Budgeting and Performance Evaluation at the Berkshire Toy Company Essay

Executive SummaryIn 1974, Berkshire Toy Company (BTC) was founded by Franklin Berkshire, Janet McKinleys farther. Janet was soon became the CEO of the family when her father retires on 1993. After two familys, BTC was acquired by attri thate Products Corporation, a manufacturer of different harvest-feasts, for a common stock of $23.2 zillion.The preliminary controversy of divisional operating income for the year ended June 30, 1998 presented the actual values gene esteemd unitedly with the master (static) calculate and master budget de elementures for the period. The company obtained higher extreme R steadyue than their budget but it turned out to an Operating impairment near a million dollars. This paper aims to study the budgets from actual results, and to think the budget variabilitys and to analyze its causes. After that, the company carrying out will be evaluated to advocate alternative solutions for improvement.IntroductionAs a division of Quality Products Corpor ation, Berkshire Toy Company produces the Berkshire Bear, a fifteen-inch pillow slip bear which atomic number 18 amply jointed, washable, and dressed in various accessories. It is sold to customers like children and adult collectors with authoritative lifetime guarantee. The company is organized into three plane sections purchasing (managed by David Hall), mathematical product (managed by Bill Willford) and merchandise (managed by Rita Smith).An incentive compensation plan was implemented in 1997, intended to enhance the participation and teamwork of the motorcoachs. It provides bonuses for eachsurgical incision heads in the following conditions Purchasing 20% of net sensibles scathe segmentation, assumptive aureate marketing 10% of excess air division of net tax tax income, take for granted prospering production 3% of net unevenness in material, toil, inconsistent overhead, labour rate difference, and the variable star and fixed overhead spending, assumin g favourable variances.Statement of the ProblemObtaining a loss approaching a million dollars despite the ontogenesis in gross revenue. Substantial uncomplimentary variances resulting from production department Effects of the incentive compensation plan to the performance of each departments handlingActual procureBudgetVarianceUnits sold325,556.00280,000.0045,556.00Total revenue14,446,487.0013,006,000.001,440,487.00 (U)Total variable disbursals8,484,4045,968,5082515,896 (U)Contribution margin5,962,0837,037,4921,075,409 (U)Total fixed cost6,805,8286,248,920556,908 (U)Operating income-843,745788,5721632,317 (U)Table 1. Preliminary Statement of Divisional Operating Income for the division Ended June 30, 1998The following can be derived from the tableRevenue were 11% higher than the master budgetVariable expenses were $2,515,896 higher than the master budget Fixed costs were $556,908 higher than the master budgetActual(1)Master ( atmospheric static) Budget(2) conciliative Master Bud get(3)gross revenue Mix variance(1-3)Sales sum of money variance(3-2)Units sold325,556.00280,000325,556.00045,556.00 (F)Retail & catalogue8,573,285.0011, 662,000.0013, 559,407.404,986,122.40 (U)1,897,407.40 (F)Internet4,428,018.00004,428,018.00 (F)0Wholesale1,445,184.001,344,000.001,562,668.80117,484.80 (U)218,668.80 (F)Total revenue14,446,487.0013,006,000.0015,122,076.20675,589.20 (U)2,116, 067.20 (F)Table 2. Sales Analysis ScheduleSales volume quantity variance indicates an add-on in profit by $2,116,067.20 if the budgeted gross revenue mix in is maintained for the actual sales volume of 325,556. However, there is an reproachful variance of $675,589.20 because the actual sales mix was not in accordance with the budgeted sales mix.If we would check the sales volume variance, sales volume quantity variance plus sales mix variance is equal to favourable $1,440,487.00, which is the variance in table 1.Production costsActualMaster Static BudgetFlexible BudgetMaster Budget VarianceF lexible varianceTotal point genuines1,230,840.001,015,924.001,181,214.83214,916.00 (U)49,625.17 (U) acquit Labour3,668,305.002,688,000.003,125,337.60980,305.00 (U)542,967.40 (U)Variable Production overhead1,725,665.001,046,304.001,216,537.66679,361.00 (U)509,127.34 (U)Fixed Manufacturing overhead658,897661,920769,614.383023 (F)-110,717.38 (F)Table 3. Schedule of Production Variances ingest Material varianceThe budgeted price is higher than the actual resulting to a favourable material price variance. This is collectible to the price discounts of 7 to 10 percentage of the three main inputs of the product namely acrylic pile cloth, moldable joints, and polyester fiber filling which contributed to some savings.However, the actual quantity utilise in production is greater than the standard quantity allowed per unit that results to unfavourable material usage variance. This whitethornbe because of substandard lumber of materials used that more materials argon needed to produce on e unit of product. In addition, there was an incident of thunderstorm that ruined the uninsured materials wherein the company doesnt able to rule large amount of fiber filling.An early(a) factor that would affect the accept material usage variance is the lifetime guarantee that the company offers which accept the bear hospital since repairs or replacements of teddy bear are free. Also, defects whitethorn be a factor for the material variances which are merely traced later on the production process.Direct Labour varianceThe actual number of hours used and the actual lease rate of BTC are higher than the standard rate allowed for the actual production. Since most part of the production of bear is dig out-intensive, the company may deem set a low standard for the number of hours necessary to produce a unit. Additional sewing steps and inspection of the fabric color may hold up contributed to the actual labor hours used.Moreover, shortages of length in the cutting stage may require additional cutting set-ups which increase production time. Considering the production of the company, they have operated near to maximum capacity that the deal are tired and some of them quit and had to be replaced at higher-than-standard wage rates that may lead to higher cost when unskilled workers are employed.Variable OverheadDue to the effect of the increased in labor requirements, the company withal incurred increased payroll taxes and fringes. Employees need to have overtime to meet the actual demanded product volume which is higher than the budgeted that consequently increase the overtime premiums paid by BTC.Since the company has been using the same mould since it was established, frequent breakdowns occurred that maintenance work have contributed to the increase in the variable expenses. This includes the maintenance labor andsupplies needed.Fixed OverheadThe increase in utilities expense was related to the overtime of employees in the production as the demand of teddy bear boost.Incentive PlanDavid HallWith the favourable net materials price variance of $295,144.00, David Hall the Purchasing Manager will have a bonus of $59,028.72.Rita Smith, Marketing ManagerSince the Actual Net Revenue is a loss, the marketing manager will not have bonus even if she manage to increase the company sales.Bill Wilford, Production ManagerDirect LabourVariable OverheadFixed OverheadDirect Material Efficiency Variance$ 122,790 (U)Direct Labor Efficiency Variance466,638.40 (U)Direct Labor rate Variance76,329.00 (U)Variable Overhead spending variance327,488.34 (U)Variable Overhead Efficiency Variance181,639.00 (U)Fixed Overhead spending variance(3,023.00) (F)Total Variance1,171,862 (U)BonusZeroAdvantages and Disadvantages of Incentive payment PlanAdvantagesDisadvantagesThe incentive plan will motivate department headsMarketing Department focuses on less profitable distribution mix. Increase the team spirit of employees as their efforts will be rewarded Produ ction Departmentuses low quality materialsforced to work overtimePerformance of the company will tear positive resultsPurchasing Department bought discounted materials which may sacrifice the quality of production. destructionThough the company may have increased their number of sales for the current period, they inactive have incurred losses ascribable to the unfavourable variances that have resulted from their production. Substantial increase in the number of bears sold is noted for the years performance. It can be assumed of a good performance of the marketing department. However, loss still occurred.The figures of sales may post a good performance conversely the current sales might perpetrate the lowest possible sales due to wrong sales mix. The marketing department has focused too much on the Internet Sales whereas it gives a lower contribution than the Retail Sales.Variances in the production of the product are due to the wrong focused of the department head because of the young incentive compensation program. Favourable direct material price variance occurred due to lower prices and discounts on the materials purchased. However, unfavourable material usage variance have occurred probably due to substandard materials were used to the production.Direct labour on the hand, have resulted to unfavourable variances on both efficiency and rate. pore of the manager may be on the efficiency of labour due to the incentive program which gives the need to hire more skilled workers. This resulted to unfavourable labour rate variance. However, due to substandard materials were used the workers may have needed additional time to work on the teddy bears which still resulted to unfavourable variance.The incentive program may have good intentions but this lead the department heads on the wrong direction and have resulted to unfavourable variances. Other factors that may have affected the variances are the spoilage due to the thunderstorms that have occurred. Machin e maintenance is another factor especially in the overhead variances where frequent breakdowns happened.Alternative solutions obtainFirst solution that we recommend is the revision of the incentive compensation plan. The objective of the plan is good and should be maintained however some computation for the said bonus should be changed. Computation of Bonus for the Marketing Manager could be retained as net revenue is a good measure not only in the performance of the marketing department but as easy as the performance of the company.Computation for the Purchasing Manager should have likewise considered the Material Usage Variance as quality of the materials purchased in also a key factor in their production. Bonus for the production manager may have been a good computation as it may have covered different factors to assess the performance of the department.On the other hand, some overhead expenses should be observed by the companyas it continuously increase overtime. They may need to consider purchasing freshly machine as maintenance cost has been a big part of their cost. A new machine may also address the comeback of frequent overtime of employees and the increasing maintenance supplies expenses.