Mile High Cycles

Mile High Cycles

Mile High Cycles was founded in 2003 by Bob Moyer, a mechanical engineer and avid cyclist from Stanford University. After a brief tour in a design engineering job in Denver, Colorado, Bob opted to pursue a career in designing, building and assembling of custom mountain bikes. With the support of friends and family, Bob has been able to turn what was once a hobby into a sustainable business. Mile High Cycles mountain bike frames are precision built in house. These coupled with meticulous wheel assembly and high quality cycling components, Mile High Cycles produces a custom mountain bike ready for distribution.

While production demands exceeded budgeted quantities in 2004, it is unclear how well costs were managed throughout the production process. Were there opportunities to streamline the assembly process? How well were the purchasing agents controlling raw material costs? This analysis will answer these questions as well as provide a detailed review of the functional variances of the mountain bike fabrication process at Mile High Cycles.

1. Determine the direct cost and overhead variances. What might be causing each of the variances to occur?

* Frame Assembly:

o Mile high paid $1.50 more per pound of steel than anticipated. This could be due to a change in price of steel / steel tubing, or the purchase of higher quality steel.

o Mile High paid $.50 more per gallon of paint than anticipated. This could have occurred because higher quality paint was used. Additionally chemical prices could have increased throughout the year resulting in an unfavorable impact on paint costs

o Mile High incurred an additional $.50 /per hr. of labor.

Due to the complexity of the frame welding and inspection process, Mile High may have required employees with greater level of skill for this phase

or new employees were hired in at a higher wage rate. The higher labor price also could have occurred due to overtime to meet order demand.

* Wheel Assembly -

o Kits - paid an additional $2.00 / kit. This could be due to a change in price of kits, or the purchase of a higher quality kit. Also, due to the increase in production, Mile High could have had to expedite kit orders incurring additional shipping costs.

o Failed to budget anything for Rework Parts, resulting in a ($25,000) unfavorable variance.

o Labor budget resulted in a labor rate variance of $.50 per hour. Additionally, the rework was not taken into consideration in the original budget resulting in a slight labor efficiency variance of ($1,300).

* Final