Whiz Calculator Company Page 1

Michele Granata 4
th
year Euro BBA Student ID: 09409688
Whiz Calculator Company (case 4-4)
Case Overview
How to control selling costs in a sales branch?
Whiz Calculator Company is considering a new methodology for planning and controlling selling
costs. The old method was unsatisfactory according to new president Bernard Riesman.
Old method of planning and controlling selling cost:
1) Selling expenses budgeted with a fixed budgeting approach. Each October, the accounting
department, sent to selling departments an accurate record of their actual department expenses for
the previous year and the current year- to-date.
2) Considering this record, the estimates for the succeeding years sales and their own judgment, the
department heads, drew up estimates of the expenses for their departments.
3) Following this, these estimates were sent to the sales manager, who verified them and cleared up
any doubtful items by correspondence.
4) After approval by the sales executive, the branch costs estimates were submitted to the marketing
manager, who was in charge of all promotion, selling and warehousing activities.
5) The marketing manager discussed these figures with the managers concerned, and she combined
the estimates of all departments into a selling expense budget.
6) Finally, the budget was submitted to the budget committee for approval. These budgeted figures
were divided into 12 parts and compared to each month`s actual results.

Whiz Calculator Company Page 2
New Budget Method proposed by Mr Riesman:
Flexible Budgeting.
Setting selling cost on a fixed and variable basis.
Fixed costs to be those incurred at the minimum sales volume.
Setting the variable expense standard using linear regression.
Variable costs to be expressed as an amount per sales dollar.
Activity driver: sales value.
Questions
Question 1
Determine whether each item of expense is (a) variable with sales volume, (b) partly variable
with sales volume, (c) variable with some other factors, or (d) not related to output volume at
all.
There is more than one possible answer for most of the items.
Managers salary: (d) not related to output volume at all.
Office salaries: (b) partly variable with sales volume and/or (c) variable with some other factors.
Variable element might be due to a bonus based on sales or variability based on overtime.
The fixed element of the office salaries is just a small percentage of the total (139$, just 11.5% of
the flexible budget). The assumption is that this fixed part relates to a sales level of zero. However,
sales never go down to that level. It is probable that the company always operates within a fairly
narrow range of sales. For instance, if the minimum sales value in this range is 250,000$, the fixed
part would effectively be 139+0.0041*250,000= 1,164; which is 96.28% of the budget figure.
Sales force compensation: (a) completely variable with sales volume for two reasons:

Whiz Calculator Company Page 3
The variable factor is a round number, 5 cents per dollar sales (0.005).
The budget is exactly the same as the actual cost.
Travel expense: (b) partly related to sales volume or (c) variable with some other factors.
Issue of time lag, travel expenses in this month could generate a sale in the following months.
Stationery, office supply: (b) partly variable with sales volume or (c) variable with some other
factors, because of seasonality. Perhaps, they could decide to have a start of term sale and start
preparing posters, flyers.....
Postage: (b) partly variable with sales volume or (c) variable with some other factors.
Light and heat: (c) variable with some other factors. It principally varies with the time of year.
The variances are due to the calculation of budget figures in a given month, dividing the total for
the year by twelve. It does not consider that, there is a higher usage of these factors in some periods
of the year.
Subscription and dues: (b) partly variable with sales volume and/or (c) variable with some other
factors. It depends on the nature of the subscriptions and dues.
Donations: (b) partly variable with sales volume and/or (c) variable with some other factors. If
the profit of the company goes down they could decide to trim donation expenses. On the other
hand, in the case of a disaster they might decide to donate a consistent amount of money.
It is highly likely to also have a fixed element.
Advertising Expense:
(b) Partly variable with sales volume. Causality issue: is a higher sales level which leads to
increasing advertising expenses or vice-versa?
(c) Variable with some other factors.
Social Security taxes: (b) partly variable with sales volume and/or (c) variable with some other
factors.

Whiz Calculator Company Page 4
Same logic that applies to salaries and sale force compensation, as presumably the company pays
tax on these expense items.
Rental: (d) purely fixed. The actual is the same as the budget. They know how much the annual
rental is going to be and just divide it by twelve.
Depreciation: (d) not related to output volume at all.
Accounting figure, depends on the assumption that they adopt in the underlying depreciation
method.
Problem: possibility of dysfunctional behaviour. Is it appropriate to use an arbitrary accounting
figure in the calculation of the budget used to incentivise staff?
Other branch expense: (b) partly variable with sales volume and/or (c) variable with some other
factors.
It is not clear what is included.
Question 2
What bearing do your conclusions in question 1 have on the type of budgeting system that is
most appropriate?
For item of type (a), (b) and (c) the new budgeting system is preferable since it allows for:
Separation of fixed and variable factors.
Adjustment of the variable portion of budget allowance to correspond to the actual sales value.
However, for item (c), the cause of variation should not be sales value.
In addition, another distinction is relevant:
Engineered costs: vary directly with sales volume (e.g. manufacturing expenses).
Discretionary costs: result of branch managers decision.

Whiz Calculator Company Page 5
Many of the sales costs are discretionary (e.g. donation, promotion...). Thus, the new quantitative
budgeting method based on the linear regression may not be appropriate. Moreover, accounting
information is not sufficient for control purpose for discretionary costs. They should be integrated
with a system of informal control.
Question 3
Should the proposed sales expense budgeting system be adopted?
A) Fixed Budget Method
The new President believed there were two limitations to this approach.
There was no possibility to ascertain the plausibility of the estimates made by department heads.
Selling conditions fluctuated over time after the budget had been adopted. Nevertheless, there
was no way to consider these changes in the budget for the year once it was established.
Other weaknesses;
The sales branch manager estimated future costs based on past spending. Past costs are
problematic in predicting the future; just relying on past costs is not sufficient.
Potential problems in relying on past costs:
Inflation
Market Conditions
New products and competitors in the marketplace (changes in the competitive
environment. For example, mobile phones entered this market as substitutes to calculators a few
years ago.)

Whiz Calculator Company Page 6
Total budget for the year divided by twelve: problem of seasonality. This is a calculator business,
and thus, it experiences a sales peak at the beginning of the year when the schools and colleges
start.
Potential conflict of interest between accountants and sales people. In the cases of unfavourable
variances, the sales manager could use the pitfalls in the budgeting system as an excuse. This
problem is, to a certain extent, also related to the difference in the average personality between
accountants and sales employees (see sentence at the end of the case).
Strengths of the fixed budget method;
Acknowledgment that optimum expense levels and performance cannot be determined precisely.
Reliance on action-accountability control to provide an indication of allowed expenses.

B) Flexible Budget Method
Problems of the flexible budget method;
Mr Riesman had been vice president of manufacturing. In fact, the methodology that he
proposed is more typical in manufacturing expense control and may not be the best solution for
selling costs. This is the reason behind the final statement of the sales executive in the case study,
where he asserts that the implementation of the new method is not appropriate for the sales
department.
Is it appropriate to use a quantitative approach when many costs are discretionary?
The hypotheses related to the fixed portion are largely arbitrary.
Variable portion expressed as a certain amount per sales dollar:
Does not consider selling difficulties, economies of scale for large orders, or consumer
behaviour.
The underlying assumption is that selling costs are driven by sales value.

Whiz Calculator Company Page 7
Not all selling expenses are variable with sales, and some are only partly variable with
sales.
Linear regression technique to set the variable expense standard. The regression is
formed around equations which showed how this variable had fluctuated with sales volume in
the past and modified arbitrarily by the controller on the basis of his judgement.
Sales manager has an incentive to increase sales value. The higher the sales value, the
higher the budget for the various cost items (Revenue Centre Approach). Is that beneficial for the
business? It does not give a clear signal for revenue-expense trade-off. It gives an incentive to
increase sales but not necessarily profit.
Solution: Profit centre approach. The budget is not set based on the sales value, but on the profit
generated by those sales. It allows for a trade-off between incremental selling expenses and their
contribution.
Strengths of the flexible budget method
Convenient because readily available and easy to understand.
It allows for an adjustment of the variable portion so as to correspond to the actual sales that
occurred in a month.
More accurate if the range of the sales figures presents a high degree of variability, which is
highly probable in a business characterized by seasonality.
Final Remarks
Both methods present pros and cons and neither is perfect. However, I believe the new method
(flexible budgeting) should be adopted. It enables the separation between fixed and variable
components of the expenses and thus is more apt to adapt to fluctuations in actual volume of sales.
This is particularly relevant in the calculator business which is characterized by seasonality.

Whiz Calculator Company Page 8
Moreover, the controller is aware of the pitfalls of the new method, and he plans to make
improvements in subsequent years:
Defining a more accurate measurement of the causes of variation.
Setting the rates of variation using the time-study technique.
Finally, the total difference between actual and budgeted figures is lower with the new system than
under the old one. This is potentially a sign that the flexible budget provides a more accurate and
valuable description of reality.
Question 4
Other suggestions regarding sales expense reporting
Given the discretionary nature of the sales costs, it is fundamental to partner the formal (accounting)
control system analysed with a system of informal controls;
Meetings to discuss changes in the competitive environment.
Analyses of the variances on a case by case basis.
Teamwork, collaboration and communication between sales and the accounting department in
establishing the sales budget.