Mile High Cycles Analysis

COST ANALYSIS FOR STRATEGIC CHANGE: ACCT 6291

Professor Dr. Julie Hertenstein

Prasanna Gopalakrishnan

Q#1. See Exhibit 1 for the detailed data on Flexible budget.

Q#2. Variances associated with Frame Assembly: (See Exhibit 2 for detailed steps)

09/24/2011

Variances associated with Wheel Assembly (see Exhibit 2 for detailed steps)

Total Variance F / UPrice or rate

Variance F/U

Usage or Efficiency Variance F/U

Wheel assembly:Parts 21,600.00 U 21,600.00 U 0.00 U

Rework parts 25,000.00 U 25,000.00 U 0.00 U

Labor 4,050.00 U 2,750.00 U 1,300.00 U

Total Variance (wheel Assembly) 50,650.00 U

Variances associated with Final Assembly ( See Exhibit 2 for detailed steps)

Total Variance F / UPrice or rate

Variance F/U

Usage or Efficiency Variance F/U

Final assembly:

Parts 183,600.00 U 183,600.00 U 0.00 U

Rework parts 45,000.00 U 45,000.00 U 0.00 U

Labor 2,600.00 U 4,000.00 U (1,400.00) F

Total Variance (Final Assembly) 231,200.00 U

Variances associated with Overhead Costs (See exhibit 2 for detailed steps)

Q#3. Yes. Bob Moyer should be concerned about the performance of Mile High Cycles since

based on his Actual cost data, it appears that Mile High Cycles incurred an additional cost of

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Total Variance F / UPrice or rate

Variance F/U

Usage or Efficiency Variance F/U

Frame assembly:

Steel tubing 8,100.00 U 170,100.00 U (162,000.00) FPaint 1,187.00 U 687 U 500.00 ULabor (91,950.00) F 25,050.00 U (117,000.00) F

Total Variance (Frame Assembly) (82,663.00) F

Total Variance F / U Spending Variance F/U

Overhead Volume

Variance F/U Overhead costs: Rent 0.00 Office staff 0.00 Depreciation 0.00 Other costs 60,000.00 U Total Variance (Overhead) (4,000.00) U (60,000) U 56,000 F

$18.81 per bike than what Bob had originally budgeted for. This translates to an unexpected

loss of $203,187 towards its profits. (See Exhibit 3 for the calculations).

After calculating his Flexible budget, it appears that Material prices and Labor rates are

the biggest drivers for variances between Bob’s Actual costs and Budgeted costs. The

cost of “parts” especially in the Final Assembly area is quite higher than what he had budgeted

for. It increased from $350 to $367 per unit (4.87% higher). Similarly the costs for parts used by

“Frame Assembly” and “Wheel Assembly” had also increased. The Labor costs have also

increased slightly for all the various areas of his plant. Overall, Bob needs to pay attention to

the Material and Labor costs. On the positive side, his plant has been utilizing the materials

more efficiently and it is especially evident in the Frame Assembly area where the efficiencies

had helped generate a favorable variance. In spite of the efficiencies gained, due to price

variances on material and labor, Mile High Cycles incurred additional costs compared to what

was budgeted.

The increase in Material and Labor costs might be related to market conditions in 2004.

In order to keep his material costs stable, Bob should work out contracts with his suppliers to

lock in the rates of the components so that he can get a stable material rate and possibly even

get a better rate as a result of confirming his intent to do bulk orders from his supplier. If he

had retained his budgeted material and labor rates, based on his sales revenue of $13,000,000,

Mile High Cycles would have achieved a gross margin of 9.92% vs. a gross Margin of 7.72% it

achieved in 2004. (See Exhibit 4 for details)

Exhibits:

1. Exhibit showing the Flexible Budget

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Exhibit 2. Variance between Flexible budget and Actual budget:

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Frame assembly: CostStandard

QtyStandard rate

per bike usage = Standard Qty / # of bikes)

Standard rate (same as the original budget)

Flexible budget Qty(F) = per bike usage x 10,800

Flexible Cost = Flexible Budget Qty

x Standard Rate

explanation of calculation for Flexible cost

Steel tubing $3,300,000 110000 $30 11.00 $30 118800 $3,564,000 =118800*30Paint $25,000 1250 $20 0.13 $20 1350 $27,000 =1350*20Labor $1,500,000 100000 $15 10.00 $15 108000 $1,620,000 =10,800 *15

Total frame $4,825,000 228150 $5,211,000

= sum(3,564,000 , 27,000 , 1,620,000)

Wheel assembly:Parts $1,200,000 10000 $120 1.00 $120 10800 $1,296,000 = 10800 * 120

Rework parts $0 0 $0 0.00 $0 0 $0 = 0*0

Labor $65,000 5000 $13 0.50 $13 5400 $70,200 = 5400*13

Total wheel $1,265,000 16200 $1,366,200 = sum(1,296,000 , 0 , 70,200)

Final assembly:

Parts $3,500,000 10000 $350 1.00 $350 10800 $3,780,000 = 10800 * 350

Rework parts 0.00 $0 0 $0 = 0*0

Labor $105,000 7500 $14 0.75 $14 8100 $113,400 = 8100*14

Total final assembly $3,605,000 18900 $3,893,400

= sum( 3,780,000 , 0 , 113,400)

Total Variable $9,695,000 $10,470,600

Variable cost per bike = total variable costs / # of bikes $969.50

Note: Fixed costs do not change

Overhead costs:Rent $250,000 $25 0.00 $23 $250,000 Office staff $100,000 $10 0.00 $9 $100,000Depreciation $100,000 $10 0.00 $9 $100,000

Note: The variable portion of "other costs" = 2/3 x 750,000 = 500,000The fixed portion of the "other costs" = 1/3 x 750,000 = 250,000Per bike rate for the variable portion of the "other costs" = 500,00/10,000

Other costs $750,000 $75 50.00 $73 1 $790,000

= 250,000 (fixed portion of "other costs" + per bike rate * 10,800

Total overhead $1,200,000 0.00 10800 $1,240,000

Cost per bike = total annual costs / # of bikes

Cost per bike = total annual costs / # of bikes

Total Annual Costs $10,895,000 $1,089.50 0.00 $11,710,600 $1,084.31

Budget - # of Bikes = 10,000 Flexible budget - # of Bikes = 10,800

Exhibit 3 – Cost per bike calculations:

Budgeted Total cost : $10,895,00 ; Total # of Bikes = 10,000Cost per bike (Budgeted) = 10895000/10000 = $1,089.50

Actual Total cost: $11,969,787; Total # of bikes = 10,800Cost per bike (Actual) = 11969787/10800 = $1,108.31

Difference in cost per bike = 1108.31 – 1089.50 = $18.81

Additional cost incurred = $18.81 * 10,800 = $203,187.00

Exhibit 4: - Gross Margin for Actuals vs. Flexible budget

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Total Variance

F / U

Price or rate Variance

F/U

Usage or Efficiency Variance F/U

Frame Assembly:

Standard rate (same as the original budget)

Flexible budget Qty(F) = per bike usage x 10,800

Flexible Cost = Flexible Budget Qty x Standard Rate

explanation of calculation for Flexible cost Actual rate

Actual Qty Actual costs

Per bike usage = (Actual Qty / # of bikes)

= Actual costs - Flexible budget costs

(Actual Rate - Standard Rate) x Actual Qty

(Actual Qty - Flexible budget qty) x Standard Rate

Steel tubing $30 118800 $3,564,000 =118800*30 $31.50 113400 $3,572,100 10.50 8,100 U 170,100 U (162,000) FPaint $20 1350 $27,000 =1350*20 $20.50 1375 28,187 0.13 1,187 U 687 U 500 ULabor $15 108000 $1,620,000 =10,800 *15 $15.25 100200 $1,528,050 9.28 (91,950) F 25,050 U (117,000) F

Total frame $5,211,000

= sum(3,564,000 , 27,000 , 1,620,000) $5,128,337 (82,663) F

Wheel assembly:Parts $120 10800 $1,296,000 = 10800 * 120 $122.00 10800 $1,317,600 1.00 21,600 U 21,600 U 0 U

Rework parts $0 0 $0 = 0*0 $2.31 10800 25,000 1.00 25,000 U 25,000 U 0 U

Labor $13 5400 $70,200 = 5400*13 $13.50 5500 74,250 0.51 4,050 U 2,750 U 1,300 U

Total wheel $1,366,200 = sum(1,296,000 , 0 , 70,200) $1,416,850 50,650 U

Final assembly:

Parts $350 10800 $3,780,000 = 10800 * 350 $367.00 10800 $3,963,600 1.00 183,600 U 183,600 U 0 U

Rework parts $0 0 $0 = 0*0 $4.17 10800 45,000 1.00 45,000 U 45,000 U 0 U

Labor $14 8100 $113,400 = 8100*14 $14.50 8000 116,000 0.74 2,600 U 4,000 U (1,400) F

Total final assembly $3,893,400

= sum( 3,780,000 , 0 , 113,400) $4,124,600 231,200 U

Overhead costs:Spending Variance

Overhead Volume Variance

Rent $23 $250,000 $23 $250,000 0

Office staff $9 $100,000 $9 100,000 0

Depreciation $9

$100,000 $9 100,000 0

Other costs $73 1 $790,000 = 250,000 (fixed portion of "other $79 850,000 60,000 U

Total overhead 10800 $1,240,000 10800 $1,300,000 1.00 (4,000) U (60,000) U 56,000 F

Flexible Overhead ($1,240,00) - Actual overhead ($1,300,000)

(Budget overhead rate ($120) * Actual Qty (10,800) ) - Flexible Overhead costs ($1,240,000)

Note: Budget Over head rate = 1,200,000 / 10,000 =$120

Actual - # of bikes = 10,800Flexible budget - # of Bikes = 10,800

Gross Margin Revenue $13,000,000

Total Annual Actual costs $11,969,787    

Profits (Revenue – Total Actual costs) $1,030,213

    Gross Margin (Actual) 7.92%

Revenue $13,000,000

Total Annual Flexible budget costs $11,710,600

   Profits (Revenues – total Annual

Flexible budget costs) $1,289,400    

Gross Margin (Flexible Budget) 9.92%

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