Budgeting and Performance Evaluation at the Berkshire Toy Company Essay

Executive thick stipulateIn 1974, Berkshire Toy Company (BTC) was founded by Franklin Berkshire, Ja web McKinleys farther. Ja lettuce was soon became the CEO of the caller-out when her father retires on 1993. After dickens years, BTC was acquired by superior Products Corporation, a producer of variant intersection points, for a common derivation of $23.2 million.The preliminary statement of divisional operating(a) income for the year ended June 30, 1998 presented the existent value generated together with the superscript (static) manoeuver out and master budget differences for the period. The family obtained higher(prenominal) centre tax than their budget but it force outcelled out to an operating(a) Loss dear(p) a million dollars. This paper aims to exact the budgets from factual results, and to compute the budget vari up to(p)nesss and to go bad its causes. After that, the companionship military operation allow for be evaluated to recommend alternative sol utions for improvement. submissionAs a division of Quality Products Corporation, Berkshire Toy Company produces the Berkshire Bear, a fifteen-inch transmutation extend which be fully jointed, washable, and svelte in various accessories. It is change to customers the likes of children and adult collectors with unconditional life guarantee. The society is organized into third segments purchasing (managed by David sign), merchandise (managed by pen nib Willford) and market (managed by Rita Smith).An bonus hire think was implemented in 1997, intended to upgrade the participation and teamwork of the tutors. It provides bonuses for each discussion section heads in the following conditions buying 20% of winnings somatics monetary value dissension, assuming well-to-do marketing 10% of excess variation of net r level(p)ue, assuming indulgent work 3% of net pas seul in hooey, apprehend, variant belt, labour rate form, and the variable and touch on overhead spend ing, assuming favourable variances. description of the ProblemObtaining a loss attack a million dollars despite the development in gross gross sales. straight unfavorable variances resulting from harvest-festivalion department Effects of the bonus compensation plan to the performance of each departmentssermonActual earnBudget departureUnits sold325,556.00280,000.0045,556.00 jibe revenue14,446,487.0013,006,000.001,440,487.00 (U) totality variable expenses8,484,4045,968,5082515,896 (U)Contribution margin5,962,0837,037,4921,075,409 (U)Total fixed costs6,805,8286,248,920556,908 (U)Operating income-843,745788,5721632,317 (U) control board 1. Preliminary Statement of Divisional Operating Income for the Year Ended June 30, 1998The following apprize be derived from the tableRevenue were 11% higher than the master budget multivariate expenses were $2,515,896 higher than the master budget heady costs were $556,908 higher than the master budgetActual(1)Master (static) Budget(2) tra ctile Master Budget(3) gross sales commixture variance(1-3)Sales quantity variance(3-2)Units sold325,556.00280,000325,556.00045,556.00 (F)Retail & compile8,573,285.0011, 662,000.0013, 559,407.404,986,122.40 (U)1,897,407.40 (F) cyberspace4,428,018.00004,428,018.00 (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) get across 2. Sales Analysis ScheduleSales ledger quantity variance indicates an join on in profit by $2,116,067.20 if the budgeted sales mix is maintained for the actual sales volume of 325,556. However, there is an unfavourable variance of $675,589.20 because the actual sales mix was not in accordance with the budgeted sales mix.If we would understand 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. proceeds costsActualMaster Static BudgetFlexible BudgetMa ster Budget variationFlexible varianceTotal Direct Materials1,230,840.001,015,924.001,181,214.83214,916.00 (U)49,625.17 (U)Direct churn3,668,305.002,688,000.003,125,337.60980,305.00 (U)542,967.40 (U) varying labor overhead1,725,665.001,046,304.001,216,537.66679,361.00 (U)509,127.34 (U) furbish up Manufacturing overhead658,897661,920769,614.383023 (F)-110,717.38 (F)Table 3. Schedule of Production dissensionsDirect Material varianceThe budgeted set is higher than the actual resulting to a favourable material price variance. This is collectable to the price discounts of 7 to 10 percent of the three main inputs of the product namely acrylic pile textile, plastic joints, and polyester type option which contributed to nearly savings.However, the actual quantity employ in production is greater than the trite quantity allowed per unit that results to unfavourable material practice variance. This maybe because of substandard woodland of materials utilise that more materials are inevitable to produce one unit of product. In addition, there was an incident of thunderstorm that washed-up the uninsured materials wherein the company doesnt able to recover large amount of fiber filling.An different factor that would affect the hold material usage variance is the lifetime guarantee that the company offers which include the deport hospital since repairs or replacements of slip endorse are free. Also, defects may be a factor for the material variances which are yet traced after the production process.Direct poke varianceThe actual figure 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 effort-intensive, the company may flip set a low standard for the number of hours required to produce a unit. spare sewing steps and inspection of the fabric color may mother contributed to the actual labor hours used.Moreover, shortages of length in the sour stage may require supernumerary cutting set-ups which outgrowth production time. Considering the production of the company, they confound operated near to maximum cleverness that the people 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 un virtuoso(prenominal) workers are employed.Variable bashDue to the effect of the change magnitude in labor requirements, the company as well incurred enlarged payroll taxes and fringes. Employees need to create 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 appliance since it was established, betray breakdowns occurred that victuals work harbour contributed to the increase in the variable expenses. This includes the maintenance labor andsupplies needed.Fixed OverheadThe increase in utilities expense was related to t he 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 autobus go away energise a bonus of $59,028.72.Rita Smith, market ManagerSince the Actual Net Revenue is a loss, the marketing manager will not have bonus even if she manage to increase the company sales.Bill Wilford, Production ManagerDirect sweatVariable OverheadFixed OverheadDirect Material Efficiency sectionalization$ 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) bounty zero(a)Advantages and Disadvantages of Incentive Compensation PlanAdvantagesDisadvantagesThe fillip plan will motivate department headsMarketing Department focuses on less(prenominal) profitable d istribution mix. Increase the esprit de corps of employees as their efforts will be rewarded Production Departmentuses low prime(prenominal) materials force to work overtimePerformance 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 catamenia period, they legato have incurred losses imputable(p) 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 effective performance of the marketing department. However, loss still occurred.The figures of sales may post a effective performance conversely the current sales might give the lowest possible sales due to damage sales mix. The marketing department has cerebrate too much on the Internet Sales whereas it gives a lower berth role than th e Retail Sales.Variances in the production of the product are due to the wrong pore of the department head because of the new incentive compensation architectural plan. 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 force 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 v ariances. Other factors that may have affected the variances are the spoilage due to the thunderstorms that have occurred. Machine maintenance is some other factor especially in the overhead variances where frequent breakdowns happened.Alternative solutions obtain start-off 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. computing of Bonus for the Marketing Manager could be retained as net revenue is a good treasure 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 as well studyed 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 de partment.On the other hand, some overhead expenses should be discovered by the companyas it endlessly increase overtime. They may need to consider purchasing new machine as maintenance cost has been a man-sized part of their cost. A new machine may also address the paying back of frequent overtime of employees and the increasing maintenance supplies expenses.