Celtic Bear Case Study

Problem 2(a)You will be assisting in the investigation of certain variances. Using the info provided, formulate some likely explanations for the observed variances. Evaluate variances at input level & overall level. The favorable sales volume variance reflects Rita Smiths internet sales policy & the advertising she implemented for it. The high sales volume, however did come at a cost. Table 5 shows catalogs, brochures, and samples expenses increased drastically, as compared to in 2011. Also, the advertising and promotional fixed expenses indicate more substantial selling and advertising efforts. The purchasing manager, David Hall, was able to purchase fabric, plastic joints, & fiber filling direct materials at discounted prices, resulting in favorable material price variances for three of Celtics main inputs. This triumph, however came at the cost of using inferior materials in the production process, which in turn caused an unfavorable material usage variance and an unfavorable labor efficiency variance because more time was needed to complete production as a result of using an inferior material. The variable overhead efficiency variance is directly related to the direct labor efficiency variance, as they were both caused by inefficient use of direct labor. The unfavorable VOH efficiency variance resulted from using 58,330 more direct labor hours than allowed given production of 325,556 units. On a per unit basis, the DLHs spent per one toy of finished product equated to 1.4 hoursexceeding the 1.2 hours/bear standard. Given this information, the likely cause specific factors causing the unfavorable efficiency variances for both direct labor and variable overhead could include reduced efficiency of the production employees due to being overworked and/or the use of new employees who took longer to perform the duties because of their lack of experience. Lastly, the inferior direct materials most likely intensified the already inefficient production process. The unfavorable labor rate variance was caused by the replacement of production employees that left them company as a result of being overworked. The employees who replaced these lost workers were being compensated for their work at wage rates that were above the company standard, and thus above what the company had budgeted for. The unfavorable VOH spending variance includes variable overhead expenditures such as payroll taxes & fringe benefits, overtime premiums, maintenance labor & supplies, & cleaning supplies. Of these expenditures, the overtime premiums represent the largest proportional increased cost for the company as compared to 2011. Overtime premiums increased by 1,344% of the cost it was last year (after adjusting for production volume differences). These led to proportionate increases in fringe benefit costs & employer taxes.

Problem 2(b)Comment on the advantages & disadvantages of the Incentive compensation plan as it applies to department heads. What is the appropriate role of the budget in performance evaluation? What modifications to the Incentive plan would you recommend? Why? Advantages associated with having an incentive compensation plan for department managers include holding key personnel responsible for the success or detriment of the company. Celtic Bear Company introduced this incentive compensation plan with the intent to divide financial responsibility in a way which the managers are being evaluated and rewarded based on areas of the company that are under their control. There are flawed aspects of the incentive plan that creates implications for Celtic Bear Company. The Incentive compensation plan does not take into consideration the interaction between the production, purchasing, and marketing departments, and the impact that these departments have on each other. The incentive plan does not correctly identify the series of events that could have led to the favorable or unfavorable financial happenings. Specifically, the marketing manager is compensated for any additional revenue earned over the budgeted revenuethus taking into account only sales related revenues and expenses. The Incentive compensation plan should incorporate the effects of additional sales and expenses related to them into the marketing managers bonus formula. The impact of the drastic increase in 2012s sales volume caused the factory to operate well above the normal capacity, and lead to unfavorable production variances. Another noticeable interaction is between the purchasing manager and the production manager. David Hall purchased raw materials that were substandard and was unable to provide production with the quantity of materials needed to satisfy demand. This had several implications for Bill Wedford, as he was subject to numerous machine breakdowns, raw materials stock-out, and increased labor and costs required to make up David Halls decision. I would recommend that Celtic Bear modify the bonus formulas for the managers so as to incorporate the other departments success as part of each of their compensation. This would encourage the managers to make decisions as a group, rather than individually. If information was shared among the three departments, more sound business decisions would occur, and more accurate predictions about the future could be made. Also, if the company is led to believe that the demand for 2012 can be anticipated for years to come, the company should expand their capacity to meet the market demands.

Problem 3: Suppose that Celtic Bear Company adopts a balanced scorecard (BSC) to measure its performance (see your textbook). The performance dimensions are typically included in a BSC are: Financial, Internal business processes, Customer satisfaction, & Learning & Growth. Organizations then use these four dimensions to develop specific performance measures. What specific performance measures (indicators) might be included in the scorecard? From the financial perspective, Celtic Bear Company should include measures which reflect and focus on maximizing shareholder value. Thus, Celtic Bear should reflect on relevant issues of profitability, growth, and stock information. In reflecting on these issues, the company should include information regarding the divisions annual operating income, the sales growth the company experienced from 2005, and the operating performance of the company. The internal perspective of Celtic Bears balanced scorecard should focus on the companys manufacturing excellence, the quality of their products, and their worker productivity. To measure their success in these areas, they could provide measures including efficiency improvements, direct materials costs, direct labor hours required to produce one unit, and product quality as measured by the number of units requiring rework. The following metrics could be used to measure success in relation to the customer perspective: o The average time it takes to process customer orders o The percent of orders returned as a result of defective units o Customer satisfaction rating as measured by a survey o Number of customer complaints o Market Share For the learning and growth perspective, Celtic Bear should be concerned about their ability to develop new marketing and advertising methods. Also, they should touch on their interest and ability to create new product lines and accessories.