A new financial planning and control system is only as good as a company’s capacity to implement it effectively. But most importantly, many employees see the new system as an end in itself, instead of a means to an end. The way standards are formulated play a crucial role in the results of these variances. For instance, management decided to use the sales forecasts based on what they made and incurred in the previous year. This would normally be the case, if the company had limited growth prospects. Reporting in aggregate may not allow a company to dissect operations appropriately, as to which areas need to be rewarded, and those that need to be assisted. For instance, the extent of increased operating income can partly be traced to an increase in price. Conflicts become inevitable when there is a lack of coordination among departments, just like the conflict between Frank Roberts and John Parker. The orientation seems to be department-based. While that is one consideration, this may adversely affect management’s decision-making process that subsequently trickles to the whole company.
How should the company formulate, compute and report its variances? How should these variances be interpreted? What actions should management take based on the interpretation of these variances?
Areas for Consideration
We evaluate Boston Creamery’s profit planning and control system by determining its effectiveness in addressing management and company needs. Since Roberts prepares the variance analysis schedule, most of the information may only be useful to those in the sales, marketing and advertising department. For instance, costs adjusted to actual volume eliminated cost variances resulting from deviations between planned and actual volume. Those eliminated variances may be of use to the manufacturing division in explaining what causes certain results in their operations, may they be favorable or unfavorable. Moreover, it was apparent that tension arose due to the information reported in the variance analysis schedule. Presenting the variances in aggregate leaves out certain information that can lead to the reasons for the resulting figures. This tension may have been avoided if, for instance, the unfavorable variances due to operations are further broken down to determine if the deviations were attributable to certain uncontrollable factors or to controllable ones that are influenced by some other department other than the manufacturing department. The way the estimates for revenues and costs must be taken into account as well. Using the company’s actual sales from the previous year can be sufficient to estimate the planned sales for the year if they had no intention of growing or didn’t expect employees to go exceed expectations. Fixed and variable costs were also maintained from the previous year. This can be an unrealistic assumption, which will lead to an unnecessary unfavorable variance in terms of fixed costs. Even favorable variances may misled managers in thinking that improvements occurred, when in fact, goals were not reflected in the system in the first place. Aside from those other areas, as earlier stated, the financial and planning control system is one of the many tools that a company should utilize, among the plethora of available options it has. Analysis outside of this must be utilized as well. Measures, beyond the numbers provided for in reports, can also lead to meaningful information that is useful in the decision making of the company. Examples would be financial ratios, the competition the company is subjected to, the emerging trends among its target market that it can utilize for future operations and the perceived brand equity of the company.
Alternative Courses of Action
Considering the company’s system of reporting costs, they could choose to: (1) retain the current process of variance reporting but with several price and volume adjustments...