This is the suggested answer to the Standard Costing exercise on Colorado Ricardo Mountain Bikes.
Material Variance
Standard $300, actual $320 = $20 adverse per bike – costing more than planned, most likely driven by the rise in steel prices.
Labour Variance
Standard $250, actual $240 = $10 favourable per bike – workshop efficiency improvements are saving money against the standard.
Overhead Variance
Standard $150, actual $150 = no variance, on budget.
Overall Variance
Net variance per bike: $20 adverse – $10 favourable = $10 adverse per bike. Across 4,000 bikes: 4,000 x $10 = $40,000 adverse overall.
Key point: the favourable labour variance is masking a real cost problem – the material variance, driven by a rising input price outside the workshop’s control, is the one management should investigate, since efficiency gains on the shop floor cannot keep absorbing rising material costs indefinitely.
This $40,000 adverse variance directly explains part of the thin margin found in the Profit and Loss Statement exercise.
