Colin Drury, Management and Cost Accounting – Boston Creamery
Boston Creamery
Professor John Shank, The Amos Tuck School of Business Administration Dartmouth College
This case is reprinted from Cases in Cost Management, Shank, J. K. 1996, South Western Publishing Company. The case was prepared by Professor John Shank from an earlier version he wrote at Harvard Business School with the assistance of William J. Rauwerdink, Research Assistant.
This case deals with the design and use of formal "profit planning and control" systems. It was originally set in an ice cream company in 1973, a few years before the advent of "designer ice cream".
Frank Roberts, Vice-president for Sales and Marketing of the Ice Cream Division of Boston
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The fixed costs in the revised profit plan are the same as in the original plan, $1,945,900. The variable costs, however, have been adjusted to reflect the actual volume level of 5,968,000 litres instead of the forecasted volume of 5,720,000 litres, thereby eliminating all cost variances due strictly to the difference between planned volume and actual volume For costs which are highly volume dependent, variances should be based on a budget which reflects the volume of operations actually attained. Since the level of fixed costs is independent of volume anyway, it is not necessary to adjust the budget for these items for volume differences. The original budget for fixed-cost items is still appropriate. Assume, for example, that cartons are budgeted at $.04 per litre. If we forecast volume of 10,000 litres, the budget allowance for cartons is $400. If we actually sell only 8,000 litres but use $350 worth of cartons, it is misleading to say that there is a favorable variance of $50 ($350-$400). The variance is clearly unfavorable by $30 ($350-$320). This only shows up if we adjust the budget to the actual volume level: Carton Allowance Forecast Volume Carton Budget Actual Volume Actual Carton Expense Variance (Based on Forecast Volume) Variance (Based on Actual Volume) = $.04 per litre = 10,000 litres = $400 = 8,000 litres = $350 = $400 - $350 = $50F = $320
The main reason behind it is that the variance analysis of materials, labor, and overhead indicates the difference between original budget and actual sales/amount. It explains that the management should make changes in the budgets in order to diminish the chances of failure (Epstein & Jermakowicz, 2010). Moreover, the company should make changes in its all budgets like production budget, sales budget, manufacturing budget, selling budget and general & administrative. These changes would be helpful to reduce the difference between the actual and projected sales of the firm.
Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget
Owens & Minor is a distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, the company is facing increased operating costs, which has resulted in lower profit margins and even losses. In 1993, O&M recorded an $18 million profit, which was reduced to a loss of $11 million in 1995. The entire industry is experiencing similar difficulties. In an effort to resume profitability, O&M is evaluating alternatives to “cost-plus pricing”. Cost-plus pricing does not reflect the true cost of the services provided by O&M. Customers are demanding more of O&M while
5. Determine the necessary sales in unit and dollars to break-even or attain desired profit using the break-even formula.
The case of Tork versus LG shows how Tork conducts its breakdown of competitor costs in order to
Bed, Bath and Beyond (BBBY) currently has $400 million more in cash than they need for ongoing growth and operations requirements. While the company is financially sound analysts and investors worry about the company’s capital structure decisions. Investors do not want to see that much cash on the books and worry that the current capital structure is not the most effective for the future. They prefer that BBBY change their capital structure by paying out excess cash and issuing debt. This could allow BBBY to improve their return on equity and raise earnings per share. Given the low interest rates available it seems like the perfect time for BBBY to add debt to its capital structure. Until now they
1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt
Essentially, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, as indicated by:
Cost accounting is a type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance (Cost Accounting, n.d.).
Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.
Solver has allocated optimally - the entire AA batch contributes to the profit and no loss is made on it. The original model allocated 700/300/2000 (x 1000 lbs) to Whole/Juice/Paste respectively. With the 80 AA tomatoes now in the picture, the allocation is now 820/260/2000. Solver has allocated the additional AA tomatoes towards producing the more profitable whole tomatoes and less of juice.
with a number of strategic issues facing a capital-intensive, mature industry. Their product costing system was
The purpose of this paper is to answer a few important questions: Why do companies allocate costs? How do companies allocate costs? And how this cost allocation can affect the decision making of the company. It is important for the companies to find the proper method to allocate the costs. Cost allocation is an important issue in many companies because many of the costs associated with designing, producing and distributing products and services are not easily identified with the products and services that are created. It would have been easier for companies to allocate cost if costs were directly traceable with the products and the cost allocation would have been minor issue for the company. The decision-making
A successful cost leadership strategy usually provides the entire firm with high efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget requests, and wide span of control efforts. However, some risks of pursuing this strategy are that competitors might imitate the strategy, thus, driving overall industry profits down; that technology breakthroughs in the industry may make the strategy ineffective; or that buyer’s interest may swing to other differentiating features besides price.
impact of the decision on the cost structures and the resultant margins for each of the