Boston Creamery Solution
1. The current variance analysis used for the 1973 fiscal years shows an overall favorable net variance of $71,700. This is an aggregate net figure based upon the favorable variance due to sales and the unfavorable variance due to operations. This net variance figure fails to highlight areas of deficiency to help identify corrective actions. Furthermore, this variance does not indicate the real cause of the favorable overall variance. The success and purpose of variance analysis is reliant on how quickly and effectively it is able to aid in undertaking corrective actions.
In addition to the lack of outputs that could lead to decision-making capabilities, the total favorable variance of $71,700 includes a favorable variance of $117,700 calculated as the difference between the budgeted income at actual volume under the revised plan and the budgeted income at the forecasted volume using the original volume, which neglects to accommodate a consideration for actual income from operations. As this was the first time Boston Creamery Inc. (BCI) had undergone this type of profit planning and control, they used last year’s actual financial data to budget for 1973 due to a lack of otherwise available information.
Boston Creamery Solution Essay Example
This budgeting method proved to be ineffective in accurately predicting a sales budget, which is evidenced by the unfavorable flexible-budget variance of $86. 973 shown in exhibit 1. Recommendation: First and foremost, it is recommended that variance analysis should be one of the many tools utilized by BCI in determining performance analysis, but not the only tool. Profit planning and control techniques utilize a wide range of assumptions and estimates and are often times unadaptable to everyday occurrences that will inevitably arise.
Other tools such as balanced scorecards and benchmarking could be useful in addition to BCI’s budgeting and variance analyses. In order to derive the most value from their variance analysis computations, it is recommended that BCI break down their net variance figure into further variances that demonstrate the cause and effect relationships of their operations. The breakdown of such further analyses can be seen in exhibits 1 through 3 which show the following: Flexible-budget variance; Sales-volume variance; Sales-mix variance; Sales-quantity variance;
Sales-volume variance; Market-share variance; and Market-size variance. These variances, combined with qualitative analysis of the causes of favorable or unfavorable outcomes, provides an extraordinarily increased usefulness to BCI in determining the corrective actions necessary to remedy the deficiencies identified. Furthermore, the qualitative analyses will help to cure the pending issue of being “too technical” in the analyses conducted. When determining budgeted amounts for 1974, BCI should spend more time and exhaust more energy into the determination of budgets.
By failing to do so through reporting in aggregate based on past results, the variance analyses that are resultant are highly ineffective at identifying causes within the organization, as a large portion of the variances can be attributed to poor budgeting. Furthermore, once a more accurate budget has been fashioned, budget revisions should be limited to only be altered to accommodate highly unusual circumstances. 2. The market-share matrix for product profit variance analysis in exhibit 3 shows an unfavorable market-share variance of $55,285 and a favourable market size variance of $167,943.
This shows that the effect of changes in the total market size of BCI’s market have had a favorable impact on their contribution margin and operating income in relation to their budget; however, BCI’s actual market share is 1% lower than budgeted, having a negative impact on operating income of $55,285. The advertising variance of 1973 demonstrated in exhibit 5 shows that advertising costs in 1973 were $29,000 higher than budgeted. This is in part due to the shift from an advertising budget of $. 06 per gallon sold to a budget of 6% of sales.
Recommendation: It is clear from the variances calculated that the increase in advertising costs has not had a positive effect on market share, in fact market share has actually declined by 1%. BCI will need to examine schedule A-4 (not provided) to determine the root causes of the inefficiencies in their advertising department and will need to remedy these ailments accordingly in order to operate at maximum efficiency and to attempt to recapture their market share lost during 1973. Additionally, BCI should use the results of this further analysis to set goals for their departments.
This is currently not being done and can be very motivating and effective at aiding with the recovery of deficiencies determined from the variance analyses performed. 3. BCI has a variety of different flavors of ice cream marketed, allowing customers the option of regular or premium ice cream. The marginal contribution on regular and premium ice cream is $. 34 per gallon and $. 725 per gallon respectively. Furthermore, their contribution margins on each flavor vary as seen in exhibit 6 below.
Recommendation: BCI should use their advertising efforts to focus their sales on the flavors of premium ice cream that provide the greatest unit contribution margin per direct material input as this will provide BCI with the most effective product mix planning for their profitability. 4. The current net variance analysis does not break manufacturing costs out to identify where the deficiencies may lie, and this is causing animosities within the managers. The $99,000 unfavorable variance does not provide insight into which corrective actions may need to be taken.
Recommendation: BCI should use the break-down of manufacturing costs within the division seen in exhibit 4 below to identify where the actual cost drivers may lie so that they can identify areas of potential cost savings. Furthermore, BCI should classify costs as controllable or uncontrollable (such as the costs of milk and sugar) so that they are most easily able to identify areas of possible improvement. The costs that are uncontrollable should be adjusted within the budget before variances are calculated as they are not relevant in the determination of solutions, and they have the potential to skew the output.
You can see from exhibit 4 that milk and sugar variances are cause for a large portion1 of the unfavorable variance, which should be eliminated prior to the variances being calculated as they are unavoidable. Additionally, the unfavorable variance of $34,400 in increased labor is largely due to a long-term change in the handling of daily production from high cost truck drivers to low cost factory workers. This change is in the best interest of the company in the long-term, and is therefore unavoidable. Figure 7 shows the calculation of the variance within the manufacturing division with these costs excluded.