Case Context
A new president, August Bernard Riesman, was elected for Whiz Calculator Company, one of the largest in its industry. Riesman is concerned with controlling the costs incurred by each branch. However, he is not satisfied with the company’s current system of budgeting costs, which is based on the different manager’s estimates of departmental expenses. He plans to devise a better system that would provide better control over these costs. As a start, he has already created a model to represent selling cost budget as a function of sales volume, with fixed and variable components.
Problem
The system of budgeting costs being used by the company is based on the estimates of branch managers. These estimates might not provide a sufficiently good standard for determining the performance of each branch because there no objective, fact-based way of determining the reasonableness of these estimates. To resolve this, a new system based on modelling the fixed and variable costs is being proposed. These two systems must be analyzed to determine which system is more effective in budgeting costs.
Framework for Analysis
The two systems of modelling the expenses of the company must be compared with each other. Since a model is a representation of a process, it must therefore be as close to the process it represents as possible. This is how a model’s usefulness is determined – by examining how well it resembles a process (i.e. the way the expenses behave). In this case, the model’s resemblance to the process it attempts to represent will be measured to determine the validity of its assumptions and hence its usefulness.
This will be done by determining the discrepancy between the actual and the budgeted cost. However, instead of simply getting the difference between the two, the discrepancy will be expressed as a percentage deviation from the actual costs in order to consider the magnitude of the costs being compared. For example, a difference of...