Whiz Calculator Case Study
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Case Study Report on Whiz Calculator CompanyIntroductionWhiz 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 Riesman, 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 DataAs 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. Branch: A Manager: N. L. Darden Month: October Budget Actual (Over)/Under Percent of SalesNet Sales $ 310,000 $261,000 $ 49,000 0Manager's Salary $ 2,500 $ 2,500 $ - 0.96%Office Salaries $ 1,450 $ 1,432 $ 18 0.55%Sales Force Compensations $ 15,500 $ 13,050 $ 2,450 5.00%Travel Expense $ 3,420 $ 3,127 $ 293 1.20%Stationery, Office supplies $ 1,042 $ 890 $ 152 0.34%Postage $ 230 $ 262 $ (32) 0.10%Light and Heat $ 134 $ 87 $ 47 0.03%Subscriptions and Dues $ 150 $ 112 $ 38 0.04%Donations $ 125 $ - $ 125 0.00%Advertising Expense $ 2,900 $ 2,700 $ 200 1.03%Social Security Taxes $ 1,303 $ 1,138 $ 165 0.44%Rental $ 975 $ 975 $ - 0.37%Depreciation $ 762 $ 762 $ - 0.29%Other Branch Expense $ 2,551 $ 2,426 $ 125 0.93%Total $ 33,042 $ 29,461 $ 3,581 11.29%As one can see, Whiz Calculator Company used percentage of sale method for calculating all the discretionary selling expenses. 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 wa ...
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