In 1973, after the installation of a new financial planning and control system at Boston Creamery, the ice cream division showed a favorable operating income variance of $71,700. In developing the profit plan for 1973, division president (and resident moron) Jim Peterson made the first of a series of inexcusable errors in budgeting surrounding the mythical “favorable” condition. He simply used expected results for the preceding year (as obtained in Oct. 1972), giving no consideration to factors like inflation, market growth, and the fact that sales goals should be expected to increase annually in a successful company. Peterson asked Frank Roberts, inept and underhanded VP of sales and …show more content…
A tentative revision from Parker’s standpoint, reflecting shared responsibility, might have looked like this.
|M & O Variance | |S, M, & A Variance | | |
|Manufacturing |($99,000.00) | |Advertising |($29,000.00) | |
|Delivery | |$54,000 | |Selling |$6,000.00 | |
|Administration |$10,000 | | | | |
|Net Variance |($35,000.00) | | |($23,000.00) | |
There are also several major shortcomings with the system used to derive these variances. The entire focus is on “what” happened, with no consideration for “why” these inconsistencies exist. An exploration of causality for the variances continues with the detailed expense breakdown as taken from Exhibit 2.