Issues

1. For what purposes does Body Glove use its budgeting system? Which purposes are emphasized?

2. Trace the steps in the development of the budget at Body Glove. What are the key events that relate to the timing of the steps in the budgeting process?

3. The case says that Body Glove never prepared a budget prior to fiscal year 1991. How can a company like Body Glove function effectively without a budge, or can it?

4. What changes to Body Glove's budgeting and review processes would you recommend, if any?

5. If Body Glove continues to grow and, perhaps, diversifies, what changes will have to be made to the budgeting and review processes?

Facts

In 1991 Russ Lesser, president of Body Glove reviewed the company's performance of the wetsuit manufacturer. The company was profitable and was ranked number two in market share industry. Body Glove's success depended on its ability to respond quickly and in a coordinated fashion to changing market conditions. It was hard to determine the wetsuit market size because most of its firms were privately held. The industry approximately generated $60 million in revenues in 1990. O'Neil the largest company held 50 percent of market shares. Most bodysuits buyers were image and quality comfort conscious. To be competitive manufacturers had to provide a large number of styles to meet customer's demand. The product line required manufacturers to carry significant amounts of raw materials and finished goods inventories.

Demand was highly seasonal and in order to smooth out the workload Body Glove started to produce snow-skiing and snowboard apparel. Exhibit 2 shows a full product listing. The company sold its products through sports specialty and retail stores. The company's goal was to become number one as a wetsuit manufacturer by the year 2000. Manufacturing areas had to increase capacity as well as maintain flexibility to meet changes in consumer demand.

The company produced products for two seasons, fall and spring. Body Gloves was in the process to move two production lines, one to produce large forecasted orders and one to produce custom orders. Andrew Coutler, manager of international sales, and Kurt Rios, manager of national sales were in charge of making forecasts in March and October of each year. The March forecast was for the fall line while the October forecast was for the spring line. The forecasts were based on historical sales data, customer demands, product life cycles, company's marketing strategy, and manager's market feel.

Andrew developed a Material Requirement Plan (MRP) based on the Bill of Materials (BOM) for standard mix of colors and sizes for each wetsuit style. The fall line needed thicker neoprene than the spring line. Neoprene was the most expensive raw material costing five times as much as any other material. Three months of lead time was necessary for delivery from Japan. US suppliers were not reliable and lacked quality. Body Gloves' neoprene purchases were not designed to match the projected needs. Regardless of the 12 percent annual inventory carrying cost, Andrew extra quantities of neoprene to anticipate customs orders. The company estimated that they lost $1 million in sales due to a shortage of materials. The company now carried $3 million worth of neoprene instead of the $1.6 million it carried in 1990.

The new management was certain that the cost of inventory stockouts were greater than the inventory carrying costs. The management knew that the prebook number represented 50-60 percent of Body Glove's total sales for the season. The company was able to turn its inventory two times a season, and spring 1991 sales increased by 45 percent over spring 1990.

In 1991 Body Glove's financial system consisted of a bottom-up budgeting process. The budgeting process for 1991 began in November 1990. The management estimated 25 percent sales growth for 1991. Russ requested that each department develope monthly projections of key expenses for the upcoming fiscal year. The budget was used to monitor performance and detect early warnings of problem areas. Russ compared actual performance on a monthly basis. Exhibit 3 shows an aggregated budget-vs-actual income statement comparison for July 1992 and 1992 year-to-date.

In July 1991 the company's sales were below budget, but the conclusion was that the variance was not a real problem and production efficiency had improved in June. The 1991 budget was revised because of the Persian Gulf war. Russ, adjusted the budgets for the second quarter of the year downward, but he adjusted the second half number (July-December) upward so the totals of the year were unchanged.

Incentives were not linked with any budget-related performance. Employees employed for more than two years earned 6-7 percent of base salary for managers bonuses were approximately 10-12 percent of salary. Management bonuses were subjective and based on numbers of indicators such as an individual's job, customer service, and satisfaction, sales levels, factory productivity, expense control.

The company had a five-year strategy focused on marketing, this plan was not accurate due to the uncertainty of the market. President Russ, concerned about the future of the company though of break out the Body Glove operation as a separate financial entity. People thought that the company's informal culture was the key to its success. However, the company was growing faster than ever before.