Boston Creamery, Inc.

Group 2
Araojo, Oscar Jan Asis, Alvin Magboo, Mike Raniel Manzano, Krystele Ann Peralta, Diana Marie Rodriguez, Jerelleen

Executive Summary The newly installed financial planning and control system has posed a number of inefficiencies in achieving the corporate strategy of Boston Creamery. In a growing industry, the control system must be able to align the actions of the employees with the companys goals. Since there have been conflicts and discrepancies with budgeted values, the current system was reviewed to come up with the following recommendations. Appropriate classification of variable and fixed costs Investment in market research and setting up responsibility centers Modified variance analysis Internal management documentation Seasonal Budgeting Strict adherence to budgeted figures

These recommendations will be able to improve the companys control system to help achieve the corporate strategy. Industry Analysis The Ice Cream Division of Boston Creamery is currently in a growth stage evidenced by the increase in market size from 11.44 gallons in volume to 12.18 gallons. The company should take advantage of this increasing market size by expanding its market share. To achieve this, the company should be able employ market penetration by selling more products to existing customers or finding new customers in existing markets. Evaluation of the Company The Company is currently using a relatively new financial planning and control system. This system produces a variance analysis report that highlights the performance of the year. Currently, the system has presented a favorable variance of $71,700 which suggests that the Ice Cream Division has outperformed the standard required. However, since there is an excessive favorable variance, the company might not be forecasting their budgets precisely and inefficiencies might occur because the market is actually bigger than what was forecasted. Hence, a revision of the budget was in place to cope with the evident changes in market conditions. This has brought inefficiencies in their planning system since revising the budget would mean more work and more expenses for the company. Not being able to forecast the correct values might lead to leaving untapped portions of the ice cream industry because it was not included in the forecast. Therefore, market share can be potentially lost. The following issues have been identified regarding the companys control system. 1. The company uses information from prior year performance to gauge the current years targets considering adjustments for few items which are clearly out of line. This will be problematic since market conditions consistently change such as what happened in the latter part of the year in forecast. The expected volume rose by 6.47% which signaled a revision of the previously proposed budget which entailed greater costs for the company.

2. There has been an apparent conflict between the Marketing and Manufacturing functions since the variances are presented and explained by only the Marketing Vice President while there are also significant variances in the Manufacturing function. 3. The classification of costs is inappropriate. For example, advertising costs were treated as variable expenses while manufacturing labor costs were treated as fixed expenses. These improper classifications of expenses might have had a significant effect in the income variances of the company. 4. There is a very limited variance analysis. Although the system is able to produce an overall variance, there can be little explanation as to how this variance is arrived. 5. The year-long budget is spread equally between the months without concern of seasonality. This makes monthly variance analysis irrelevant since actual sales may be varied across the months.

Problem Given the following inefficiencies of the current control system, the company is faced with the problem on how to improve the financial planning and control system of the Boston Creamery to ensure that the company is operating efficiently with regard to its plan of increasing it hold of the growing market size. Analysis The control system should be able to cater to the corporate strategy which is to thrive in the growing Ice Cream Industry. Since we are aiming to increase penetration, the sales of low cost ice cream would be greater in volume. This would result to a lower margin for the company. To be able to keep the company profits high, expenses should be regulated. As such, cost should be regulated and properly classified. Treating fixed or discretionary costs as variable will overstate the allowable expenses as sales volume goes up while treating variable costs as fixed will tend to understate it. The 1973 increase in volume sales does not necessarily signify an increase in dollar sales. The company should be mindful of which mix of products are pushing the larger volume. The accounting system has all the information it needs to generate an analysis of different variances. The company must be able to take advantage of this understanding in order to formulate a better forecast. Moreover, the responsibility of the marketing and manufacturing vice presidents cannot be directly attributed to the budget since they were not part of setting it up in the first place. To be able to be in an agreement that would motivate the people to achieve the standards, the budget must be attainable while still in line with the corporate strategy. The marketing and manufacturing department has the most knowledge in their area, therefore their inputs are valuable.

Recommendations With the above analysis of internal and external factors affecting the company, the following recommendations are advised.

Direct labor costs shall be treated as variable costs while fixed costs should include advertising, indirect labor, warehouse, and delivery expenses. Direct manufacturing costs that can be mainly attributable to the cost of a product are vital to contribution margin analysis. If these costs were to be treated as fixed, the contribution margin will be overstated and can affect managements decision in product management like sales mix evaluation. On the other hand, costs for advertising, indirect labor, warehouse, and delivery is not correlated to production volume and shall be treated as fixed. This shall help the contribution analysis determine the correct total costs to be recovered by the contribution margin. In setting the advertising costs and indirect labor costs as fixed, management can control such costs so as to achieve its strategic goals. Whenever significant variances are present especially in the sales mix, cost for advertising can now be shifted to concerned products to achieve the target mix unlike in the current system where advertising costs for a specific product is limited depending on its sales performance. The same is true with route sales personnel costs. This indirect labor cost shall now be considered as a fixed cost through making the budget depending on the results of the volume of sales.

Reclassification of Variable and Fixed Costs

An in-depth variance analysis can now be done after the revision of variable and fixed costs. The flow of the proposed variance analysis is as follows:

Modified Analysis of Variances

The new variance analysis shall further breakdown the flexible budget variance used in the current system. In this set-up, variances for direct materials, direct labor, variable and fixed overhead can be analyzed. The price variance for direct materials is essential for the monitoring and update of the standard prices especially that prices for dairy ingredients and sugar are known to be fluctuating. In addition, direct labor costs variances shall be available for management to further monitor the cost performance of each product of the company. Furthermore, variances for variable overhead and fixed overhead shall be utilized by management to control its budgeted overhead costs. Sales mix and sales quantity variances shall be continued to be used as tools for evaluating actual sales volume. The proposed additional variances shall aid sales mix analysis through focusing on individual product performances. Ultimately, reliable information regarding the operating condition of the company will be available.

Invest in Market Research and setting up responsibility centers

The companys forecasts are inaccurate, which lead them to revise the current forecast at a point within the period. This entails greater costs for the company, since it will undergo the whole planning stage again and would not be able to control what should have been planned during the year. Moreover, the company should be able to incorporate the inputs of the Marketing and Manufacturing departments in their budgets and hold their functions as profit and expense centers, respectfully. This will ensure that they will do well in increasing sales and decreasing costs for the company since it will be tied up with their performance. Internal Management Documentation The results of the analysis of the variances shall be provided to the concerned parties of the companies. Thus, these variances shall be integrated to the internal management financial statements that the company uses. Consequently, the following variances shall be furnished to the respective parties or departments: o Direct Material Price Variances: Accountant The price and efficiency variances for direct materials shall be used by the accountant to determine the need to revise the standard costs. If these variances exceed a certain threshold set by management, standard costs are needed to be updated by the current costs so that information will be reliable and relevant. Direct Labor Variances, Fixed Overhead Variances, Variable Overhead Variances: Manufacturing and Operations Function In the event of unplanned production levels, the behavior of the costs related to the mentioned variances is vital. Overtime, machine hours and other overhead costs tend to deviate from the budget in these times. As such, these variances shall contribute greatly to the function of controlling cost. Suggestions to the budget can be raised when the control function deems that the variances are material and recurring. Sales-Mix and Quantity Variance: Sales and Marketing Function This variance explains the differences from the forecast made by the marketing department and the actual results of operations. In this light, marketing will be able to evaluate their forecasts and adjust for significant variances.

Provide a Seasonal Budget Since ice cream sales differ between seasons, a seasonal budget should be used. A common ice cream product cycle at least one product introduction in a year. During this period, costs will be high because of intensive marketing while the rest of the year will be low since marketing efforts will diminish. At the same time, sales will be at peak during the new product introduction and stabilizes on the later days.

Instead of making a budget for the whole year, the Ice Cream Division could make a quarterly budget that would be more relevant to the current period in review. Implement strict adherence to the budgeted figures Since the company has made a practice to revise their budgets whenever they need to, they have been lacks regarding their budgeting implementations. Control is therefore hard to achieve. The company must make sure that the budgeted figures should at its very best be more precise with the current market conditions so that revisions from the plan would be avoided.