Date: October 20, 2014
To: Mr. Jim Peterson, President, Boston Creamery, Inc., Ice Cream Division
Subject: Evaluating the decision choices of Boston Creamery to improve budgeting
Boston Creamery is currently experiencing difficulties with regards to its budgeting process and variance analysis. For the fiscal year 1973, the Ice Cream Division has a favorable operating income variance of $71,700. The President, Jim Peterson feels that the comparisons between budgeted results and actual results are not providing adequate information from which to decide whom should be commended for their ability to produce favorable variances, but more importantly what improvements need to be implemented, where they need to be implemented, and which manager is responsible for any shortcomings. There are several issues with the current system. First, it has allowed for managers to slack the budget for their benefit. In addition, they are also projecting revenues that are less than their real estimates so that the budgeted revenue is more easily attained. Additionally, at the direction of Jim Peterson, Frank Roberts created a variance analysis that was oversimplified, biased, and misleading as a result.
There are several underlying issues that require analysis. To begin, the Sales Budget is based on past year’s sales. This does not account for any potential changes in demand (or trends), economic environment, competitor actions, weather, etc. The sales budget is the most important of all budgets because the accuracy of all other budgets depends heavily on it. Mr. Peterson said “… there was plenty of time in later years to refine the system by bringing in more formal sales forecasting techniques and concepts.” This type of procrastination will rarely position the firm for success and more importantly, useful budgeting and controlling data. A sales budgeting process should be implemented that is more specific and accounts for several