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Boston Creamery Case

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Colin Drury, Management and Cost Accounting – Boston Creamery

Boston Creamery

Professor John Shank, The Amos Tuck School of Business Administration

Dartmouth College

This case is reprinted from Cases in Cost Management, Shank, J. K. 1996, South Western Publishing

Company. The case was prepared by Professor John Shank from an earlier version he wrote at

Harvard Business School with the assistance of William J. Rauwerdink, Research Assistant.

This case deals with the design and use of formal "profit planning and control"

systems. It was originally set in an ice cream company in 1973, a few years

before the advent of "designer ice cream".

Frank Roberts, Vice-president for Sales and Marketing of the Ice Cream Division of Boston Creamery,

was pleased when he saw the final earnings statement for the division for 2000 (see Exhibit 1). He

knew that it had been a good year for ice cream, but he hadn't expected the results to be quite this

good.

Only the year before the company had installed a new financial planning and control system. This was

the first year that figures comparing budgeted and actual results were available. Jim Peterson,

president of the division, had asked Frank to make a short presentation at the next management

meeting commenting on the major reasons for the favorable operating income variance of $71,700.

Peterson asked him to draft his presentation in the next few days so that the two of them could go

over it before the meeting. Peterson said he wanted to illustrate to the management group how an

analysis of the profit variance could highlight those areas needing corrective attention as well as those

deserving a pat on the back.

THE PROFIT PLAN FOR 2000

Following the four-step approach outlined in the Appendix, the management group of the Ice Cream

Division prepared a profit plan for 2000.

Based on an anticipated overall ice cream market of about 11,440,000 litres in their marketing area

and a market share of 50%, forecasted overall litre sales were 5,720,329 for 2000. Actually, this

forecast was the same as the latest estimate of 1999 actual litre sales. Since the 2000 budget was

being done in October of 1999, final figures for 1999 were not yet available. The latest revised

estimate of actual litre volume for 1999 was thus used. Rather than trying to get too sophisticated on

the first attempt at budgeting, Mr. Peterson had decided just to go with 1999's estimated volume as

2000's goal or forecast. He felt that there was plenty of time in later years to refine the system by

bringing in more formal sales forecasting techniques and concepts.

This same general approach was also followed for variable product standard costs and for fixed costs.

Budgeted costs for 2000 were just expected 1999 results, adjusted for a few items which were clearly

out of line in 1999.

Original Profit Plan for 2000

Standard Contribution Forecasted Forecasted Standard

Margin/litre litre Sales Contribution Margin

Vanilla $.4329 2,409,854 $1,043,200

Chocolate .4535 2,009,061 911,100

Walnut .5713 48,883 28,000

Buttercrunch .4771 262,185 125,000

Cherry Swirl .5153 204,774 105,500

Strawberry .4683 628,560 294,400

Pecan Chip .5359 157,012 84,100

Total $.4530 5,720,329 $2,591,300

Colin Drury, Management and Cost Accounting – Boston Creamery

Breakdown of Budgeted Total Expenses

Variable Costs Fixed Costs Total

Manufacturing $5,888,100 $612,800 $6,500,900

Delivery 187,300 516,300 703,600

Advertising 553,200 -- 553,200

Selling -- 368,800 368,800

Administrative -- 448,000 448,000

Total $6,628,600 $1,945,900 $8,574,500

Recap

Sales $9,219,900

Variable Cost of Sales 6,628,600

Contribution Margin 2,591,300

Fixed Costs 1,945,900

Income from Operations $645,400

ACTUAL RESULTS FOR 2000

By the spring of 2000 it had become clear that sales volume for 2000 was going to be higher than

forecast. In fact, actual sales for the year totaled over 5,968,000 litres, an increase of about 248,000

litres over budget. Market research data indicated that the total ice cream market in their marketing

area was 12,180,000 litres for the year as opposed to the budgeted figure of about 11,440,000 litres

A revised profit plan for the year at the actual volume level is shown below.

The fixed costs in the revised profit plan are the same as in the original plan, $1,945,900. The variable

costs, however, have been adjusted to reflect the actual

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