Craig Shoe Company

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Concepts covered in Case

The case focuses on the Standard cost system and Flexible budgeting. A standard cost is a carefully determined cost used as a benchmark for judging performance. The purposes of a standard cost are to exclude past inefficiencies and to take into account changes expected to occur in the budget period. A static budget is based on the level of output planned at the start of the output period. A flexible budget is adjusted to recognize the actual output level of the budget period. Flexible budgets help managers gain more insight into the causes of variances than what is available from static budgets. Managers use a three-step procedure to develop a flexible budget. When all costs are either variable with respect to output units or fixed, these three steps require only information about budgeted selling price, budgeted variable cost per output unit, budgeted fixed costs and actual quantity of output units. Case Analysis

Craig Shoe Company used to prepare fixed budget using standard cost system. Over the years, they have developed flexible standards which are used to prepare flexible budget for the company. Company develops complete financial budget for each six months. Financial budget is prepared by integrating the budgets of various operations of the company such as sales, manufacturing, administration etc. Sales budget

Sales budget were prepared in November for the period from January to June The company budgeted for a six month period only because they found it impossible to estimate sales or the break-down of sales for longer period. Cost catalogues were prepared covering standard prices for all the different materials used and standard quantity allowances of materials for the various types and grades of shoes. Labour cost catalogues, containing some 28000 piece prices were also prepared. Tentative expense and production budgets were prepared. Preliminary standard cost figures were worked for the shoes in all the different grades which the company expected to sell during the six-month period. Thus sales budget estimated Expected Shipment to customers for each month for each grade (Grades are A,B,C and D). Production budget

Company had learned that they should keep 1.5 times the number of the shoes that they expected to sell during the period. By adjusting the figure reflecting shipments to customers by an amount necessary to bring the stock on hand to the basic level required for the first of the following month, the number of pairs of shoes to be delivered each month from the factory to the warehouse was determined. Thus, Required deliveries to warehouse during a month =

1.5 * Expected Shipment to customers + Change in Stock during the month Where, 1.5 * Expected Shipment to customers gives Required stock level 1st of the month And Change in Stock during the month is calculated from the additions/subtraction from the production required to meet shipments to correct basic stock on first of the following month. Final adjustments to production budget were made due to limits of the production capacity of the factory and fluctuation in seasonal requirements. Manufacturing Expense budget

The company had analysed its records of cost experience for a number of years to find out the relationship of each item of manufacturing expense to volume of inactivity, as measured by pairs of shoes produced. They prepare additional charts on a percentage basis to establish the percentage by which each item of expense should be expected to vary from normal for a given percentage of production variation from normal These charts were used with average month’s budget to prepare flexible budget allowance for the actual production in a month. Manufacturing expense budget data were shown at the 1/6th of the figures estimated by the financial budget. Selling and Administrative Expense budget

In selling and administrative expense budget, most of the items were marked as fixed in the budget but actually they...
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