Berkshire Bear Co, Case Study Example

From the information obtained from the talk with McKinley, together with thevariances that are depicted in Table 6 and Table 7, one can identify and pinpoint the cause and triggers of the problems that Berkshire Toy Co. is facing.

A company’s total flexible budget for FY1998 was unfavorable, at $2,101,727. The unfavorable variance from both the fixes selling expense ($560,192) and variable selling expense ($443,100) amount to 48% of the company’s total flexible budget variance, company’s production and sales volumes were considerably over budget for FY1998 as a result of the company’s aggressive ,arketing techniques. This can be clearly depicted in the favorable sales volume variance ($2,116,083) for the company’s total volume. It is however important to note that McKinley had reported that this was achieved through providing special internet sales price discounts on select commodities. Catalog and retail sales decreased significantly while internet sales increased, providing the $675,596 unfavorable sales mix. The increase in internet sales raised sales for units that needed labor intensive add-ons, for example tattoos, and intricate costumes. It is highly doubtful that these costs were factored into the $42 discount price for every bear purchased.

Smith clearly increased the company’s advertising and direct sales techniques and expenses as shown in the company’s unfavorable fixed selling expense variance ($560,192) and unfavorable variable selling expenses ($443,100). The company’s increase in samples, brochures and catalogs have been used to increase the advertising efforts. The company did not alter its policy on issuance of commissions. Nevertheless, the company has shifted to internet and catalog sales and moved from the wholesale and retail activities, explaining the considerable decrease in the commissions that were initially issued on wholesale and retail activities.

The company’s underlying problems can be attributed to the company’s miscued and inappropriate incentive and compensation plan. The company has two clear flaws. (1) The company has failed to take into consideration inter-departmental interactions by treating each department as an independent and self-contained unit. (2) Thecompany rewards the marketing manager based on the increase realized in revenue and opposed to the increase in the company’s profitability.

The compensation plan has effectively divided the responsibilities to the various department managers. The managers are rewarded with bonuses depending on the performance of their particular docket. Production and purchasing departments are considered cost incurring departments while the marketing department is the revenue generating department. According the principle of controllability, every given departmental head or manager should be rewarded according to the performance of a given facet of the company that is under their control. However, Berkshire’s bonus plan rewards a manager’s exclusive area of responsibility instead of considering the inter-departmental relationships that play a huge role towards the company’s profitability.

The company’s bonus plan fails to consider the effects of the high sales volume realized by the company on it costs of production. The company has to approximate annual sales volume from the annual production volume owing o the fact that the company’s inventory at the beginning and end of the financial year were negligible. This shows that in reality, the company produced more than 325,00 units during the current year, as opposed to its 280,000 units capacity. As a result, the company is producing well above its range and as such products costs lie variable overheads and direct labor were far beyond their expected levels.

Works Cited

Dury, Colin. Management and Cost Accounting. 8th. London: Cengage, 2012. Print.