Berkshire Toys: Answers at the Bottom

Chapter 14

The Flexible Budget: Factory Overhead

Teaching Notes for Cases

14.1: Budgeting and Performance Evaluation at the Berkshire Toy Company

ABSTRACT: This case provides an opportunity to study budgets, budget variances, and performance evaluation at several levels. As a purely mechanical problem, the case asks for calculations of various price, efficiency, spending, and volume variances from a set of budgets and actual results. The case is also an interpretive exercise. After the variances have been computed, the next step is to develop plausible conjectures about their likely causes. Finally, it is a case about performance evaluation and responsibility accounting. The company has an incentive plan, based on the budget variances, that needs to be analyzed and critiqued.

TEACHING NOTES

In a recent survey of U.S. accounting and financial executives, Siegel and Sorensen (1994) identified a “preparation gap” between the expected and actual level of the employees’ accounting knowledge, skills, and abilities. Among the top preparation gaps reported, budgeting ranked first and performance evaluation ranked fourth. Subsequent studies in the practice of management accounting confirmed the importance of analytical skills and long-term planning (Siegel and Sorensen 1995, 1999).

This case is designed to help instructors address an important aspect of the preparation gap in budgeting and performance evaluation. Berkshire Toy Company complements and supports topic coverage in a range of popular textbooks and provides an opportunity to integrate concepts from these closely related subjects.

An example of a poorly designed reward system is used to help the student identify basic problems created when the system does not support goal congruence between the managers and the owners of the firm. A related issue concerns the coordination of the efforts of the managers within the firm. The case also involves calculating and...