A new financial planning and control system is only as good as a company’s capacity to implement it effectively. But most importantly, many employees see the new system as an end in itself, instead of a means to an end. The way standards are formulated play a crucial role in the results of these variances. For instance, management decided to use the sales forecasts based on what they made and incurred in the previous year. This would normally be the case, if the company had limited growth prospects.
Reporting in aggregate may not allow a company to dissect operations appropriately, as to which areas need to be rewarded, and those that need to be assisted. For instance, the extent of increased operating income can partly be traced to an increase in price. Conflicts become inevitable when there is a lack of coordination among departments, just like the conflict between Frank Roberts and John Parker. The orientation seems to be department-based.
While that is one consideration, this may adversely affect management’s decision-making process that subsequently trickles to the whole company. Problem How should the company formulate, compute and report its variances? How should these variances be interpreted? What actions should management take based on the interpretation of these variances? Areas for Consideration We evaluate Boston Creamery’s profit planning and control system by determining its effectiveness in addressing management and company needs.Since Roberts prepares the variance analysis schedule, most of the information may only be useful to those in the sales, marketing and advertising department. For instance, costs adjusted to actual volume eliminated cost variances resulting from deviations between planned and actual volume. Those eliminated variances may be of use to the manufacturing division in explaining what causes certain results in their operations, may they be favorable or unfavorable. Moreover, it was apparent that tension arose due to the information reported in the variance analysis schedule.
Presenting the variances in aggregate leaves out certain information that can lead to the reasons for the resulting figures. This tension may have been avoided if, for instance, the unfavorable variances due to operations are further broken down to determine if the deviations were attributable to certain uncontrollable factors or to controllable ones that are influenced by some other department other than the manufacturing department. The way the estimates for revenues and costs must be taken into account as well.Using the company’s actual sales from the previous year can be sufficient to estimate the planned sales for the year if they had no intention of growing or didn’t expect employees to go exceed expectations.
Fixed and variable costs were also maintained from the previous year. This can be an unrealistic assumption, which will lead to an unnecessary unfavorable variance in terms of fixed costs. Even favorable variances may misled managers in thinking that improvements occurred, when in fact, goals were not reflected in the system in the first place.Aside from those other areas, as earlier stated, the financial and planning control system is one of the many tools that a company should utilize, among the plethora of available options it has.
Analysis outside of this must be utilized as well. Measures, beyond the numbers provided for in reports, can also lead to meaningful information that is useful in the decision making of the company. Examples would be financial ratios, the competition the company is subjected to, the emerging trends among its target market that it can utilize for future operations and the perceived brand equity of the company.Alternative Courses of Action Considering the company’s system of reporting costs, they could choose to: (1) retain the current process of variance reporting but with several price and volume adjustments relative to market conditions or (2) improve the financial planning and control system by using additional variances as tools for analysis.
The management could opt to maintain the current system of variance reporting. However, the data to be used in the computations must encompass the possible effects of changes in different economic activities.Figures must be adjusted for changes in demand which could be caused by shifts in weather conditions and consumer spending. Possible increases in manufacturing costs must also be considered. In addition to data adjustments, the company could also choose to have additional variances as tools for cost analysis.
They could compute for variances that will be directly used by different departments. They could report the variances by dividing it into functions. For the sales department, variances on selling price and sales mix would be useful tools in setting target sales for the subsequent year.On the other hand, variances on volume, price and efficiency could be helpful to the manufacturing department to anticipate possible shifts in production schedule. (See Exhibit 4) With this, better incentive mechanism could be implemented.
Then, aggregate variances could also be presented to provide an overall assessment of the company. With regard to the system on variances, the company has two options. The first option is to maintain variances on an aggregated level. On the other hand, it can choose to breakdown the figures for these variances in terms of two-way, three-way and four-way analysis.
With regard to its product mix, many options exist as to what product will receive the most investment in terms of priority in sales, like through production and advertising. Of course the most optimal strategy would be to focus on products that have high contribution margins, in relation to the other products. In terms of outlook, the company can maintain a department approach that puts a premium on department welfare. It can also view operations from an organization wide perspective. Both options do not preclude the possibility of a hybrid model that integrates both.Recommendations Budgeting has to be more tedious.
Budgets are make or break in businesses. Budgets must present a clear goal. In the case, the forecast budget was anchored upon latest estimate of the actual litre sales of the previous year. No goals were set for the current year. Sales and Marketing should eliminate tendencies of budgeting sales somewhat lower than the best estimate amounts, in other words, slacking the budget. Sales must take into account growth that is inevitable, in order to isolate it from actual additional work done by employees.
Budgets should be based upon reasonable estimates and standard costs that were adjusted for changes in the market in order to not punish workers for inevitable expenses. Further, Management needs to determine which costs can be controlled and which costs cannot be controlled for. Even if the company is a price taker, because most of its materials are everyday commodities, they can get lower prices per unit when they buy in bulk. Also, it will not hurt to try and negotiate with suppliers or enter into purchase agreements.After all, the company is growing and has a significant market share of a product that has a relatively assured demand, especially in seasons like summer, and in demographics like children. It will also be in its favor that many suppliers can be available and are fighting for customers like Boston Creamery.
On the other hand, Sales and Marketing can control fixed costs of sales salaries by increasing or decreasing the size of the sales force. Whereas, Manufacturing and Operations needs to explore economies of scale, engineering processes, product mix, and so forth, that will yield lower costs and higher profits.Budget must promote coordination and communication among business functions within the company. The case presents managers up against each other to defend their own position, thus failing to look at the factors that will contribute to the company’s success and profitability.
To complement, Management could implement an incentive system that will reward performance based on organization-wide aside from per department. Each one has a specific job function and belongs to a specific department, but they all must work with other organization members to accomplish the overall objectives of the firm.Budgets must be understandable and measurable. Management does not seem to understand what they need to measure with their new Financial Planning and Control System. It should provide framework for judging performance and motivating managers and employees unlike the conflict brought about by their disagreement over the variance analysis.
Clearly defined measures of operating results are needed aside from the net-operating revenues ratio that they are sole using. They could also choose the return on net assets ratio.Caution must take place in interpreting favorable and unfavorable variances that can be attributable to each department. For example, unfavorable variances in manufacturing department from production scheduling may be due to unreasonable forecasts from marketing. On a final note, budgets must be prepared and analyzed by a reliable, skilled, and with authority employee. In the case, Jim Peterson should not tasked Roberts to analyze the new Financial Planning and Control System, or the profitability of the operations during the past year.
These are accounting tasks. Vance is the Controller, so he should be doing the analysis.
