Riide, as discussed in the chapter opener, uses a costing system with standard costs for direct materials, direct labor and overhead costs. Two comments frequently are mentioned in relation to standard costing and variance analysis: Variances are not explanations and Managements goal is not to minimize variances. Write a short memo (no more than two paragraphs) to Amber Wason and Jeff Stefanis, Riides co-founders, interpreting these two comments in the context of their electric bike business. After your memo, please choose one of the follow questions to comment on: Which of the two comments was most difficult for you to explain and why? How are standard costs for direct materials determined? What trick has helped you remember how to compute variances?

Reading:

WASHINGTON, DC-Avid bikers Amber Wason and Jeff Stefanis believe electric bicycles are the solution to urban congestion and global energy needs. However, we didnt see anything at an affordable price that people would want to ride, recalls Jeff. Amber adds, no one in the US had done it, so we decided to design and build our own. Amber and Jeff spent a year and their own money to design and develop Riide (Ride.com), a lighter and cheaper e-bike. The duo set out to make their e-bike maintenance-free. We obsessed over every detail, explains Jeff, and we developed precise standards. They set standards for materials and labor. We use only the highest quality components, says Amber, and we reject any material that does not meet our requirements. Amber and Jeff focus on variances between actual and expected costs. Materials price and quantity variances are used to control the costs of expensive raw materials. Unfavorable materials price variances can result from rising materials prices, which can lead them to consider alternative suppliers or to raise selling price. Each Riide bike is assembled by hand, so the company knows precisely how long each bike should take to assemble. If assembly takes longer than expected, Amber and Jeff investigate why and take corrective action. Riide has sold out all of its production for many months in advance. Our biggest challenge is keeping up with demand. Explains Amber. We want to accelerate production. When production accelerates, budgets quickly can become outdated. Flexible budgets, which reflect budgeted costs at different production levels, are useful in analyzing performance and controlling costs. While attention to budgeting, standard costs, and variances is important, Amber and Jeff encourage others to have passion and give back. We have a grand vision, claims Amber. We have to.

Sources: Riide website, January 2017: Pando, January 9, 2014; Urbanful, January 13,2015, DCInno, February 8, 2016 Washington Post, August 4, 2014