Cost Accounting

Part 2:

1. Direct materials price: $88,400/5200= $17.00

      Price variance: ($17-$18) x 5,200= $5,200 Favorable

      Efficiency variance: (4700-3200) x 18= $27,000 Unfavorable

1. One of the factors that could affect the variances is the quality of titanium.  If the quality of the titanium purchased online is lower, they will have to use more to satisfy the need of each bicycle.  With the quality titanium they used before, they only needed 8 pounds per bike.  The new online titanium needs 11.75 pounds per bicycle.  There also could have been a miscalculation, and they purchased more than they needed when the manager ordered it.  They realistically needed 4,700 pounds of titanium, but he ordered 5,200 pounds.  The sales-volume variance could also be affected.
2. Switching suppliers was not a good idea for Best Bikes because the cost per bicycle would actually be higher when more material is required per bike with the new titanium.
3. Michael Bentfield’s performance should not be based on the price variances, because even though it is favorable, that does not necessarily mean it is the best thing for the company.  Similarly, the production manager’s performance should not be based on the efficiency variances because he had no part in ordering the materials which made the variance unfavorable.  Katharine Johnson should understand the causes of the variance before she evaluates because the numbers can be deceiving.
4. We would calculate the variance to know which supplier is best for the product specific to the company, price-wise.

1. In the future, the products may break and disappoint customers because the titanium is lower quality.  If the products become less reliable, the company is less trustworthy, and as a result, people may stop buying products from Best Bikes.