1. Examine the direct cost and overhead variances. What might be causing each of the variances to occur
Indeed, the cost has changed due to the following factors:
Derived From Price
Derived from volumes
Rework parts - Wheel Assembly
Rework parts - Final Assembly
Other Costs (variable)
Cost per unit
Cost at 10000 units produced
Cost at 10800 units produced
As we can see above, the two main factors were increase in price (44% of the increase) and increase in volumes (40% of the increase), followed by rework parts and overhead (2/3 variable)
2. Should Bob Moyer be concerned about Mile High Cycles' performance? Where should he be prepared to direct his attention? What additional information should he try to obtain?
Yes. Bob should drive his attention to the prices of the items he needs, since almost half of the increase was caused by increases in prices (maybe inflation). Also, there are inneficiencies
in the production line that caused the cost related to rework parts. Either way there isn´t any explanation over the increase in other costs, 2/3 out of which are variable, as this additional
information is not provided yet.
3. Are there any purposes for which a total, per unit variance would be more useful than a series of functional variances? If so, for what?
Yes, because by comparing cost per unit one can measure the marginal cost for each additional unit produced. However, such data is not sufficient, since it must be identified why the
unit cost has changed, and such is only possible through a price/volume analysis, as in item 1.
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