Boston Creamery

EXECUTIVE SUMMARY

Boston Creamery, Inc, is an ice cream company that manufactures and distributes ice cream to wholesalers and retailers. In 1973, the company had installed a new financial planning and control system that compares budgeted results against actual results and be able to highlight things that needed corrective actions or commend things that resulted in a favorable overall variance. This year, the division has a favorable operating income variance of $71,700.

Highlights:

* Jim Peterson, president of the ice cream division, asked Frank, vice-president of the Sales and Marketing of the Ice Cream Division to make a short presentation at the next management meeting commenting on the major reasons for the favorable operating income variance of $71,700

* Using the newly installed financial planning and control system, Peterson wanted to illustrate to the management group how this new software can analyze the profit variance and highlight those areas needing corrective attention as well as those deserving a pat on the back.

Results:

The main weakness of the new "profit planning and control" software is that it had many space for budgetees to slack the budget. In this case, the budgetees seemed to have a tendency of budgeting revenues somewhat lower than the best estimate amounts. As well, the forecast is so simple. Furthermore, the imprecise information that the forecast provides made the firm to set up another revised profit plan. Budget revisions should be limited only to unusual circumstances.

INTRODUCTION

This case, set in an ice cream company in 1973, deals with the design and use of formal "profit planning and control" systems. This company has installed a new financial planning and control system; and the year 1973 would be the first year that figures between budgeted and actual results are compared.

Purpose

The purpose of this case analysis is to illustrate to the management group at the next management meeting how an analysis of the profit variance-budgeted amounts versus actual results, could highlight those areas needing corrective attention as well as those deserving a pat on the back.

In this case, Frank Roberts, vice-president for Sales and Marketing of the Ice Cream Division of Boston Creamery is asked by Jim Peterson, president of the division, to make a short presentation at the next management meeting commenting on the major reasons for the favorable operating income variance of $71,700.

Problem

The variance analysis schedule proposed by Frank Roberts was general. The draft was less in details and so highly aggregated that it contained several flaws which can mislead the management.

Also, since Frank Roberts is the vice-president for Sales and Marketing, his numbers are likely to be perceived as biased, even though they might not be. Therefore, it is not surprising that John Parker, vice-president for Manufacturing and Operations felt that Roberts was "playing games" to make himself look good at his expense.

Analysis

This case analysis will break down Frank Roberts' general draft of variance analysis into qualitative and quantitative and therefore highlight things in a manner which indicated what corrective actions should be taken in 1974 or indicated the real causes for the favorable overall variance

Issue #1: Preparation of Variance Analysis by Frank Roberts

Frank Roberts is asked by Jim Peterson to make a short presentation at the next management meeting commenting on the major reasons for the favorable operating income variance of $71,700. The problem in this situation is that Roberts of vice-president of Sales and Marketing; therefore his numbers are likely to be perceived as biased regardless if they are or not. It is not surprising tat John Parker felt that Roberts was "playing games" with the numbers to make himself look good.

Solution

A solution to this dilemma is to ask John Vance, the corporate controller to prepare the variance analysis. In this way, the numbers produced by the variance analysis will not be viewed as biased by the management and in fact, will be perceived as more accurate since it is prepared by a CPA.

John Vance can prepare the variance analysis and Frank Roberts can do the presentation. According to the case, with John Vance's way of presenting the variance analysis, it would put people to sleep. Once the analysis by John was done, it can be passed on to Frank and he can make John Vance's work brilliant in a way that it will not put people to sleep. He can make the presentation in PowerPoint for instance and only highlight the bottom number. Management will not be interested in going through the whole variance analysis process. As per the case, they only wanted to highlight things that need their attention and therefore, action can be taken for the 1974 year and commend the causes for the favorable overall variance.

If management wanted a detail analysis of a particular variance, it would certainly be outside of Frank's scope and therefore, John can step in and explain how the number is derived. A professional relationship can exist between these two where each can benefit from one another.

Issue#2: First draft of Variance Analysis

The variance analysis schedule proposed by Roberts was general. The draft was less in details and so highly aggregated that it contained several flaws which can mislead the management. The sales volume variance in his report reflected the effects of changes in units of sales on sales expenses, contribution margins, and operating income. To provide management with more details, the sales volume variance should be broken down into sales quantity variance and sales mix variance. Based on the result of the sales quantity variance analysis, the management could see the effect of change in the number of units sold from the number of units budgeted to be sold. A product's sales mix variance measures the effect on the contribution margin and the operating income attribute to the difference between actual and budgeted sales mix ratios.

Furthermore, two factors must be indicated that contribute to a sales quantity variance: the market size variance and the market share variance.