Variable Expenses To The Sales Dollar Amount example essay topic

Case Study Report on Whiz Calculator Company Introduction Whiz Calculator Company is currently considering the new method of planning and controlling selling cost. The old method was unsatisfactory in the new president's point of view. The old way of planning and controlling the selling expenses was as follows: 1. Selling expenses were budgeted on a "fixed" or "appropriation" basis. Each October, the accounting department sent to the branch managers and to other managers who were in charge of selling departments a detailed record of the actual expenses of their department for the preceding year and for the current year- to- date. 2.

Guided by this record, by estimates of the succeeding year's sales, and by their judgment, these department heads drew up and submitted estimates of the expenses for their departments for the succeeding year. 3. The estimates made by the branch managers were then sent to the sales manager, who was in charge of all branch sales. He determined whether or not they were reasonable and cleared up any questionable items by correspondence. 4. Upon the approval by the sales manager, the estimates of branch expenses were submitted to the manager of marketing, who was in charge of all selling, promotional, and warehousing activities.

5. Then the manager of marketing discussed these numbers with the managers concerned, and after differences were reconciled, the estimates of all selling departments were combined into selling expense budget. 6. This budget was submitted to the budget committee for final approval.

These budgeted figures were divided into 12 equal amounts and compared to each month actual results. In the new president's point of view there were two limitations of the old method. Firstly, there was no 100 percent confidence in reasonableness of the estimates made by department heads. Secondly, selling conditions changed substantially after the budget was adopted, however under the old method it was impossible to modify the budgeted expenses for these changes. Therefore, the new president introduced a proposal of measuring selling cost on a fixed and variable portion basis. The Key Questions of the case study.

Bernard Ries man, the president of Whiz Calculator Company, was very concerned about the method of measuring and appraisal of selling expenses. He was very sure that the method used was the thing to be changed in the company. Therefore, he introduced a proposal of new method of measurement. Under his proposal all selling expense items should be divided into two portions. One portion is variable to the sales and another is fixed. He thinks that this method would be better in making budgeted selling expense report, because the new method makes it possible to adjust the budgeted report to the increased sales volume.

In implementing the new method some points should be clarified: 1. What selling expenses are variable to sales, what are partially variable and is there any expenses that are not dependant on sales at all? 2. What proportion of each expense is variable and which is not? How to calculate them? In addition to above key questions for the Whiz Calculator Company, we, as students of strategic management, want to know the strength and limitations of new method.

Compare it with the strength and weaknesses of old method. Choose the one that is more appropriate. Also we want to find what company management should do in order to improve the method it will use. Analysis and Interpretation of Available Data As it was mentioned before the company management wanted to know what portion of selling expense items are variable to the sales volume, are they variable at all and are they variable on some other factors. Certainly, this method was very easy to implement.

There were some shortcomings of the method implemented. Firstly, there was no certainty in of the percentage that should be taken in calculating each selling expense. There was no connection between sales and expense item. Another, shortcoming is that it was not possible to adjust adequately the expenses to the increase in sales volume.

For example, if the new expectations in sales volume differ form the budgeted amount then the budget should be adjusted for that new expected amount. However, additional sales do not mean that manager's salary should be increased proportionally to the sales amount. Even more, the manager's salary should not fluctuate with the sales volume, because it is fixed in the feasible period. Feasible period is short - run period where some expenses are considered as fixed.

For example, if the sales volume increases not substantially, then the manager's salary would be the same as it was before increase. However, if extraordinary sales increase occurred the managers would probably get increase in their salary because of their successful actions. In this situation the manager's salary is not fixed cost any more. One can also say similar about light and heat, rental, depreciation, etc. Advertising expense require additional explanation here.

The expense incurred under Advertising Expense (Local) label is long-term investment, because it will provide benefits in future. Therefore, one cannot say that specific portion of advertising expenses should be allocated this period, just because it contributes to the sale of this period. Hence, specific consideration is required for all expenses in order to find the expenses that are variable to the sales volume in total, find what are partially variable and find what are not variable to sales at all. In order to accomplish this goal the management of the company decided t find the fixed portion of selling expenses, by determining the amount of expenses that had to be incurred at the minimum sales volume the company can operate. It was ascertained that the minimum sales volume required to operate the company was 65 percent of total capacity of the company. All the expenses at this volume of sales were calculated.

The controller of the company decided that the variable portion of the selling expense should be expressed as certain amount per sales dollar. However, the method lacks to take into consideration the specifics of each region, the economies of scale of large orders and the changes in buying behavior of a consumer. Nevertheless, this was better measure of selling expenses, because it eliminated the disadvantages of old method. The calculations made by controller of the company can be illustrated as follows: After making regression analysis for each type of selling expense, the controller found the slope of the line after the point 250 000 in sales volume. It was the value of minimum sales volume at which the company can operate. It is 65 percent of total capacity.

The slope after the point 250 000 for the Other Branch expenses was 0.0076. This figure shows the variable amount of expense per sales dollar. The fixed portion of the expense is equal to 318 dollars. Each of the selling expense is calculated in the same manner. There is a summary of all expense variability to the sales volume and their fixed and variable portions if they are so for Branch A: One can observe that under the new method the expenses budgeted are less than the budgeted expenses under old method.

This shows that the expenses are more accurately calculated under the new method, taking into consideration the portion of the expense that do not change with the increase in sales. In this aspect the new method is better. However, the pitfall of the new method is that it does not take into consideration the specifics of the regions, the change in buying behavior of consumers and economies of scale of large orders. Nevertheless, so did the old system.

Therefore, it will be meaningful to implement the new method. Conclusion Of Case Study The proposed budgeted sales expense system is the most appropriate for the Whiz Company. The new system is more accurate and precise in predicting and budgeting expenses. Old system had many weaknesses. First, the expense estimates made by the department heads cannot be traced, and checked if there were right or wrong. Next is that set budgets were not flexible and adaptive for the changes of sales quantity and other sales conditions.

Company did not have logical relationship between budgeted figures and budgeted sales amounts. In case of increased sales volume than forecast ed it is impossible to estimate incurred additional costs. Arguments for the new method are: O The new system was developed after the study conducted to research sales volume, revenue, expenses and other factors in order to understand the trend. This helped to introduce specific system of calculating expenses on a historical basis, which was more representative than the proportions developed under old method. O Expenses were separated as fixed and variable, the fixed portion was set on the minimum amount to be sold at 65% of overall factory capacity. So it is easier to allocate the rest of the costs on the variable basis.

O Variable expenses were estimated to relate directly to sales per dollar. Not to the actual number of sales. The price can vary, also the most concerning factor is the actual sales dollar amount. It is better to budget respond at least to the number of sales amount than not to respond at all. O After using new system the difference between actual and budgeted numbers was equal to + 524 USD, however using old budgeted system it was equal to + 4,512 USD.

It means that the selling expense measured on more accurate basis. As it was mentioned before, not all of the expenses move with sales proportionally, because they have some fixed portion that do not depend on the sales volume. The old method did not consider this issue. So we can see that the new system is more appropriate and useful to use for the Whiz Company. Recommendations: Our suggestions to modify and develop could concern aspect of relating variable expenses to the Sales dollar amount rather than the number of units sold.

For the Melted it is better to develop more modified expense forecasting system that will estimate variable costs on the basis of actual number of sales. This could be done by tracking the production process and understand how much of resources are needed to produce one unit of calculators. Conduct more research and try to evaluate the fixed costs not on the minimum amount of production but on the actual expenses that do not vary with the change in the number of units produced. Calculators are little in volume so to track its per unit production can be difficult, so it is better to try to track variable costs on the batches of production or for 100 units and etc. We suggest implementing the new method. However, there are some pitfalls that should be eliminated.

We saw that the new method do not take into consideration the territorial specifics of each branch, the change in buying behavior and the economies of scale of large orders. Thus, the variable costs should pass more thorough analysis to include these issues. Also in the century of continuous technological development it is important to conduct research and development, to make Whiz calculators more attractive and sell able. These costs should be counted as the fixed costs and capitalized. Another problem in implementing the new method is determining the appropriate portion of advertising expenses each period.

The company should introduce the system of allocating advertising expense, because even under new method the relationship of this expenses with sales are not clear..