Material cost variances, use of variances for performance evaluation Katharine Stanley is the owner of Better Bikes, a company that produces high quality cross-country bicycles. Better Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Better Bikes has purchased titanium from suppliers in the supply chain. Better 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, Better Bikes hired Michael Scott, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an on-line marketplace at a lower price.

Better Bikes established the following standard based upon their experience with their previous supplier. The standards are:

Actual results for the first month using the online supplier of titanium are:

1. Compute the direct materials price and efficiency variances.

2. What factors can explain the variances identified in requirement 1? Could any other variances be affected?

3. Was switching suppliers a good idea for Better Bikes? Explain why or why not

4. Should Michael Scott’s performance evaluation be based solely on price variances? Should the production manager’s evaluation be based solely on efficiency variances? Why it is important for Katharine Stanley to understand the causes of a variance before she evaluates performance?

5. Other than performance evaluation, what reasons are there for calculating variances?

6. What future problems could result from Better Bikes’ decision to buy a lower quality of titanium from the on-line marketplace?

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Cost of titanium Titanium used per bicycle $20 per pound 8 Ibs