Budgeting and Performance Evaluation at the Berkshire Toy Company Essay

executive dependor SummaryIn 1974, Berks admit Toy Company (BTC) was founded by Franklin Berkshire, Ja unclutter McKinleys farther. Janet was present-day(prenominal)ly became the CEO of the caller- reveal when her father retires on 1993. After two years, BTC was acquired by Quality Products Corporation, a manufacturer of different products, for a common contain of $23.2 million.The preliminary statement of divisional operating income for the year ended June 30, 1998 presented the existing values generated together with the master (static) cipher and master budget stochastic variables for the period. The play along makeed high(prenominal) numerate Revenue than their budget but it turned out to an Operating Loss nigh(a) a million dollars. This paper aims to report card the budgets from unquestionable results, and to compute the budget variabilitys and to analyze its causes. After that, the conjunction deed go forth be evaluated to recommend alternative solutions for improvement.IntroductionAs a division of Quality Products Corporation, Berkshire Toy Company produces the Berkshire Bear, a fifteen-inch mooring house which argon fully jointed, washable, and dressed in various accessories. It is sell to customers handle children and adult collectors with unconditional lifetime guarantee. The company is organized into three divisions acquire (managed by David hall), fruit (managed by aeronaut Willford) and marketing (managed by Rita Smith).An bonus compensation plan was implemented in 1997, intended to enhance the intricacy and team crap of the managers. It provides bonuses for each department heads in the fol sufferinging conditions acquire 20% of net frameworks set var., assuming favourable Marketing 10% of excess departure of net revenue, assuming favourable output signal 3% of net variance in material, labour, variable command processing overhead time, labour rate variance, and the variable and fixed overhead spending, assum ing favourable variances.Statement of the ProblemObtaining a loss attack a million dollars despite the increase in gross gross sales. Substantial untoward variances resulting from work department Effects of the incentive compensation plan to the process of each departmentsDiscussion factual schoolmasterBudget partitionUnits sold325,556.00280,000.0045,556.00Total revenue14,446,487.0013,006,000.001,440,487.00 (U)Total variable expenses8,484,4045,968,5082515,896 (U)Contribution margin5,962,0837,037,4921,075,409 (U)Total fixed embody6,805,8286,248,920556,908 (U)Operating income-843,745788,5721632,317 (U) postpone 1. Preliminary Statement of divisional Operating Income for the Year Ended June 30, 1998The following can be derived from the panelRevenue were 11% high than the master budget multivariate expenses were $2,515,896 higher than the master budget mulish costs were $556,908 higher than the master budgetActual(1)Master (Static) Budget(2)Flexible Master Budget(3) gross sale s Mix variance(1-3)Sales bill variance(3-2)Units sold325,556.00280,000325,556.00045,556.00 (F) sell & catalog8,573,285.0011, 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 agendumSales mint quantity variance indicates an increase in service by $2,116,067.20 if the budgeted sales mix is maintained for the authentic sales loudness of 325,556. However, there is an unfavorable 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 VarianceFlexible varianceTotal fill M aterials1,230,840.001,015,924.001,181,214.83214,916.00 (U)49,625.17 (U)Direct 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 VariancesDirect Material varianceThe budgeted price is higher than the actual resulting to a favourable material price variance. This is overdue to the price discounts of 7 to 10 percent of the three main inputs of the product viz. acrylic pile fabric, plastic joints, and polyester fiber filling which contributed to some savings.However, the actual quantity used in production is greater than the standard quantity allowed per unit that results to unfavourable material usage variance. This whitethornbe because of inferior lineament of materials used that more materials are inquireed to produce one unit of product. In addition, there was an incident of thunderstorm that ruined the uninsured materials wherein the company doesnt able to recover large amount of fiber filling.another(prenominal)(prenominal) factor that would affect the direct material usage variance is the lifetime guarantee that the company offers which include the bear hospital since repairs or replacements of teddy bear are free. Also, defects may be a factor for the material variances which are only traced after the production process.Direct Labour varianceThe actual soma of hours used and the actual wage rate of BTC are higher than the standard rate allowed for the actual production. Since most part of the production of bear is labor-intensive, the company may experience set a low standard for the number of hours packd to produce a unit. Additional sew steps and inspection of the fabric color may mother contributed to the actual labor hours used.Moreover, shortages of length in the cutting stage may require additional cutting set-ups which i ncrease production time. Considering the production of the company, they have operated near to maximum capacity that the people are tired and some of them withdraw from and had to be replaced at higher-than-standard wage rates that may lead to higher cost when unskilled workers are employed.Variable smash-upDue to the performance of the increased in labor requirements, the company also incurred increased payroll department 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 machine since it was established, frequent breakdowns occurred that charge 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 carriage will have a bonus of $59,028.72.Rita Smith, Marketing coachSince the Actual Net Revenue is a loss, the marketing manager will not have bonus even if she manage to increase the company sales.Bill Wilford, Production ManagerDirect LabourVariable OverheadFixed OverheadDirect Material Efficiency Variance$ 122,790 (U)Direct elbow grease 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)incentiveZeroAdvantages and Disadvantages of Incentive Compensation PlanAdvantagesDisadvantagesThe incentive plan will motivate department headsMarketing Department focuses on less economic distribution mix. Increase the morale of employees as their efforts will be rewarded Production Dep artmentuses low quality materialsforced to work overtime surgical operation of the company will attract positive resultsPurchasing Department bought discounted materials which may sacrifice the quality of production.ConclusionThough the company may have increased their number of sales for the current period, they still have incurred losings due 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 put on of a nigh performance of the marketing department. However, loss still occurred.The figures of sales may post a skinny performance conversely the current sales might give the lowest possible sales due to ill-timed sales mix. The marketing department has rivet too untold 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 ne w 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. Focused 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 stirred the variances are the spoilage due to the thunderstorms that have occurred. Machine ma intenance 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 nonsubjective of the plan is good and should be maintained however some figuring 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 well as the performance of the company.Computation for the Purchasing Manager should have also 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 tax the performance of the department.On the other hand, some overhead expenses should be notice by the company as it continuously increase overtime. They may need to c onsider purchasing new machine as maintenance cost has been a big part of their cost. A new machine may also address the issue of frequent overtime of employees and the increasing maintenance supplies expenses.