ACC 550 Module 7 Milestone Three Example

Separating Weather From Management: A Flexible Budget and Variance Evaluation for a Drought Season

[Student Name]

Southern New Hampshire University

ACC 550: Cost Accounting

Final Project Milestone Three

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Separating Weather From Management: A Flexible Budget and Variance Evaluation for a Drought Season

Introduction

The pecan sheller's budget for the season assumed it would buy and shell 28 million pounds of in-shell nuts. A summer drought across south Georgia and Alabama cut the regional crop, and the company received 25.2 million pounds, 10 percent less, at higher prices and lower quality. This milestone compares the season's results with the budget, separates the effects of volume, price, yield and spending, and recommends how the plant manager and purchasing manager should be evaluated. It uses the cost behavior estimates from Module Two and connects to the activity-based model from Milestone Two (Datar & Rajan, 2021).

Static and Flexible Budgets for the Plant

Table 1. Plant Operating Cost: Static, Flexible and Actual

Against the static budget, the plant appears to have saved $100,000. That comparison is misleading because the plant processed 10 percent fewer pounds and should have spent much less. Flexed to actual volume using the regression estimate from Module Two, the budget is $12,216,000, and the plant spent $684,000 more. That is the figure that reflects how well the plant was run. Investigation of time cards, fuel invoices and maintenance logs found three causes: overtime when the shortened harvest compressed deliveries into seven weeks instead of ten, about $410,000; extra drying fuel for nuts delivered with higher moisture, about $150,000; and a cracker repair, about $124,000. The first two arose from the drought's timing; the third from deferred maintenance the plant manager had chosen in the spring.

Nut Price Variance

The budget assumed $2.40 a pound. The regional shortage pushed the average price paid to growers to $2.62. On 25.2 million pounds, that is an unfavorable price variance of $5,544,000. The purchasing manager bought at prevailing market prices, and competitors paid similar amounts according to the regional growers' association price reports; she had proposed forward contracts with three large growers in the spring, which the owners declined.

Yield Variance

The standard yield is 22 percent halves and 26 percent pieces. Drought-stressed kernels were smaller and more brittle, and the season yielded 20.5 percent halves and 27.5 percent pieces. The 1.5 points that graded into pieces instead of halves, about 378,000 pounds, sell for $3.20 a pound less, an unfavorable yield variance of about $1,210,000 in sales value. Laboratory records show kernel quality across the region fell similarly, and the plant's grading accuracy, checked by sample re-grading, was within normal limits. Two other shellers in the region reported halves yields between 20 and 21 percent, which supports treating the variance as a crop effect rather than a processing problem.

Evaluating Performance

Table 2. Variances and Responsibility

The plant manager should be evaluated on spending against the flexible budget, the measure he could most directly influence, with the weather-related overtime and drying explained but not counted against him, and the cracker repair counted, since deferring maintenance was his choice. The purchasing manager should not be penalized for market prices she did not control, and her forward contract proposal should be credited. The yield variance belongs to the crop, although the plant manager should report how grading was adjusted for smaller kernels so that future seasons can be compared. Hansen et al. (2003) note that budgets used rigidly for evaluation encourage managers to protect themselves rather than respond to conditions, and holding these managers to the static budget would have done exactly that. Libby and Lindsay (2010), surveying North American firms, found budgets still widely valued for control, with many firms evaluating managers more flexibly against them, the approach recommended here.

What the Variances Imply for Next Year

The variances also point to changes in how the company plans. The price variance shows how exposed the company is to the regional crop: a 22-cent change in the price of nuts moved costs by more than $5 million, far more than any plant efficiency could offset. The owners should reconsider forward contracts with large growers for part of next year's volume, accepting that they will sometimes pay more than the spot price in exchange for stability. The yield variance suggests building a crop quality scenario into the budget rather than assuming a standard yield every year; a drought scenario with a 1.5-point lower halves yield would have prepared sales for the shortage of halves. And the overtime caused by the compressed harvest suggests a contingency plan for temporary crews that can be activated quickly when deliveries bunch up. A budget that includes these scenarios is less likely to produce surprises and gives managers clearer standards for evaluation.

Links to the Earlier Milestones

The activity-based model from Milestone Two should be built into next year's budget. A smaller crop means fewer pounds, but retail packaging activity depends on orders and changeovers rather than pounds, so post-shelling overhead will not fall in proportion to volume. Budgeting it by activity rather than per pound will prevent next year's static budget from understating those costs.

Conclusion

A static comparison suggested the plant saved $100,000; a flexible budget shows it overspent by $684,000, mostly because of the drought's timing. Nut prices and yields cost the company far more, $5.5 million and $1.2 million, but neither was controllable this season. Managers should be evaluated against flexible budgets on what they could influence, and next year's budget should incorporate forward buying and activity-based overhead. Reporting the season this way gives the owners an honest account of what went wrong and keeps the managers focused on what they can improve.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95

Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), 56-75. https://doi.org/10.1016/j.mar.2009.10.003