Midwest a

Case 24-4 Midwest Ice Cream Company (A) QUESTIONS 1. Explain in as much detail as possible where all the numbers for Steps 1-4 would come from. (You will need to use your imagination; the case does not describe all details of the profit planning process.) We can get the numbers from the companys records and its external environment. We can use the following from the companys records: Managements short term and long term plans; Accounting reports such as financial statements; Source documents such as official receipts, purchase and sales invoices and vouchers; Communications/directives from management that affect in one way or another the companys budgeting process; and Previous budgets and comparisons with actual performance. The following factors from the external environment can be used: Trends in the market where the company operates; Existing economic conditions and issues; Competition; and Environmental factors, such as weather conditions. Step 1: Establish standards for selling price, variable expenses, and marginal contribution per gallon. The companys accounting personnel can use current prices and records for determining material costs. These can be traced trough source documents such as official receipts and invoices.

In the problem, advertising expense has been considered as part of the variable cost because management decided to have an allowance of 6 cents per gallon for this expense for the actual number of gallons sold. After the unit variable cost has been developed, this amount is subtracted from the selling price to arrive at marginal contribution per unit. Step 2: Sales forecasts In coming up with a sales projection, consideration should be given to the number of days in a given period, as well as to the number of Fridays and Mondays, as these are two of the heaviest days and will make a difference in the sales forecast. Consideration should also be given to the following: Target sales for the period; Trend analysis of financial statements; Economic and market conditions; Degree of competition; Environmental conditions; and Anticipated promotions Step 3: Budgeted fixed costs Management discretion is the biggest factor in determining fixed cost budgets. Experience from previous periods are evaluated and considered in arriving at an amount that will more or less estimate the current level of operations. Trend analysis can also be helpful in determining budgeted fixed cost. The increase and decrease of every identified expense from previous periods can prompt management to set fixed cost in the same manner under underlying conditions and assumptions. Market and economic consideration may likewise affect management judgment in setting up budgeted fixed cost. Rising oil prices and cost of commodities, for example, can trigger an increase in certain expenses. Step 4: The profit plan.

The figures are arrived at by combining data generated in Steps 1 and 2 to arrive at a monthly marginal contribution. Subtracting the budgeted fixed cost identified in Step 3 from the combination of Steps 1 and 2 would help the company arrive at the operating profit. 2. Explain the difference between a months planned profit as shown in Step 4 and a months budgeted profit as shown in Exhibit C. Why would Midwest want to have two target profit amounts for a given month? (Hint: Study the variance calculations at the bottom of Exhibit C.) The effect of changes in planned sales volume and mix caused the $6,125 unfavorable variance between the profit planned in Step 4 and the budgeted profit in Exhibit C. Step 4 is designed to maximize profit at a given target sales volume combined with the appropriate sales mix at a predefined cost structure. While it appears that actual sales volume exceeded the target of 495,000 gallons by 25,000 gallons, consideration should be given to the sales mix component. Marginal contribution on actual sales volume generated only $195,875.00 (Exhibit A), which is short by $6,125.00 compared with the target. This is because the change in sales mix component resulted in a decrease in the allocated volume with the highest possible contribution margin. Considering budgeted fixed costs are still appropriate, comparison between Step 4 and Exhibit C should be focused on the volume and mix variance. Midwest management would want to have two target profit for a given month because, the management probably should have already considered that a change in planned sales volume coupled with a change in sales mix component will generate uncertainty as to whether the change would be favorable or not. Companies with multiple product lines would tend to consider much for its sales mix component. Setting up two targets for a month would probably address this concern. 3. Evaluate Midwests budgeting and control processes. Budget flexibility is a key factor in Midwests budgeting and control processes. It uses standard costing system to determine what the management should aim for. The companys planning process involves the establishment of a sales forecast, determination of costs as to variable and fixed, and the computation of income. With these steps the company can estimate its desired net income. If however, management decides to adjust due to current issues and concerns, it can do so either by altering its budgeted fixed cost component or changing its selling price.

This is what makes it flexible. Along with this, is the companys control process. Overall performance can promptly be evaluated and reviewed. With the use of variance analysis, difference in cost and volume estimates as compared to actual performance can be easily recognized. With these processes, companys performance on profitability can be arrived quickly and reviewed by management. It does not need to wait for the reportorial requirements for it to know how well the firm has achieved its targets. Hence, it is concluded that Midwests planning and control processes are both effective and efficient.