Management needs to determine which costs can be controlled and which costs cannot be controlled. The variance analysis simply showed that there was an unfavorable variance for manufacturing (99,000 U). Manufacturing Cost of Goods Sold must be evaluated individually because of the underlying facets from just a number. This unfavorable number could be caused by either an increase in price or a waste in using the number of unit materials. The materials variance should be broken down into the price variance and the usage variance. Exhibit 1 shows that variable cost and fixed cost were separated and variance was computed. Variable cost was the main culprit of the increase in cost. Here, we can identify that the increase may mainly be due to the price variance of milk and sugar.
Cooperation between John Vance, the corporate controller and Frank Roberts in preparing the variance analysis must exist. Figures to be provided will be free from bias and management can easily detect areas that need to be addressed immediately. Management will obviously not be interested in going through the whole variance analysis process. They can highlight areas which are to be addressed urgently. As per the case, they only wish to see the items that need their concern so that action can be taken the next year, 1974.
Boston Creamery must increase advertisements of their products to address the increase in market size. Boston Creamery, Inc. lost 1.0% market share – from 50% to only 49%, despite the favorable increase in market size variance of $ 167,610.00 (See Exhibit 2). This was highlighted from the unfavorable result of $ 55,266.00 of market share variance. This means that the increase in market share did not benefit the Company, and the increase in sales was mainly due to the increase in the price of their products. Company must probe on the competitors, looking into how they were able to gain the increase in market share. For example, if competitors were able to provide better ice cream or were aggressive in advertising their products as opposed to Boston Creamery. The Company must be able to increase advertising efforts and evaluate means to gain the increase in market share.
Management must provide a more comprehensive sales mix, breaking down each sales to clearly see which ice cream flavors are selling or not. Use of sales mix variance compares the actual mix sales to the forecasted; we can easily analyze which items have higher profit than the other. As a result, Boston Creamery may want to re-evaluate the contribution margin for the items which are unfavorable. Introducing new flavors which may sell better, or change in selling price, can be done in order to sell the product. Looking at Exhibit 3, we can see that despite the favorable outcome of the sales quantity, this did not translate to a favorable sales mix. This can be attributed to the loss of popularity of the basic flavors (e.g. vanilla and chocolate).
BASES FOR RECOMMENDATION
One of the factors that contributed to the unfavorable variance in manufacturing cost of goods sold is the increase in labor- cartonizing and freezing (increase of $34,400). Carton handling workers sort daily production each day onto pallets grouped by delivery truck, based on the next day’s sales orders. As stated in the case, the change in the truck loading system lowers cost of factory labor in exchange of a higher cost driver labor for loading the trucks and also frees up some driver time each day. Also, the greater part of the variable unfavorable variance is due to milk and sugar price variances ($57,300 and $23,400 respectively). This should not be held against the manager; rather, it should have been adjusted in the budget. Looking into the items on the schedule for manufacturing cost of goods sold, the uncontrollable costs were Milk and Sugar.
A professional relationship can exist between John Vance and Frank Roberts, wherein they can benefit from one another....