Answer the following questions, reading the Case Study, Exhibits and reviewing the PP3 attachment.

1.UsingtheapproachinPP3,developa2004flexiblebudget,andcomputetheflexible-actualvariances.(tableandexplanationparagraph)

2.Determinedirectcostvariances(sixforFrame;foureachforWheelandFinal)andtwooverheadvariances. (Min 150 words discussing answer)

3. What is causing these variances? Do you see any patterns or relationships among the variances that suggest possible causes? (Min 150 words discussing answer)

\fIn 2005, Bob Moyer was reviewing production costs for Mile High Cycles. Located in Denver, Colorado, the company sold very high-quality, handcrafted mountain bikes to bicycle retailers throughout the country. Sales for the company were $13 million that year. Bob Moyer had been an avid cyclist in college, racing for the Stanford University cycling team while completing his degree in mechanical engineering. After working for a few years as a design engineer for a company in Denver, Bob decided to start his own business. As a hobby, he had designed and built several prototypes of a mountain bike, which had been enthusiastically received by his mountain-biking friends. Approaching several friends and relatives for start-up money, Mile High Cycles was founded in 2003. A mountain bike was a bicycle with 15 to 21 speeds, designed and built to take the punishment of riding on dirt trails and roads. The bikes were first made by avid cyclists who customized their 10-speed road bikes in order to ride on mountain trails and dirt roads. Some with frame building experience began to experiment making their own frames in order to handle better the additional demands of off-road riding. By 1992, several small companies had emerged selling bicycles specifically designed for riding under these conditions. During the rest of the 1990s, mountain bikes had taken off in popularity, not only for use off-road but also for use in the city, where their sturdy construction could withstand the pounding from potholes and curbs. In addition, many casual cyclists preferred the mountain bike's more upright riding position in comparison to that of the hunched position of the 10-speed road bike. Sales of all bicycles in the United States had declined in 2003. However, over the same time period, sales of mountain bikes increased to more than 2.0 million units. Bob Moyer had planned to produce 10,000 bikes in 2004, all of one model. Operations at Mile High Cycles consisted of three departments: frames, wheel assembly, and final assembly. In frames, steel tubing was cut to length for the components of the frame. The prices were carefully welded together to form the completed frameset. This part of the process was quite time-consuming, requiring frequent inspection and measurement to ensure that the frameset was aligned perfectly. After welding, the frame was painted in one of 10 different colors schemes and prepared for final assembly. In wheel assembly, front and rear wheels were assembled from their key components: hubs, spokes, and rims. All of the components were purchased from an outside supplier. Mile High Cycles used a high-quality automatic lacing and truing machine to build its wheels. This machine would lace the spokes between the hubs and rim and then automatically tighten the spokes to the appropriate tension. The machine was quite precise but would occasionally damage spokes during the insertion process. In such a case, the operator would replace any damaged parts and restart the machine. Each wheel would also be inspected and trued by hand in order to ensure that the wheels were in perfect alignment. In final assembly, the frame and wheels were combined with other purchased parts to create the final package that would then be shipped to bicycle dealers. In this area, the front fork and many other key components were attached to the frame, and the inner tubes and tires were mounted on the wheels. In order to minimize damage while shipping, some of the bicycles' components were left packaged for the bicycle dealer to assemble before selling the bike to the final customer. All of the components were purchased from outside suppliers and then were combined to form kits for the bicycles. Mile High Cycles carried an inventory of spare parts to replace any parts damaged during assembly or shipping, although such replacement was quite infrequent. In reviewing his costs, Bob noted that he had produced 10,800 bicycles in 2004, 800 more than planned. Bob thought that operations during the year had done well to meet the additional demand, but he wondered if Mile High Cycles was doing a good job in managing its costs. Exhibit 1 shows the planned material, labor, and overhead costs for 2004. Exhibit 2 shows the actual material, labor, and overhead costs for that year. Performance Evaluation Flexible Budget and Variances 1 Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Example: Flexible Budget and Variance Direct Cost Variances Direct Material Variances Usage Variance = (SQ - AQ) x SP Price Variance = (SP - AP) x AQ Direct Labor Variances Efficiency Variance = (SQ - AQ) x SP Rate Variance = (SP - AP) x AQ Direct Material Variances Direct Material SP SQ AP AQ Standard per Unit Actual per Unit Actual Units 2 yds. @ $1/yd. 2.2 yds. @ $1.50/yd. 90 Direct Material Variances Direct Material SP Standard per Unit Actual per Unit Actual Units 2 yds. @ $1/yd. 2.2 yds. @ $1.50/yd. 90 $1/yd. SQ AP AQ $1.50/yd. Direct Material Variances Direct Material Standard per Unit Actual per Unit Actual Units 2 yds. @ $1/yd. 2.2 yds. @ $1.50/yd. 90 SP $1/yd. SQ 2 yds./ unit x 90 units = 180 yds. AP $1.50/yd. AQ 2.2 yds./unit x 90 units = 198 yds. Direct Material Variances Direct Material Standard per Unit Actual per Unit Actual Units 2 yds. @ $1/yd. 2.2 yds. @ $1.50/yd. 90 SP $1/yd. SQ 2 yds./ unit x 90 units = 180 yds. AP Usage Variance = (SQ - AQ) x SP AQ Price Variance = (SP - AP) x AQ $1.50/yd. 2.2 yds./unit x 90 units = 198 yds. Direct Material Variances Direct Material Standard per Unit Actual per Unit Actual Units 2 yds. @ $1/yd. 2.2 yds. @ $1.50/yd. 90 SP $1/yd. SQ 2 yds./ unit x 90 units = 180 yds. AP Usage Variance = (SQ - AQ) x SP AQ (180 - 198) x $1 $1.50/yd. 2.2 yds./unit x 90 = units 18 U = 198 yds. Price Variance = (SP - AP) x AQ ($1 - $1.50) x 198 = 99 U Total = 117 U Direct Material Variances Price Standard Cost SP $1 180 yds. SQ Volume Direct Material Variances Price Actual Cost AP $1.50 SP $1 180 yds. SQ 198 yds. AQ Volume Direct Material Variances Price AP $1.50 SP $1 Usage Variance Price Variance 180 yds. SQ 198 yds. AQ Volume Direct Labor Variances Direct Labor SP SQ AP AQ Standard per Unit Actual per Unit Actual Units .5 hrs. @ $6/hr. .4 hrs. @ $7/hr. 90 Direct Labor Variances Direct Labor SP Standard per Unit Actual per Unit Actual Units .5 hrs. @ $6/hr. .4 hrs. @ $7/hr. 90 $6/hr. SQ AP AQ $7/hr. Direct Labor Variances Direct Labor Standard per Unit Actual per Unit Actual Units .5 hrs. @ $6/hr. .4 hrs. @ $7/hr. 90 SP $6/hr. SQ .5 hrs./unit x 90 units = 45 hrs. AP $7/hr. AQ .4 hrs./unit x 90 units = 36 hrs. Direct Labor Variances Direct Labor Standard per Unit Actual per Unit Actual Units .5 hrs. @ $6/hr. .4 hrs. @ $7/hr. 90 SP $6/hr. SQ .5 hrs./unit x 90 units = 45 hrs. AP $7/hr. AQ .4 hrs./unit x 90 units = 36 hrs. Efficiency Variance = (SQ - AQ) x SP Rate Variance = (SP - AP) x AQ Direct Labor Variances Direct Labor Standard per Unit Actual per Unit Actual Units .5 hrs. @ $6/hr. .4 hrs. @ $7/hr. 90 SP $6/hr. SQ .5 hrs./unit x 90 units = 45 hrs. AP $7/hr. AQ .4 hrs./unit x 90 units = 36 hrs. Efficiency Variance = (SQ - AQ) x SP (45 - 36) x $6 Rate Variance = (SP - AP) x AQ ($6 - $7) x 36 Total = 54 F = 36 U = 18 F Direct Labor Variances Price Standard Cost SP $6 45 hrs. SQ Volume Direct Labor Variances Price Actual Cost AP $7 SP $6 36 hrs. 45 hrs. AQ SQ Volume Direct Labor Variances Price Actual Cost AP $7 Efficiency Variance SP $6 Rate Variance 36 hrs. 45 hrs. AQ SQ Volume Overhead Variances Overhead Spending Variance Flexible - Actual Overhead Volume Variance Absorbed1 - Flexible Total Overhead Variance Overhead Spending Variance + Overhead Volume Variance 1. Sometimes called \"Applied\" Overhead Variances Original Budget Flexible Budget Actual Volume 100 units 90 units 90 units Variable 100 90 Fixed 300 300 Total 400 390 Flexible 390 Actual 380 380 Absorbed = Overhead per unit from Original Budget = $400/100 units = x Actual units Total Absorbed = $4 x 90 $360 Overhead Variances Overhead Spending Variance Flexible - Actual = 390 - 380 = 10 F Overhead Volume Variance Absorbed1 - Flexible = 360 - 390 = 30 U Total Overhead Variance Overhead Spending Variance + Overhead Volume Variance = 10 F + 30 U = 20 U 1. Sometimes called \"Applied\" $ dget Flexible Bu $400 $300 100 Flexible Budget = $300 + $1 x Units Volume (units) $ dget Flexible Bu $400 380 $300 90 100 Flexible Budget = $300 + $1 x Units Flexible Budget at 90 units = $300 + $ x 90 = $390 Spending Variance = Flex - Actual = 390 - 380 = 10F Volume (units) $ ) ied ppl (A ed b b r vora so a b F A udget Flexible B $400 $300 an Vari e m olu le V b a r avo Unf ce rian a V e l um o V le ce 90 100 Flexible Budget = $300 + $1 x Units Absorbed = $4 x Units Volume Variance = Absorbed - Flex = $4 x 90 - (300 + $1 x 90) = $360 - $390 = 30 U Volume (units) Running head: FLEXIBLE BUDGET AND VARIANCE 1 Flexible Budget and Variance Name Institution FLEXIBLE BUDGET AND VARIANCE 2 FLEXIBLE BUDGET AND VARIANCE A flexible budget is a budget that shows differing levels of revenue and expense, based on the amount of sales activity that actually occurs (Horngren et al,. 2002) Its budget variance is any difference between the results generated by a budget model and actual results. FLEXIBLE BUDGET AND VARIANCE -2004 DM Standard ds per unit Frame assembly: Original budget unit (10,000) Steel tubing DL 8,0 $3,300,000 Actual per (10,800) $3,572,1 2 8,187 Paint $25,000 labor$1,500,000 $ 1,6 DL $5,128,337 00 25,000 Wheel assembly: Actual cost 1,528,05 70,000 0 Parts$1,200,000 $1,416,850 TOTALS OVERHEA D FIXED VARIABLE Labor 65,000 Final assembly: $1,317,6 Parts $3,500,000 00 25,000 Labor 105,000 S $9695000 7 $4,124,600 FLEXIBLE BUDGET AND VARIANCE 3 4250 $1,300,000 TOTAL Rent $250,000 OVERHEA D Office staff 100,000 Depreciation 100,000 $3,963,60 Other costs 75000 0 45,000 116000 1,200,000 1,200,000 (8,000hrs. $11,969,78 7 @$14.50/r $10,895,00 0 From the information given in the table, the direct cost variance is given by the difference between the actual costs and the original budget costs. Frame variances Frame assembly: Steel tubing =$3,572,100-$3,300,000 FLEXIBLE BUDGET AND VARIANCE 4 =$272,100 Paint=28,187-25000 =$3187 Labor cost in assembly=1528050-$1,500,000 =28050 Wheel assembly Parts=$1,317,600-1200000 =117,600 Rework parts=25000 Final variance Actual annual-budgeted annual $11,969,787-$10,895,000=$1,074,787 The variances and variations in the values obtained are as a result of the variance that is seen to be making the budget unpleasant (Finkler 1985) It represents what costs should be given a certain level of activity. The budget should be adjusted upward to reflect the actual number of units produced before a comparison is made, thus the term flexible budget. As we develop the process of cost variance analysis, we will use flexible budget information. That is, we will revise the master budget for direct materials, direct labor, and variable manufacturing overhead to reflect actual sales. The budget should be adjusted upward to reflect the actual number of units produced before a comparison is made. As we develop the process of cost variance analysis, we use flexible budget information. That is, we revise the master budget for direct materials, direct labor, and variable manufacturing overhead to reflect actual sales (Braun et al,. 2013) FLEXIBLE BUDGET AND VARIANCE 5 Variances are always caused by so many factors. In accounting the variation in the amount budgeted for and the actual cost is caused by the change in factors of production such as change in prices of the materials used and labor cost changes. From the above given data the change has been caused by varying changes including the bicycle uses and cost of production including high labor wages spent on various laborers. On the other hand, there is high cost on the direct material used to frame and wheel the bike. This has resulted to high overhead charges thus increasing the variance. The budget should thus be made allowing room for flexible changes that might occur in due course of the project. References Braun, K. W., Tietz, W. M., & Harrison, W. T. (2013). Managerial accounting. Pearson. Finkler, S. A. (1985). Flexible budget variance analysis extended to patient acuity and DRGs. Health care management review, 10(4), 21-34. Horngren, C. T., Bhimani, A., Srikant M.. Datar, Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall. FLEXIBLE BUDGET AND VARIANCE 6