Module 4 – Case
BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS
Case Assignment
T&P Fashion Shops
T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.
Below follows some cost estimates for the Houston store.
|
T&P Fashions |
|||
|
Flexible Budget Information |
|||
|
Expense |
Fixed |
Variable |
|
|
Cost of sales |
$210,000 |
40% |
$740,000 |
|
Management |
27,000 |
12% |
186,000 |
|
Shop assistants |
162,000 |
8% |
268,000 |
|
Rent |
13,200 |
5% |
54,450 |
|
Utilities |
34,800 |
34,800 |
|
|
$447,000 |
$1,283,250 |
||
Additional information
- The sales forecast for the year is $1,400,000.
- Variable expenses are based on revenues. Do note that percentage clause for rent only kicks in above $500,000 in sales.
- Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.
- T&P wants to see a flexible budget based on the sales forecast, including estimates for sales being 10% below budget and 10% above budget.
Actual results
|
T&P Fashions |
|
|
Actual Results from Operations |
|
|
Revenues |
$1,325,000 |
|
Cost of sales |
790,000 |
|
Management |
208,000 |
|
Shop assistants |
230,000 |
|
Rent |
58,200 |
|
Utilities |
31,000 |
|
Operating profit |
$7,800 |
Required:
Computations (use Excel)
- Prepare a flexible budget in good format.
- Compute the flexible variances and indicate whether favorable or unfavorable.
- Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in the table.
Memo (use Word)
Write a 4- or 5-paragraph memo to the division manager explaining the flexible budget variances; how to interpret the information; and what action, if any to take. Comment on the 5% marketing proposal too. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word) Start with an introduction and end with a summary or conclusion. Use headings.
- Discuss how to interpret static and flexible budget variances. How is the information useful in general?
- What are the benefits of variance analysis? How can such analysis be detrimental rather than beneficial to the organization?
Assignment Expectations
Each submission should include two files: (1) An Excel file; and (2) A Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
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