Solutions to additional assignments

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  1. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of

a. Koala Camp Gear’s goals, objectives, and principles of budgeting

Information about the company’s goals, objectives, and principles of budgeting are available on the company’s homepage and interviews with its employees. It is important to understand the company’s complex motivation to understand the implications of the budget variance analyses that follow. Furthermore, each company has its own culture, which might work against general, recipe-book recommendations. Fro example, Koala has strong environmental and social goals that are translated into its operating principles. Information from its homepage follows. Solutions should discuss how these key points can affect the company’s budgeting and evaluation of variances.

The Koala Camp Gear Company is committed to achieving excellence in critical areas of performance:

  • Superior innovation and functional design
  • Uncompromising customer service, before and after the sale
  • Support of environmental preservation, without which our products have no meaning
  • Creation and maintenance of a socially responsible company culture

The Company will achieve its goals by meeting the following objectives:

  • Product functions will meet or exceed extreme performance demands
  • Product designs will use recycled and recyclable materials to the greatest extent possible
  • Customers will be satisfied – Period
  • At least one percent of our annual sales will be contributed to worthy environmental preservation projects
  • Every employee is a valued member of our company family and will be treated as such

The Company will employ a budgeting system with the following principles:

  • Achieve accuracy in measuring sales, production, revenues, and costs
  • Report plans and results clearly and succinctly
  • Identify as early as possible sources of significant deviations from plans
  • Use budget and variance data constructively to improve in the future, not to cast blame for the past

b. Variable cost variances for June tent production (show details)

Direct cost variance tables for June are shown in the problem materials and computed in the downloadable spreadsheet files. Although students should demonstrate ability to compute these variances, solutions to this assignment should focus on interpretation of these variances. Note that Koala uses variable costing for internal purposes, so the only fixed cost variance is the spending or budget variance. See assignments 4 and 5 for additional computational requirements. Following are examples of charts or graphical displays of the variances.

c. Indications of production problems related to the company’s goals

Several patterns emerge that appear to be consistent with the company’s non-financial goals, but might conflict with its goal of improved profitability. For example, direct material price and quantity variances are mostly unfavorable (costs greater than expected). If higher prices and usage reflect improved environmental impact of new materials, as discussed by the logistics manager, perhaps the company can accept these higher costs. As the controller indicated, the company needs to be sure about this tradeoff, or the company might be worse off on all dimensions. The direct labor price variance is unfavorable because of the increased benefit cost, also discussed by the controller. In each case, however, the labor quantity or efficiency variance is favorable, nearly erasing the adverse effect of the benefit increase. This might reflect increased labor productivity, but not necessarily. Variable overhead variances are uniformly unfavorable, reflecting both higher spending and greater use of machining resources. The production manager should be able to explain this result and/or demonstrate efforts to preclude this happening again. It is worth considering whether some or all of the variances are related. For example, higher material use might be related to less labor time – workers are being less careful with material because it is harder to work with. This also could lead to higher use of machining because of increased rework and defects. Note that non-financial operating performance statistics should support or refute these arguments. Thrashing out these issues is a valuable aspect of the company’s regular budget meetings, but these problems should be addressed in real time, in time to prevent problems.

  1. Prepare a 2-page report (including a table or chart) or a 10-minute visual presentation of

a. Potential conflicts regarding Koala Camp Gear’s multiple goals

Goals of profitability can conflict with social and environmental goals, although some believe that long-run profitability is supported by shorter-term pursuit of these non-financial goals. This might be true, and some companies appear to prosper with environmental and social goals that are on a par with financial goals. However, an objective observer might expect to find economic tradeoffs that could moderate efforts to pursue these non-financial goals without restraint. One might draw a parallel to total quality management where claims that “quality is free” have been largely replaced with more mainstream economic notions of “return on quality.” That is, every pursuit has a cost, and responsible management seeks to at least measure the tradeoffs if not be ruled by them. Companies certainly are free to pursue environmental and social goals at the expense of short-term profits – with the approval of all stakeholders – but survival no doubt dictates that this be done with eyes wide open to the short-term costs and long-term difficulties of other market pressures. Managing potentially conflicting goals probably is an example of Herbert Simon’s observation of profit “satisficing” rather than profit maximizing behavior. Examples of companies that appear to be doing well by doing good include among many others Patagonia, Gaiam, CMP Publishing, Pride Industries. Perhaps this is a growing phenomenon.

b. Sales volume variances for annual tent production – contribution margin basis

Sales volume variance tables for June are shown in the problem materials and computed in the downloadable spreadsheet files. Although students should demonstrate ability to compute these variances, solutions to this assignment should focus on interpretation of these variances. See assignments 4 and 5 for additional computational requirements. Following is an example of a chart or graphical display of the variances.

c. Indications of production and sales problems related to the company’s goals

Although the overall budget effect is favorable (contribution margin exceeded expectations by $215,500), the variance analysis reveals at least one troubling sign. Most of this favorable effect can be traced to growth of the tent market, which is not directly controllable by the company and which should have resulted in an increased contribution margin of $754,500 if all other expectations had been met. However, the company lost market share (from 5% to 4%), which depressed the contribution margin by $533,300, again holding other expectations constant. The net market effect is reflected in the sales quantity variance, which is positive, but actually reflects worse than expected market performance by the company. The sales mix variance reflects a slight adverse effect from shifting from the expected product mix. The net of the sales mix and sales quantity variances, the sales volume variance, is favorable and more so when netted with the contribution margin variance. Nonetheless, a simplistic view of performance that focuses only on the sales activity variance of $215,500 misses underlying market changes that could signal serious problems in the future.

Possible problems include competitors who have matched the performance and pricing of Koala’s tents and have taken market share, perhaps through improved marketing, advertising, and promotions. Particularly worrisome might be the possibility that the company’s environmental message is being diluted or lost in the market to the point that customers are not willing to pay higher prices for what appear to be comparable products.

3.Prepare a 4-page report (including tables or charts) or a 20-minute visual presentation that analyzes:

a. Koala Camp Gear’s goals, objectives, and principles of budgeting

See the solution to 1a.

b. Variable cost variances for July tent production

Note that Koala uses variable costing for internal purposes, so the only fixed cost variance is the spending or budget variance, which is $100 favorable. Following are tables and charts of the requested variances. These also are available in the downloadable spreadsheet solution file.

Analysis of Variable Cost Variances Tree Line Tents / Actual / Flexible Budget Variance / Flexible Budget / Budget Variance / Static Budget
Direct materials / 246,130 / 6,130 / 240,000 / (48,000) / 288,000
Direct labor / 96,900 / 6,900 / 90,000 / (18,000) / 108,000
Variable overhead / 25,751 / 3,251 / 22,500 / (4,500) / 27,000
Analysis of Flexible Budget Variances Tree Line Tents / Actual, AP x AQ / Price Variance / EP x AQ / Quantity Variance / Flexible Budget, EP x AQ allowed
Direct materials / 246,130 / 4,530 / 241,600 / 1,600 / 240,000
Direct labor / 96,900 / 5,100 / 91,800 / 1,800 / 90,000
Variable overhead / 25,751 / 1,151 / 24,600 / 2,100 / 22,500
Analysis of Variable Cost Variances River's EdgeTents / Actual / Flexible Budget Variance / Flexible Budget / Budget Variance / Static Budget