Module- Case
BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS
Case Assignment
T&P Fashion Shops
T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.
Below follows some cost estimates for the Houston store.
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T&P Fashions
Flexible Budget Information
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Expense
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Fixed
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Variable
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Cost of sales
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$210,000
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40%
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$740,000
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Management
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27,000
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12%
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186,000
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Shop assistants
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162,000
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8%
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268,000
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Rent
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13,200
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5%
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54,450
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Utilities
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34,800
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34,800
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$447,000
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$1,283,250
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Additional information
• The sales forecast for the year is $1,400,000.
• Variable expenses are based on revenues. Do note that percentage clause for rent only kicks in above $500,000 in sales.
• Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.
• T&P wants to see a flexible budget based on the sales forecast, including estimates for sales being 10% below budget and 10% above budget.
Actual results
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T&P Fashions
Actual Results from Operations
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Revenues
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$1,325,000
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Cost of sales
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790,000
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Management
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208,000
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Shop assistants
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230,000
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Rent
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58,200
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Utilities
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31,000
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Operating profit
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$7,800
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Required:
Computations (use Excel)
• Prepare a flexible budget in good format.
• Compute the flexible variances and indicate whether favorable or unfavorable.
• Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in the table.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the flexible budget variances; how to interpret the information; and what action, if any to take. Comment on the 5% marketing proposal too. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word) Start with an introduction and end with a summary or conclusion. Use headings.
• Discuss how to interpret static and flexible budget variances. How is the information useful in general?
• What are the benefits of variance analysis? How can such analysis be detrimental rather than beneficial to the organization?
Assignment Expectations
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
Module Tips
Case : A flexible budget is given for a forecasted sales of $1,325,000. Fixed and variable costs are given. Fixed costs remain fixed. Variable costs change with sales. For example, if you have to calculate cost of sales for a forecasted sales of $1,400,000, it would be $210,000 + (1,400,000x40%) = $770,000. Remember the condition for the rent amount.
The above method can be used to prepare flexible budgets for (+) and (-) 10%. Remember the condition for the rent amount.
Take into account the proposed marketing expenses.
Prepare a one page short memo and explain the analysis as required by the assignment.
Essay: Essay question is simple. Please look beyond the generic websites such as Investopedia and Wikipedia. I encourage you use the university library and/or Google books. Credible references are required for a good grade.
SLP 4: Follow the bullet points. Suggest specific financial and non-financial performance measures for the managers and divisions of your SLP1 organization. Suggest how these performance measures sync with your organization's goals.
Module- Background
BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS
Required Background Materials
Budgets and variance analysis are related topics. The first interactive video introduces terminology and concepts.
Flexible Budgets and Standard Costs. (2014). Pearson Learning Solutions, New York, NY. Retrieved from http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=11649
Next is an interview with a CFO.
CFO Insights: Gary Cokins on Embracing Change. (2013, Oct. 31). [Videos]. Part I:https://www.youtube.com/watch?v=LG1jRXULpC0&index=6&list=PL_PvlGddtOgGkSwnLdl1p5CWr2wcVEZ95 Part II (https://www.youtube.com/watch?v=SQuqreqcOgk&list=PL_PvlGddtOgGkSwnLdl1p5CWr2wcVEZ95&index=7)
The next resources cover the material in more detail.
Martin, J. R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues - Chapter 13: Profit Analysis: An Overall Performance Evaluation. Retrieved from http://maaw.info/Chapter13.htm
Walther, l. (2014). Chapter Twenty-One. Budgeting: Planning for Success. Retrieved fromhttp://www.principlesofaccounting.com/
Walther, l. (2014). Chapter Twenty-Two. Tools for Enterprise Performance Evaluation. Retrieved from http://www.principlesofaccounting.com/
Suggested Resources
Agrawal, N. (2010).Principles of Management Accounting. Budgetary Control. Chapter 5. Delhi, IND: Asian Books Pvt Ltd. Retrieved from the Trident Online Library.
Gjerde, Kathy A. Paulson and Hughes, Susan B. (2007). Tracking performance: when less is more Management Accounting Quarterly. Retrieved fromhttp://www.imanet.org/PDFs/Public/MAQ/2007_Q4/2007MAQ_fall_hughes.pdf.
Khan, M. H., Halabi, A. K., Sartorius, K. 2011.The use of multiple performance measures and the balanced scorecard (BSC) in Bangladeshi firms.Journal of Accounting in Emerging Economies. Bingley: 2011. Vol. 1, Iss.2; pg. 160.