BOSTON CREAMERY, Inc. Case Study Solution
Boston Creamery, Inc. has adopted the “Profit Planning and Control System” in the previous years. Mr. Frank Roberts, VP was now responsible to present the budget and the variance analysis between actual and budgeted results. The results showed a favorable variance of 71700. In their presentation they needed to highlight the importance and benefits of variance analysis. However, John Parker, VP was unhappy with the results and doubted Mr. Roberts for manipulating the numbers.
Changes in the Variance Analysis
I definitely would propose some changes to the variance analysis provided by Frank Roberts. These changes are as follow:
- First things first, I would be involved in the proper research of the market. I would be making a team to collect the data that would be needed in order to get efficient and workable results.
- I would use a bottom to top approach. In this approach, the data is collected from the lower management and/or staff/labor. This is useful to prepare a better sales mix and therefore a brilliant budget plan and profit and control plan. This is because the lower management and/or staff/labor are the people with the information that is needed for this budget but here, in this case neither the top to bottom is used nor is the bottom up approach is used. They are just working on naive method and wasting.
- Calculate the correct amount of revenue, market share and market size. Since Frank’s estimates were based on a naïve approach, which was very misleading in its pure form. Some reasons for not using naïve approach are:
- Changing Economic factors.
- Improved Technology.
- Instead of using a static budget and then adjusting it to a flexible one is one way to do things. But I would have done something different. Instead of making/preparing a static budget, I would have made a flexible budget. Now there are many benefits of a flexible budget, one is that it does not have to be fixed, which means that it is flexible. I would have just collected the required data. Then by using that data I would have made some criteria for expenses. Since fixed expenses cannot be changed they would remain the same. The variable expenses however would be in a different manner, for example; let’s suppose if variable expense for milk is .6 I would write it in the sense of a formula i.e. .6x. This method would help in recognizing the estimated price of each item. This method is relatively better than the one used in the case.
I do agree to the fact that Jim Peterson was right because once the analysis is complete it is just a matter of opinion to answer the questions he addressed. For example, he asked that which elements are uncontrollable. This required a simple answer; not technical calculations, that most of the variable cost are not controllable since they vary with quantity, although their pricing can be controlled but we cannot control the total variable cost that would arise, other factors such as technology, competition, and environment are some factors which we cannot control but we can try to mitigate their affect.
Another concern of Jim was to breakdown the sales volume variance into few parts, part attributable to the sales mix, market share shift and the overall volume change. This, however required expertise but still it would not make the schedule too technical.
John Parker’s Way
Mr. John Parker was another VP in the Boston Creamery. He also went through Mr. Roberts’s analysis and was unhappy with what he saw. He was in doubt that Mr. Robert was playing with numbers to mark a good impression in the company. What he meant was Mr. Robert intentionally kept the budget low so that he would attain the favorable results.
Although, as the case mentions, this was the first time the company started variance analysis to make its operations more efficient. Mr. Robert also mentioned his basic assumptions that he would be using a naive method to forecast the statements. This was understood that naive model would most probably underestimate the statements.
If Mr. Parker was to conduct this analysis he would not use the naïve method, since he is from the marketing department and he had the view that it is marketing department’s business to set price he would have adjusted the prices with inflation or might have adjusted the prices with trend and or season. My view is that it would have been better since naïve method is not so popular and it is also proven that this method is not effective. Things might have turned out differently solely depending on the underlying assumptions he would have set………..
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