Material cost variances, use of variances for performance evaluation. Katharine Stanley is the owner of Better Bikes, a company that produces high-quality cross-country bicycles. Better Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Better Bikes has purchased titanium from suppliers in the supply chain. Better Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Better Bikes hired Michael Scott, a recent graduate from Key University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price. Better Bikes established the following standards based upon their experience with their previous suppliers. The standards are

Cost of titanium .........$20 per kg

Titanium used per bicycle ....... 8kg

Actual results for the first month using the online supplier of titanium are:

Bicycles produced .......... 500

Titanium purchased ...........6,000 kg for $108,000

Titanium used in production ......5,000 kg

REQUIRED

1. Compute the direct materials price and efficiency variances.

2. What factors can explain the variances identified in requirement 1? Could any other variances be affected?

3. Was switching suppliers a good idea for Better Bikes? Explain why or why not.

4. Should Michael Scott’s performance evaluation be based solely on price variances? Should the production manager’s evaluation be based solely on efficiency variances? Why it is important for Katharine Stanley to understand the causes of a variance before she evaluates performance?

5. Other than performance evaluation, what reasons are there for calculating variances?

6. What future problems could result from Better Bikes’ decision to buy a lower quality of titanium from the online marketplace?