Winn's Bicycles, Inc. is a large manufacturer located in Denver. The company has been a leader in the 21-speed bike industry for several years. However, with increasing competition and a higher public emphasis on quality, Winn has been searching for ways to maintain quality and cut costs. John Jackson, production planner, suggested that starting at the beginning of 2017, the company invest in higher quality materials and hire more experienced workers at a slightly higher pay rate.
The company has used a standard cost system for the past five years. The current standard costs for one bicycle, based on production of 12,000 units, are as follows:
Materials........................................................ $55
Direct labor (4 hours at $10).......................... 40
Variable overhead*........................................ 22
Fixed overhead per unit................................. 9
*Total variable overhead is presumed to change with the number of bicycles (units)
Jeffrey Winn, president, was skeptical about decreasing costs by increasing materials and labor costs. However, after much debate, he agreed to try to changes for one year beginning with January 2017. Because the exact costs of changes were not known at the beginning of 2017, the existing standard costs were retained. Therefore, the changes will be in the variances from standard costs.
During 2017, the company produced only 10,500 bicycles because the marketplace showed a decreasing demand. The following data show the actual results:
1. Materials costing $617,500 were purchased and used. The prices of materials were exactly as predicted by the standards, so any differences were due solely to quantities used.
2. Direct labor was $249,375 for 23,750 direct labor hours.
3. Actual variable overhead totaled $193,000.
4. Actual fixed overhead totaled $106,275.
Even though production was down, the difference in costs was significant. He would like to know why. He would also like to know if you think he should make permanent the change in production methods recommended by John Jackson.
Required:
1. Compute all appropriate variances for the following categories:
a. Materials (price and quantity variances)
b. Labor (price and efficiency variances)
c. Variable Overhead spending and efficiency
d. Fixed Overhead budget variances
2. Assuming that the actual cost results for 2017 represent the new standard performance, calculate the standard cost per bicycle for 2018, showing separately the materials, labor, and variable and fixed overhead components. Winn expects 2018 production to be 11,000 bicycles.