Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

Case 4.4: Whiz Calculator Company

1. From the information given in Exhibits 1 and 3, determne insofar as you can

whether each item of expense is (a) variable with salles volume, (b) partly

variable with sales volume, (c) variable with some other factors, od (d) not

related to output volume at all.

In Exhibit 1, the figures of selling expenses are fixed or appropriation basis wherein

the managers use judgement method for arriving at the budget for succeeding year.

This is known as static budgeting. They work well for evaluating performance when

the planned level of activity is the same as the actual level of activity, or when the

budget report is prepared for fixed costs. Thus, in old system, expenses are not

related to output variable at all.

However, the disadvantage of this method is that if actual performance in a given

month or quarter is different from the planned amount, it is difficult to determine

whether costs were controlled. Thus, the expenses which are fixed for a particular

period may not be incurred or there might be increase in spending. For ex: travel

expenses in reality may be more in order to achieve higher sales while rentals are a

fixed expense.

On the other hand, in exhibit 2, the figures for budget are arrived at by using flexible

budgeting system. It provides budgeted data for different levels of activity. For

instance, travel expenses are partly fixed and partly variable with percentage of

sales. The fixed component is based on the target of 65% capacity utilization

wherein it is projected that minimum this would minimum sales below which it will

not fall. In the meantime, rentals for the company are kept constant since this is

fixed cost which is incurred.

Thus, in order to have proper control over costs as well as to evaluate the

performance, management must use a budget prepared for the actual level of

activity (here minimum sales volume = 65% of capacity utilization). But at the same

time, the management needs to capture the variances in actual sales. This can be

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

achieved by way of flexible budgeting. Therefore, the new system is partly variable

with sales volume and partly fixed vis-à-vis old system which was completely fixed.

2. What bearing do your conclusions in question 1 have on the type of

budgeting system that is most appropriate?

Based on the conclusion in question 1, the new method for budgeting is most

appropriate since it tends to be more accurate in representing both the requirement

for input cash flow into a business, as well as projected sales profits as compared to

a static budget. Since a flexible budget tries to adapt to changing resource levels in

consumption, it offers a more precise level of control over business processes than

a static budget can. Variable budgets also tend to be better at predicting future

demands for the business and adjusting for unexpected external factors than can

affect productivity.

3. Should the proposed sales expense budgeting systembe adopted? Why or

why not?

Currently, Whiz Calculator is estimating the budget for the coming year’s selling

expenses as if it is comprised of only fixed expenses. President Riesman finds this

method unsatisfactory for two major reasons:

1. It is difficult to judge how good the estimates made by the department heads

really are;

2. Selling conditions fluctuate over time and there is no way to account for these

changes in the selling expenses once the budget is set for that year.

Thus a new budgeting method is being researched at this time. The new method, if

adopted, would be based on both fixed and variable costs. The fixed costs will be

those incurred at the minimum sales volume and the variable costs would be

expressed as an amount per sales dollar. President Riesman and the controller

understand that basing the selling costs on sales has some limitations, but believe

that this method would still be more appropriate than the current model because it

would incorporate some variability and allow for budget adjustments. After some

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

initial research, it was determined that the minimum sales volume required to

operate is 65% of the total capacity. The expenses for this capacity were

determined using regression analysis, which established that at this percentage of

capacity they company should have $250,000 in sales with $2,218 in expenses.

The fixed portion of these expenses is $318 and the variable portion is 0.0076 per

sales dollar. From this equation/graph, each selling expense was calculated to form

the new budget (see exhibit 3 in the case).

It is important to note that this new method does not consider the nature of each

selling region, economies of scale for large orders, or consumer behaviour.

Additionally, not all highlighted selling expenses are variable to sales and some are

only partly variable to sales (e.g. officer’s salary and travel expenses).

When comparing the new method figures with the figures from the current method,

it is apparent that the new method has lesser variation with the actual sales.

4. What other suggestions do you have regarding the sales expense reporting

system for Whiz Calculator?

The new method is based partly fixed and partly variable components. However,

while doing so the company should also focus on:

Demand from various regions

The company should establish the standard costing methods as well. This

would help in comparing the actual costs with the standard costing.

Try to consider economies of scale since this would reduce the overall costs.

Case 4.6: Grand Jean Company

1. How would you describe the goal(s) of the company as a whole? Is this, or are

these, the same as the goal(s) of the company’s marketing organization and

the company’s 25 managers of manufacturing plants?Explain.

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

The main objective of the company is to increase profitability and achieve high

growth. The company is striving hard to achieve cost effectiveness and achieve

high level of quality.

Now, the goals of the company’s marketing organization and company’s 25

managers of manufacturing plant are different. The marketing division is treated as

a ‘Revenue Centre´ so the goal of the company’s marketing organization is to

maximize revenue and sell what is produced

They are evaluated on the basis of meeting the set sale unit and sales dollar

targets. Also, they are responsible for making demand forecasts which are used to

decide the production levels of each plant. Whereas, the manufacturing plant have

the goal to just meet the budget figure and fulfill the quota allocated to each plant

Since they are considered as an expense center and there is no immediate

monetary reward to compensate for increase in responsibilities or requirements,

they are not concerned to achieve higher efficiency and thus, want to exceed the

targets

.

2. Evaluate the current management planning and control system for the

manufacturing plants and the marketing departments. What are the

strenghths and weaknesses?

By 1989, the company was one of the world’s largest cloth manufacturer 

Following are the Strengths:

a. The company has been profitable for a long time

b. The company has 25 manufacturing units of its own and 20 independent

contractors producing efficiently and reliably for them

c. They have developed a learning curve to develop the production’s standard

hour 

d. 1-to- 5 scale reward system can motivate employees work  harder 

e. Use budgeting to set the quota, which can evaluate the performance easily

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

Following are the Weaknesses:

a. There is no incentive to the manufacturing plants to exceed production. Rather, it

makes the things difficult for them as they have to meet increased quota and

have thus resorted to 3Hoarding E of stock even if there is enough demand.

b. Standard hour’s calculations are done on same scale for new and old machines,

which hence produces inaccurate results.

c. They are highly dependent on the outside independent contractors who provide

for approximately one-third of the total pants sold by them.

d. The reward system is not fair. The people who work at the headquarters are

awarded higher rating than the plant managers.

e. There is lack of staff for some departments as they continue to maintain 11:1

supervision ratio to achieve leadership excellence. Thus, the immediate and

significant information requirements cannot be met on time. Also, the production

cannot be increased because of lack of personnel.

3. One plant manager recommended that plants be operated as profit centres

because it would overcome some of the problem discovered by Mia Packard

and the casewriter. This plant manager commented, “My competitor is the

nearby independent manufacturer that makes the same pants for Grand Jean

as my plant makes. And this outsider might also make pants for Grand Jean’s

competitor. Because of the competitive market, only the best managed plants

survive in this business. Therefore, like the outside company’s manager i

should have bottom line responsibility and be rewarded accordingly.” Do you

agree or disagree with the profit centre concept for Grand Jean’s 25

manufacturing plants? How would this approach affect the plnat managers’

decisions, performance, etc.?

The manufacturing plants have the goal to just meet the budget figure and fulfill the

quota allocated to each plant. There is no incentive to the manufacturing plants to

exceed production. Rather, it makes the things difficult for them as they have to

meet increased quota and have thus resorted to “Hoarding” of stock even if there is

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

enough demand.Since they are considered as an expense center and there is no

immediate monetary reward to compensate for increase in responsibilities or

requirements, they are not motivated to achieve higher efficiency.

But the manufacturing plants are considered as a Profit Centre, the plant manager

will be able to earn incentives through higher efficiency. He will be motivated to

work efficiently and produce at peak levels. Also they’ll not restrict themselves to the

plant quota and would not hoard the excess production; rather they’ll make full use

of this extra production and gain maximum monetary rewards. A change in the

reward system would encourage the plant managers to push to maximum

production and also to minimize the cost, time and effort to produce efficiently.

Also due to intense competition from independent contractors, only the best plants

will survive. Hence the plants need to be competitive. Also increase in production

will help the company to be self-sufficient and will reduce their dependence on

external contractors.

If Grand Jean’s manufacturing plants were treated as profit centers, three

alternatives were suggested for recording revenues for each plant:

a. Use the selling price recorded by Grand Jean’s sales personnel for pants sold

to retailers and distributors.

b. Use full standard manufacturing cost per unit plus a “fair” fixed percentage

markup for gross profit.

c. Use the average contract price Grand Jean paid outside companies for making

similar pant types.

4. Evaluate these three alternatives. Which one would you recommend? Why is

your selection the best one?

a. Using selling price recorded by Grand Jeans sales personnel for pants sold to

retailer and distributer will not leave the sales department with any margin. The

Sales department would not earn any profits. Hence it is not a feasible option.

Every department needs to generate revenue for its sustenance.

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

Also, the sales department is already getting their products manufactured

from 20 other outside suppliers for almost 5 years now. If the manufacturing

plants would charge them at the price at which they are selling to retailers

and distributors, then the sales department would switch to the external

suppliers for supply at a lower cost and will not continue with this system.

Also, if the manufacturing department thinks of selling their products to the

outside market even then they will have to reduce their price to the market

price.So, considering both the points that are mentioned above using selling

price recorded by Grand Jean’s sales personnel for pants sold to retailers

and distributors, it will not do any good either to the manufacturing or to

company as a whole.

b. Using full standard manufacturing cost per unit plus a fair fixed percentage

markup for gross profit means manufacturing unit calculates the per unit cost of

manufacturing and add a predefined 3 Fair E Profit percentage to it to arrive at the

transfer price.

This method has the advantage that there is incentive for the manufacturing

department to do well and to increase efficiency. There is a fixed percentage

of the cost that the manufacturing unit will charge over and above the cost

and that will be its gross profit. So, for every unit they produce and sell they

get profit for it. This profit will make them work harder and attain more

efficiency. Also as a profit center even if they produce more than what is their

own companies requirement they may sell it to the market as contracted

manufacturers and earn further profit as a “Fair” percentage of cost.

But in this case there is nothing motivating for the employees to focus on

keeping on cost of production as low as possible. The employees should try

their level best to keep the cost as low as possible and competitive. Hence,

this alternative has several advantages of motivation, but cost factor needs to

be taken care of.

c. If we consider the option of the average contract price that Grand Jeans is paying

to outside companies to get its product made that would give them the price

Name: Nurul Sari

NIM: 1101002048

Case 4.4 and Case 4.6

range with very little margin to work with as the bargaining power of Grand Jeans

is pretty high. Hence, this may lead to reduction in the quality so as to maintain a

fair margin for themselves. This may in turn lead to increased number of

rejections at the customer end and may lead to reduction in brand value and loss

of market share to the company.

Considering the three alternatives given to us the best one would be the

cost plus fixed margin (Alternative 2).All other options don’t fit well in the

situation of Grand Jeans. Moreover, the manager of manufacturing and

sales may sit down and negotiate and reach at a consensus. This price

could be between the cost plus margin price and selling price of the sales

department.

At this price the sales department will have sufficient margin as well as

manufacturing department will have good incentives to do well.