also that understand efficiency variances may arise for many different reasons and she needs to know these reasons before evaluating performance. 5.Variances should be used to help Better Bikes understand what led to the current set of financial results, as well as how to perform better in the future. They are a way to facilitate the continuous improvement efforts of the company. Rather than focusing solely on the price of titanium, Scott can balance price and quality in future purchase decisions. 6.Future problems can arise in the supply chain. Scott may need to go back to the previous suppliers. But Better Bikes’ relationship with them may have been damaged and they may now be selling all their available titanium to other manufacturers. Lower quality bicycles could also affect Better Bikes’ reputation with the distributors, the bike shops and customers, leading to higher warranty claims and customer dissatisfaction, and decreased sales in the future.
7-35(30 min.)Direct manufacturing labor and direct materials variances, missing data. 1.Flexible Budget(Budgeted InputActual CostsQty. Allowed forIncurred (ActualActual Input Qty.Actual OutputInput Qty.× Actual Price)× Budgeted Price× Budgeted Price)Direct mfg. labor$368,000a$384,000b$360,000c$16,000 F$24,000 UPrice varianceEfficiency variance$8,000 UFlexible-budget varianceaGiven (or 32,000 hours × $11.50/hour)b32,000 hours × $12/hour = $384,000c

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture