MANAGEMENT ACCOUNTING -2

PROJECT REPORT BY-

GROUP – A4

Devesh Mohta (21PGDM017)

Jessica Singh (21PGDM021)
Kankan Das (21PGDM022)
Kumar Ankit (21PGDM023)
Soumit Goswami (21PGDM046)
Swarit Grover (21PGDM048)
Anshika Singh (21PGDM151)

Submitted To:

Dr. Pinku Paul

BUDGETING AND VARIANCE ANALYS IS OF THE CASE:

MIDWEST ICE CREAM COMPANY
 ACKNOWLEDGEMENT

We are glad to express our extreme thank and feeling of deep gratitude, indebtedness, and reverence to our

esteemed professor, Dr. Pinku Paul who has always shown exemplary keenness and interest in the process

of Case Study Assignment Work. Her valuable guidance, timely suggestion, and constant treachery

inspiration made it possible for us to complete the present shape and due date.

The completion of this Case Study Assignment Report is the result of valuable guidance, constructive

suggestion, keen interest, and eminent professor of Dr. Pinku Paul.

 ABSTRACT

When Frank Roberts, the marketing vice president, saw the company's financial accounts in 1973, he was

overjoyed because they had not expected the final earnings to be so good; they had exceeded their

expectations.

Now, if we look at the planned vs. actual variance table, we can see that there is a significant discrepancy

between them. This is due to a poorly designed budget that covers all of the company's failures while

failing to offer them a genuine picture of the situation.

When we look at the table, we can see that the company's market share has shrunk despite the fact that its

market size has grown. Every other component in the table increases except fixed cost, which is supposed

to remain constant until a certain level of output is reached. All of this adds up to a $1,17,700 sales

volume variance that is beneficial. In the excel sheet provided, table no. 1 shows the calculation in greater

detail.

From the excel sheet provided these points can also be noticed:

Midwest Ice Cream's overall variance is $71,700F. This is a positive variance because it indicates that

they made more money than they had budgeted for. The problem with this variance analysis was that it

was overly abstracted and provided little information on possible correction steps. Because revenue and

profit are created from a product mix, breaking down the variation into its components will aid in

determining why a 71700 F variance was found. The breakdown of this difference paints a very different

picture; it appears that Midwest underestimated its ice cream sales forecast by 248,037 gallons, or

$117,700F. This figure was slightly offset by the $(58,000) U operating variance and adding $12,000 F

sales margin price variance, which brings the total number to $71,700F.
OPERATING EXPENSES

The operation consists of expenses such as manufacturing, delivery, advertising, selling and administration.

The greatest variance within operations is the unfavorable manufacturing expense of $(99,000) U. This

manufacturing variance can be broken into fixed and variable costs. Variable Cost Variance $(59,100)

Fixed Cost Variance $(39,900)

Total $(99,000)

The $(59,000) can be broken down into $(80,700) U due to price increase and $21,600F due favorable usage

variance. The $(80,700) U price increase is most likely due to an unforeseen environmental change which

Midwest probably has little control over. The detailed manufacturing variance analysis allows management the

opportunity to make the proper corrective actions for 1974’s budget.

The operating variance can be found by subtracting the flexible budget income from the actual income. In the

case of Midwest, the operating variance is $(46,000) U, this unfavorable variance is mainly due to a decrease

in sales. The operating variance can be broken down into Gross Margin and Fixed Costs.

Gross Margin $(22,100)

Fixed Costs $(23,900) Total $(46,000)

This operating variance is added to the income variance to give a final variance of $71,700F. The reason why

the operating variance is $(46,000) U and not $(58,000) U is because there was a $12,000F variance in the

Sales Price. This $12,000F is because there were higher margin flavors sold in 1973.
 Analysis of LEVEL 1-2-3

The entire analysis has been done in the following manner:

At level 1: Total sales margin Variance is calculated

At level 2: Sales Variance is further analyzed to calculate Sales Volume Variance and Price Variance

At Level 3: Sales Volume variance is analyzed in 3 parts: 1. Market Size Variance

2. Market Share Variance

3. Sales Mix Variance

The sales margin variance occurring due to quantity can be attributed to that occurring from variances in the

sales mix and the sales quantity over a constant product mix.

The variance due to change in sales is computed by:

SMMV = (Actual Sales Quantity – Actual Sales in Budgeted Proportions) × Standard Margin

Breaking Down the Sales Volume Variances

For reviewing and analyzing the sales variances as presented by Roberts, we will break down the total sales

margin variance as shown in the diagram below:

We begin by analyzing the total sales margin variance which is the sum of the sales margin price variance

and the sales margin volume variance. The computation for these variances is shown in the table attached.
We begin by analyzing the total sales margin variance which is the sum of the sales margin price variance

and the sales margin volume variance. The computation for these variances is shown below:

Here Sales Margin Volume Variance is approximately 117700 Favorable since Actual sales quantity is more
than budgeted. Then we analyze the Sales price variance shown below.

Budgeted Sales Value of Units Actually 9645300

Sold
Actual Sales Value 9657300
Sales Margin Price Variance 12000 F

However, the overall sales variance is $117,700 this number on its own can be misleading that is why it is
necessary to break it down into specific areas and this will be shown in a few moments. But before this, there
is one very important aspect to be analyzed which is the Variance due to operations. Let us see that:

Manufacturing Cost of Goods Sold

Manufacturing expense 6824900 6725900 -99000 U
Delivery 706800 760800 54000 F
Advertising 607700 578700 -29000 U
Selling 362800 368800 6000 F
Advertising 438000 448000 10000 F
Total Expense 8940200 8882200 -58000 U
The operation consists of expenses such as manufacturing, delivery, advertising, selling, and administration.

The greatest variance within operations is the unfavorable manufacturing expense of $(99,000) U. This

manufacturing variance can be broken into fixed and variable costs.

Variable Cost Variance $(59,100)

Fixed Cost Variance $(39,900)

The operating variance can be found by subtracting the flexible budget income from the actual income. In the

case of Midwest Ice Cream Company, the operating variance is $(46,000) U, this unfavorable variance is

mainly due to a decrease in sales. The operating variance can be broken down into Gross Margin and Fixed

Costs.

This operating variance is added to the income variance to give a final variance of $71,700F. The reason

why the operating variance is $(46,000) U and not $(58,000) U is because there was a $12,000F variance in

the Sales Price. This $12,000F is because there were more high-margin flavors sold in 1973.

Next At level 3, we
analyze the overall sales
variance in Market Size
Variance, Market Share
50%
Variance, and Sales Mix
Variance. Starting With
Market Size Variance X
Budgeted MarketShare
Actual Industry Volume 12180000
Expected Industry Volume 11440000
Budgeted Contribution 2591300
Unit Contribution Margin 0.45299842
Market Size Variance 167609.4154
Next Market Share Variance

By combining all this we are able to correctly identify where the problem actually was. For example, by

analyzing Market share variance we understood that the business even though has increased sales than

forecasted but that was due to the increase of overall market size and on careful analysis they have actually

lost market share.

The mix concept gives you a breakdown of sales by product and enables you to see the influence each

producthas on the gross margin. This is a very important area of the business because it allows a

manager todetermine which products are stars and dogs. A good manager will constantly change the mix

to support the products that best help the gross margin. In the case of Midwest the product mix variance

shows there hasbeen a large decrease in the sales of vanilla and chocolate and an increase in the sale of

strawberry and cherry swirl. The breakdown of the market mix variances show the managers at Midwest

what flavors are popularand what flavors are not selling well. Midwest might want to consider encouraging

their salespeople to push the high margin flavors (Pecan Chip and Walnut), this would be an effective way

to maximize the profits.

 KEY OBSERVATION

Taking a close look into the financial planning and control system we can figure out the mistakes made

by the Midwest Ice Cream Company.

When we see the 4 steps involved in the planning process, we can observe that the sales went up but total

standard contribution was less than it was predicted. The reason for the same was 1 gallon premium was

sold 30,000 less which led to a fall in total standard contribution.

 CONCLUSION

✓ Majority contribution margin was due to the variance in the volume of sales.

✓ Within this volume increase, the variance was primarily due to a change in the physical quantity of

products sold and not because of a radical shift in the product mix.

✓ Also, this change in the physical quantity of products sold was mainly due to an overall increase in the

market size that Midwest was reaching.

✓ There was some unfavorable variance in the market share since with the actual numbers, the market

share of Midwest fell by about 1%.

✓ We can, after breaking down and analyzing the individual variances, conclude that a majority of the

✓ favorable variance was driven by exogenous factors such as an increase and market size and not

particularly due to increase in performance.

✓ In fact, an increased market size led to a decreased market share for the company.

✓ Company should focus on increasing their market share and maintaining at least 50% market share

rather than increasing the market size.

✓ There were several limitations for our analysis, so before going for any strong conclusion it is

necessary to consider those limitations

✓ Firstly, analysis of variance does not take into consideration the price elasticity of demand of goods.

✓ Changing prices of goods will drive variance not only for prices but also for volumes by the demand

supply relationship.

✓ Hence, price and volume need to be treated as interrelated entities.

✓ Another reason that negatively affected the contribution margin for organization was treating the

advertisement cost as variable cost but not as fixed cost.

 RECOMMENDATION

• It is recommended that Midwest should use t h e Kaizen system for better result and overcome

a fewlimitations that turn out to be profitable which increases its sales as well as total standard

contribution.

• This system is based on the premise that every budget dollar requires justification.

• Midwest should maximize their flexible budget capabilities and try to cut costs wherever possible.