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Assignment on Case Study

Whiz Calculator Company


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Whiz Calculator Company is into manufacturing the complete line of electronic calculators. Their products are sold through branch offices to wholesalers to retailers or directly to government or industrial users. Sales budgeting is the expected volume of sales and selling expenses. For doing we need to have a look at the following parameters before arriving at proper forecasting: Sales in the previous years Competition Expected volumes to be sold and at what price Raw Material costs Other related expenses

Generally, Sales budget and related selling expenses can be based on Judgements: It is more of the fixed method approach wherein managers make sales budget as per their own judgement and experience. Percentage of sales method: The related expenses are purely based on how much sales is done or to be done. However, both methods individually may not be of much help. Hence, certain companies used a combination of two methods to take the complete advantage for controlling the systems.

Q1. From the information given in Exhibits 1 and 3, determine insofar as you can whether each item of expense is (a) variable with sales volume (b) partly variable with sales volume (c) variable with some other factors or (d) not related to output variable at all. In Exhibit 1, the figures of selling expenses are fixed or appropriation basis wherein the managers use judgement method for arriving at the budget for succeeding year. This is known as static budgeting. They work well for evaluating performance when the planned level of activity is the same as the actual level of activity, or when the budget report is prepared for fixed costs. Thus, in old system, expenses are not related to output variable at all. However, the disadvantage of this method is that if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled. Thus, the expenses which are fixed for a particular period may not be incurred or there might be increase in spending. For ex: travel expenses in reality may be more in order to achieve higher sales while rentals are a fixed expense. On the other hand, in exhibit 2, the figures for budget are arrived at by using flexible budgeting system. It provides budgeted data for different levels of activity. For instance, travel expenses are partly fixed and partly variable with percentage of sales. The fixed component is based on the target of 65% capacity utilization wherein it is projected that minimum this would minimum sales below which it will not fall. In the meantime, rentals for the company are kept constant since this is fixed cost which is incurred.

Thus, in order to have proper control over costs as well as to evaluate the performance, management must use a budget prepared for the actual level of activity (here minimum sales volume = 65% of capacity utilization). But at the same time, the management needs to capture the variances in actual sales. This can be achieved by way of flexible budgeting. Therefore, the new system is partly variable with sales volume and partly fixed vis--vis old system which was completely fixed. Q2. What bearing do your conclusions in question 1 have on the type of budgeting system that is most appropriate? Based on the conclusion in question 1, the new method for budgeting is most appropriate since it tends to be more accurate in representing both the requirement for input cash flow into a business, as well as projected sales profits as compared to a static budget. Since a flexible budget tries to adapt to changing resource levels in consumption, it offers a more precise level of control over business processes than a static budget can. Variable budgets also tend to be better at predicting future demands for the business and adjusting for unexpected external factors than can affect productivity. Q3. Should the proposed sales expense budgeting be adopted? Why or Why not? Currently, Whiz Calculator is estimating the budget for the coming years selling expenses as if it is comprised of only fixed expenses. President Riesman finds this method unsatisfactory for two major reasons: 1. It is difficult to judge how good the estimates made by the department heads really are; 2. Selling conditions fluctuate over time and there is no way to account for these changes in the selling expenses once the budget is set for that year. Thus a new budgeting method is being researched at this time. The new method, if adopted, would be based on both fixed and variable costs. The fixed costs will be those incurred at the minimum sales volume and the variable costs would be expressed as an amount per sales dollar. President Riesman and the controller understand that basing the selling costs on sales has some limitations, but believe that this method would still be more appropriate than the current model because it would incorporate some variability and allow for budget adjustments. After some initial research, it was The The determined that the minimum sales volume required to operate is 65% of the total capacity. percentage of capacity they company should have $250,000 in sales with $2,218 in expenses.

expenses for this capacity were determined using regression analysis, which established that at this fixed portion of these expenses is $318 and the variable portion is 0.0076 per sales dollar. From this equation/graph, each selling expense was calculated to form the new budget (see exhibit 3 in the case). It is important to note that this new method does not consider the nature of each selling region, economies of scale for large orders, or consumer behaviour. Additionally, not all highlighted selling

expenses are variable to sales and some are only partly variable to sales (e.g. officers salary and travel expenses). When comparing the new method figures with the figures from the current method, it is apparent that the new method has lesser variation with the actual sales.

Q4. What other suggestions do you have regarding the sales expense reporting system for Whiz Calculator? The new method is based partly fixed and partly variable components. However, while doing so the company should also focus on Demand from various regions The company should establish the standard costing methods as well. This would help in comparing the actual costs with the standard costing. Try to consider economies of scale since this would reduce the overall costs.

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