A Case Method Approach of Teaching how Cost-Volume-Profit Analysis is connected to the Flexible Budgeting Process and Variance Analysis
To start a successful business, students need to understand the steps necessary to achieve their desired profits. While Managerial textbooks teach each step independently, we demonstrate how these steps are integrated. We present a Multi-Disciplinary Case-Method approach to teaching Cost-Volume-Profit (CVP) Analysis. Finally, students prepare a Flexible Budget demonstrating the importance of distinguishing between activity and revenue/spending variances.
“We first present an alternative, more comprehensive teaching approach, for ...view middle of the document...
This allows students to see how budgets are used to develop goals, as well as to determine if actual results were achieved. This paper’s approach emphasizes the importance of CVP analysis and how it ties directly into planning and control processes management must take in order to start a potentially successful business. More importantly, we show students the importance of these key practical yet very relevant management-accounting tools, all done in one integrative setting instead of teaching those concepts separately.
A very important concept for students to understand is whether they have accomplished profit goals they set in their CVP analysis. In other words, they need to understand how to take their assumptions from the first part of the case and use them to develop the necessary budgets in order to finally prepare a projected Income Statement. Budgets force management to plan for the future as does CVP analysis. In addition, preparing a number of budgets allows students to understand that in order accomplish their profit goal they must also prepare budgets to coordinate activities throughout the company. This case will allow students to understand how budgets can help them coordinate activities throughout the entire company by integrating material purchases’ plans, and labor use, etc. Even more importantly, students will learn the importance of budgets and their use for evaluation and control purposes. Because the actual level of activity will most likely differ from the planned level of activity, we also require the students to prepare a Flexible budget. The Flexible budget allows them to understand the reason planned results differ from actual results in terms of activity variances versus revenues and spending variances (Horngren et al., 2012).
DEVELOPMENT OF THE CASE
“The case assumes students will open a milkshake shack on the beach of a resort on the “big Island” of Hawaii. I have studied existing restaurants, read industry reports, and have done some research on expected minimum costs to be incurred in operating the business. A unique feature of my milkshakes is that I will serve them with flavored straws that match the flavor of the chosen milkshakes by customers. My research embeds the following assumptions:” (see Machuga, 2012)
Sales prices of milkshakes ($7.00 for small, and $10.00 for large)
Cost of materials needed to make milkshakes:
DIRECT MATERIAL INGREDIENTS | Small (8 oz. size) | Large (12 oz. size) |
Whole Milk ($15 for a 5 gallon=640 oz.) | (need 2 oz. of milk) | (need 3 oz. of milk) |
Cream ($20 for 1 gallon=128 oz.) | (need 2 oz. of cream) | (need 3 oz. of cream) |
Sugar ($10 for a 15 lb. bag=30 cups) | (need ½ cup of sugar) | (need ¾ cup of sugar) |
Premium Vanilla Ice Cream ($24 for 600 oz.) | (need 6 oz. of ice cream) | (need 9 oz. of ice cream) |
Flavorings | .25 per shake | .40 per shake |
Flavored specialty straws | .75 per straw | .75 per straw |
Cups (500 8 oz. cups @ a cost of...