This paper presents a summary description of the steps Midwest Ice Cream Company takes to build its first planning and control. The applicability of concepts such as fixed costs, variable costs, unit standard costs, sales and manufacturing budgets used depict the same. However, attention shifts to whether each of the budgets presented in each of the steps is static or flexible. Besides, an explanation on the variance due to volume and variance due to mix is presented in the paper.
The budget is step 2 is a flexible budget. The Vanilla Ice Cream Sales Forecast in Gallons shown in step 2 is designated to change in accordance with the level of activity attained. This type of budgeting involves budgeting at various levels in anticipation for change (Morlidge and Player, 2010). The original sales budget can be flexed to present the actual conditions on which the performance was based. The step 2 budget presented can be adjusted to include a range of information at the planning stage. It gives room for control for data when compared to the actual performance. Besides, it is the budget that the company can use in all the phases in making the profit plan. Thus, it can be adjusted to rip the desired profit. Basically, it is prepared with certain considerations. For instance, it gave consideration to certain days of the week which of course can be adjusted to increase the profit the company desires. It can be re-adjusted as it is very critical for all the phases in making the profit plan. If the plant managers wish to use more days, it’s logical that the budget can be adjusted. In essence, it provides opportunity for planning and control of the company operations.
The budget in step 3 is a static budget. It is based on a single level of activity--in this case a particular value of expenses. It matches that characteristic of static budget of only one level of activity budgeted for. The actual results can be compared against the budget costs. For instance, the manufacturing expense, delivery expense, administrative expenses and selling expenses can be compared against the budgeted costs at the original budgeted level of the activity. Each and every month’s incurred expense costs can be weighed against standard costs but only at the original activity budget. These expenses cannot be adjusted to reflect actual activity level when change occurs.
The budget in step 4 which is the profit plan is a flexible budget. This is due to that it can be adjusted or flexed and hence bring a variation in the volume of the activity. It is a flex budget solely because it is not constrained to one activity at a time. Besides, the actual results are almost impossible to compare with budgeted costs at the actual or standard budget activity level. If the profit figure is insufficient, a new evaluation and adjustment can always be made to the fixed costs developed in step 3.
Variance analysis entails the process of analyzing the variation between the standard cost and the actual cost into its constituent parts. Based on the calculations of Sales Activity Variances for January, presented in Table A, the variance due to volume is larger than that due to mix. This implies that the off-the –standard performance for the volume is far much more than that of the mix when compared.
The management needs to distinguish the difference between the two variances. The variance due to mix helps approximate the mixing and usage of component materials so that the variance is level is contained. Its analysis help obtain practical pointers to the causes of off-the-budgeted performance (Michael, 2009). On the other hand, variance due to volume is determined to help understand the more major sales mix and final sales volume variances. It thus helps the management understand the off the budgeted sales performance. Besides, its analysis aids in understanding the reason behind the causes of below standard performance. It therefore helps the management to improve the company operations with regard to the efficiency, the usage of the available resources and effective ways on how the cost can be minimized.
Based on the Profit Plan for the budgeted profit at Actual Volume and forecasted table, the variance due to volume is computed as under.
Michael C. J. (2009). Corporate Budgeting Is Broken--Let's Fix It. Harvard Business Review.
Morlidge, S., and Player, S. (2010). Future Ready: How to Master Business Forecasting. 1st edition. Wiley.
The given case study. Midwest Ice Cream Company.