Budgeting and Performance Evaluation
Issues in Accounting Education Vol. 15, No. 2 May 2000
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.
J
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,
INTRODUCTION
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
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.
J
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,
INTRODUCTION
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