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)		x		=
Direct materials (usage)		x		=

Next determine the formula and calculate the cost for the flexible budget.

		x		=	Flexible budget cost
Direct materials		x		=

Now compute the price and efficiency variances for direct materials. Label each variance as favorable (F) or unfavorable (U).

	Price		Efficiency
	variances		variances
Direct materials

Katharine Donaldson is the owner of Grand Bikes, a company that produces high quality cross-country bicycles. Grand Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Grand Bikes has purchased titanium from suppliers in the supply chain. Grand 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, Grand Bikes hired Michael LaChut, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs If he purchased titaniurn from an online marketplace at a lower price. - X Data Table Requirements Grand Bikes established the following standards based upon the company's experience with their previous suppliers. The standards are as follows: Cost of titanium $17 per pound Titanium used per bicycle Blbs. Actual results for the first month using the online supplier of titanium are as follows 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 Grand Bikes? Explain why or why not. 4. 4 Should Michael Lachut's performance evaluation be based solely on price variances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Donaldson to understand the causes of a varlance before she evaluates performance? 5. Other than performance evaluation, what reasons are there for calculating variances? 6. What future problems could result from Grand Bikes' decision to buy a lower quality of titanium from the online marketplace? 700 Bicycles produced Titanium purchased Titanium used in production 7,100 lb. for $113,600 6,600 lb. Print Done Print Done could be due to several factors including The is due to the difference between the standard price based on the previous suppliers and the actual price paid through the online marketplace. The nexperienced workers, lower quality product, and machine malfunctions. The variance could be affected if the lower quality titanium caused the workers to use more time. Requirement 3. Was switching suppliers a good idea for Grand Bikes? Explain why or why not, Switching suppliers a good idea. The in the cost of titanuim was outweighed by the material usage. In addition, the variance recognize the total impact of the lower quality titanium because only pounds were used. Grand Bikes could expect the remaining pounds to result in an additional variance. Requirement 4. Should Michael LaChut's performance evaluation be based solely on price variances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Donaldson to understand the causes of a variance before she evaluates performance? The purchasing manager's performance evaluation be based solely on the price variance. The short-run V in purchase costs was more than offset by usage rates. In addition, the production manager's performance evaluation V be based solely on the efficiency variances. In this case, the production manager responsible for the purchase of the lower-quality titanium, which led to the W efficiency scores Select the two statements that answer why it is important for Katharine Donaldson to understand the causes of a variance before she evaluates performance. It is important for Donaldson to understand that not all favorable material price variances are "good news", because of the negative effects that can arise in the production process from the purchase of inferior inputs. Donaldson should understand efficiency variances may arise for many different reasons and she needs to know these reasons before evaluating performance It is important for Donaldson to understand that all favorable material price variances are "good news", because they are increasing profits. m Donaldson should understand efficiency variances may arise for only one reason and she needs to know that reason before evaluating performance Requirement 5. Other than performance evaluation, what reasons are there for calculating variances? O A. Variances are used to demand higher quality materials from suppliers at the same cost that Grand Bikes pays now. B. Variances should be used to help Grand Bikes understand what led to the current set of financial results, as well as how to perform better in the future. O C. To use the variance information to negotiate lower prices with suppliers. Requirement 6. What future problems could result from Grand Bikes' decision to buy a lower quality of titanium from the online marketplace? O A. Future problems can arise in the supply chain. LaChut may need to go back to the previous suppliers. But Grand Bikes' relationship with them may have been damaged and they may now be selling all their available titanium to other manufacturers. B. Lower quality bicycles could affect Grand Bikes' reputation with the distributors, the bike shops and customers, leading to higher warranty claims and customer dissatisfaction, and decreased sales in the future. O c. There are no future problems from buying a lower quality of titanium. Grand Bikes has a good reputation and bike shops and customers will still purchase the bikes. As a result LaChut has increased profits. O D. Both A and B