Mile High Cycles!

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|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) [pic]
• Variances associated with Wheel Assembly (see Exhibit 2 for detailed steps) [pic]
• Variances associated with Final Assembly ( See Exhibit 2 for detailed steps) [pic]
• 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 $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

Exhibit 2. Variance between Flexible budget and Actual budget:

Exhibit 3 – Cost per bike calculations:

Budgeted...
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