Budgeting and Performance Evaluation at the Berkshire Toy Company Dean Crawford and Eleanor G. Henry
ABSTRACT: This case1 provides an opportunity to study budgets, budget variances, and performance evaluation at several levels. As a purely mechanical problem, the case asks for calculations of various price, efficiency, spending, and volume variances from a set of budgets and actual results. The case is also an interpretive exercise. After the variances have been computed, the next step is to develop plausible conjectures about their likely causes. Finally, it is a case about performance evaluation and responsibility accounting. The company has an incentive plan, based on the budget variances, that needs to be analyzed and critiqued.
anet McKinley is employed by the Quality Products Corporation, a publicly traded conglomerate. The corporation manufactures and sells many different kinds of products, including luggage, music synthesizers, breakfast cereals, peanut butter, and children’s toys. McKinley is Vice President in charge of the Berkshire Toy Company, a division of Quality Products. It is late July 1998 and McKinley has just received the preliminary income statement for her division for the year ended June 30, 1998 (see Table 1). The master (static) budget and master budget variances for the same period are included for comparison purposes. McKinley looks at the bottom line, a loss approaching a million dollars, then picks up the phone to call you. You are an accountant in the controller’s office at the headquarters of Quality Products Corporation. You worked with McKinley when her company was acquired by Quality Products,
and now she has called you for advice. “I know the bottom line looks pretty bad,” she says. “But we made great strides this year. Sales are higher than 1
This case is based on field research at an existing toy company. The essential facts relating to production and sales have been retained. However, all names, dates, actual events, and identifying details have been concealed to protect the privacy and identity of the company. Thus, if any names used in this case are those of actual firms or individuals, then it is purely coincidental.
Dean Crawford and Eleanor G. Henry are both Associate Professors at SUNY at Oswego. The valuable comments and suggestions on earlier versions of this case from Professors Jeffery Abarbanell, James Noel, Nicholas Schroeder, the editor, David E. Stout, and associate editor, Jeffrey Cohen, two anonymous reviewers, and the students of the Graduate School of Business Administration at the University of Michigan and the College of Business Administration at the University of Toledo are gratefully acknowledged.
Issues in Accounting Education
TABLE 1 Berkshire Toy Company A Division of Quality Products Corporation Preliminary Statement of Divisional Operating Income for the Year Ended June 30, 1998 Master (Static) Budget 280,000 $11,662,000 0 1,344,000 13,006,000 Master Budget Variance 45,556 $ 3,088,715 4,428,018 101,184 1,440,487 F U F F F
Actual Units sold Retail and catalog (174,965 units) Internet (105,429 units) Wholesale (45,162 units) Total revenue Variable production costs: Direct materials Acrylic pile fabric 10-mm acrylic eyes 45-mm plastic joints Polyester fiber filling Woven label Designer Box Accessories Total direct materials Direct labor Variable overhead Total variable production costs Variable selling expenses Total variable expenses Contribution margin Fixed costs: Manufacturing overhead Selling expenses Administrative expenses Total fixed costs Operating incomea 325,556 $ 8,573,285 4,428,018 1,445,184 14,446,487
256,422 125,637 246,002 450,856 16,422 69,488 66,013 1,230,840 3,668,305 1,725,665 6,624,810 1,859,594 8,484,404 5,962,083 658,897 5,023,192 1,123,739 6,805,828 $ ( 843,745)
233,324 106,400 196,000 365,400 14,000 67,200 33,600 1,015,924...