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 Creamery, was pleased when he saw the final earnings statement for the division for 2000 (see Exhibit 1). He knew that it had been a good year for ice cream, but he hadn't expected the results to be quite this good. Only the year before the company had installed a new financial planning and control system. This was the first year that figures comparing budgeted and actual results were available. Jim Peterson, president of the division, had asked Frank to make a short presentation at the next management meeting commenting on the major reasons for the favorable operating income variance of $71,700. Peterson asked him to draft his presentation in the next few days so that the two of them could go over it before the meeting. Peterson said he wanted to illustrate to the management group how an analysis of the profit variance could highlight those areas needing corrective attention as well as those deserving a pat on the back. THE PROFIT PLAN FOR 2000 Following the four-step approach outlined in the Appendix, the management group of the Ice Cream Division prepared a profit plan for 2000. Based on an anticipated overall ice cream market of about 11,440,000 litres in their marketing area and a market share of 50%, forecasted overall litre sales were 5,720,329 for 2000. Actually, this forecast was the same as the latest estimate of 1999 actual litre sales. Since the 2000 budget was being done in October of 1999, final figures for 1999 were not yet available. The latest revised estimate of actual litre volume for 1999 was thus used. Rather than trying to get too sophisticated on the first attempt at budgeting, Mr. Peterson had decided just to go with 1999's estimated volume as 2000's goal or forecast. He felt that there was plenty of time in later years to refine the system by bringing in more formal sales forecasting techniques and concepts. This same general approach was also followed for variable product standard costs and for fixed costs. Budgeted costs for 2000 were just expected 1999 results, adjusted for a few items which were clearly out of line in 1999. Original Profit Plan for 2000 Standard Contribution Margin/litre Vanilla Chocolate Walnut Buttercrunch Cherry Swirl Strawberry Pecan Chip Total $.4329 .4535 .5713 .4771 .5153 .4683 .5359 $.4530 Forecasted litre Sales 2,409,854 2,009,061 48,883 262,185 204,774 628,560 157,012 5,720,329 Forecasted Standard Contribution Margin $1,043,200 911,100 28,000 125,000 105,500 294,400 84,100 $2,591,300
Colin Drury, Management and Cost Accounting – Boston Creamery
Breakdown of Budgeted Total Expenses Variable Costs Manufacturing Delivery Advertising Selling Administrative Total Recap Sales Variable Cost of Sales Contribution Margin Fixed Costs Income from Operations $9,219,900 6,628,600 2,591,300 1,945,900 $645,400 $5,888,100 187,300 553,200 --$6,628,600 Fixed Costs $612,800 516,300 -368,800 448,000 $1,945,900 Total $6,500,900 703,600 553,200 368,800 448,000 $8,574,500
ACTUAL RESULTS FOR 2000 By the spring of 2000 it had become clear that sales volume for 2000 was going to be higher than forecast. In fact, actual sales for the year totaled over 5,968,000 litres, an increase of about 248,000 litres over budget. Market research data indicated that the...