River Beverages: Budgeting

Hilton, Chapter 18, Case 18.48, River Beverages
Overview
River Beverages is a food and soft-drink company with worldwide operations. The company is
organized into five regional divisions with each vice president reporting directly to the CEO, Cindy
Wilkins.
Each vice president has an R&D department, controller, and three divisions; carbonated drinks, juices
and water, and food products. Management believes that the structure works well for River
Beverages because different regions have different tastes and the division's products complement
each other. River Beverages' companywide and divisional organization charts are shown here.
Industry
The US beverage industry has become mature with its growth matching population growth. In one
recent year alone, consumers drank about 50 billion gallons of fluids. Most of the industry growth has
come from the nonalcoholic beverage market, which is growing by about 1.1 percent annually. In the
nonalcoholic arena, soft drinks are the largest segment, accounting for 53.4 percent of the beverages
consumed. Americans consume about 26 billion gallons of soft drinks, ringing up retail sales of $50
billion every year. Water (bottled and tap) is the next largest segment, representing 23.7 percent of
the market.

Juices represent about 12 percent of the beverages consumed. The smallest but fastest-growing
segment is ready-to-drink teas, which is growing by more than 91 percent in volume but accounts for
less than 1 percent of the beverages consumed.
Sales Budgets
Susan Johnson, plant manager at River Beverages' noncarbonated drink plant in St. Louis, recently
completed the annual budgeting process. According to Johnson, division managers have decisionmaking
authority in their business units except for capital financing activities. Budgets keep the
division managers focused on corporate goals.
At the beginning of December, division managers submit a report to the vice president for the region
summarizing capital, sales, and income forecasts for the upcoming fiscal year beginning July 1.
Although the initial report is not prepared with much detail, it is prepared carefully because it is used
in the strategic planning process.
Next, the strategic research team begins a formal assessment of each market segment in its region.
The team develops sales forecasts for each division and compiles them into a company forecast. The
team considers economic conditions and current market share in each region. Management believes
the strategic research team is effective because it is able to integrate division products and more
accurately forecast demand for complementary products. In addition, the team ensures continuity of
assumptions and achievable sales goals.
Once the corporate forecast has been completed, the district sales managers estimate sales for the
upcoming budget year. The district sales managers are ultimately responsible for the forecasts they
prepare.
The district sales forecasts are then compiled and returned to the division manager. The division
manager reviews the forecast but cannot make any revisions without discussing the changes with the
district sales managers. Next, the district sales forecasts are reviewed by the strategic research team
and the division controller. Finally, top management reviews each division's competitive position,
including plans to increase market share, capital spending, and quality improvement plans.
Plant Budgets
After top management approves the sales budget, it is separated into a sales budget for each plant.
Plant location is determined by product type and where the product needs to be distributed. The
budget is broken down further by price, volume, and product type. Plant managers budget
contribution margins, fixed costs, and pretax income using information from the plant sales budget.
The plants are designated as profit centers. Each plant's budgeted profit is determined by subtracting
budgeted variable costs and budgeted fixed costs from the sales forecast. If actual sales fall below
forecasts, the plant manager is still responsible for achieving the budgeted profit. One of the most
important aspects of the plant budgeting process is that plant managers break the plant budget down
into various plant departments.
Operations and maintenance managers work together to develop cost standards and cost-reduction
targets for all departments. Budgeted cost reductions from productivity improvements, unfavorable
variances, and facility-level costs are developed for each department, operation, and cost center in
the plant.
Before plant managers submit their budgets, a member of the strategy team and the regional
controller visit the plant to keep corporate management in touch with what is happening at the plant
level and to help corporate management understand how plant managers determine their budgets.
The visits also allow corporate management to provide budget preparation guidance if necessary.
The visits are especially important because they force plant management to keep in touch with
corporate-level managers.
The final budgets are submitted and consolidated by April 1. The vice president reviews them to
ensure that they are in line with corporate objectives. After all changes have been made by the vice
presidents and the chief executive officer (CEO), the budgets are submitted to the board of directors
for approval. The board votes on the final budget in early June.
Performance Measurement
The corporate office generates variance reports monthly. River Beverages has a sophisticated
information system that automatically generates reports based on input downloaded daily from each
plant.
Managers in the organization also can manually generate the reports. Most managers generate
variance reports several times during the month, allowing them to solve problems before the
problems get out of control.
Corporate management reviews the variance reports, looking closely at overbudget variance
problems. Plant managers are questioned only about overbudget items. Management believes that
this ensures that the plant managers are staying on top of problem areas, and that this keeps the
plants operating as efficiently as possible. One week after the variance reports are generated, plant
managers are required to submit a response outlining the causes of any variances and how they plan
to prevent the problems in the future. If a plant manager has repeated problems, corporate
management might send a specialist to the plant to work with the plant manager to solve the
problems.
Sales and Manufacturing Relations
"We are expected to meet our approved budget," remarked Kevin Greely, a division controller at River
Beverages. "A couple years ago, one of our major restaurant customers switched to another brand.
Even though the restaurant sold over one million cases of our product annually, we were not allowed
to make revisions to our budget."
Budgets are rarely adjusted after approval. However, if sales decline early in the year, plant
managers might file an appeal to revise the budgeted profit for the year. If sales decline late in the
year, management usually does not revise the budgeted amounts but asks plant managers to cut
costs wherever possible and delay any unnecessary expenditures until the following year. Remember
that River Beverages sets budgets so it is able to see where to make cuts or where it can find any
operating inefficiencies.
Plant managers are not forced to meet their goals, but they are encouraged to cut costs below
budget.
The sales department is primarily responsible for product price, sales volume, and delivery timing
while plant managers are responsible for plant operations. As you might imagine, problems occur
between plant and regional sales managers from time to time. For example, rush orders could cause
production costs to be higher than normal for some production runs. Another problem could occur
when a sales manager runs a promotional campaign that causes margins to shrink. In both instances,
a plant manager's profit will be affected negatively while a sales manager's sales will be affected
positively.
Such situations are often passed up to the division level for resolution; however, the customer is
always the primary concern.
Incentives
River Beverages' management has devised what it thinks is an effective system to motivate plant
managers.
First, plant managers are promoted only when they have displayed outstanding performance in their
current position. Second, monetary incentives reward plant managers for reaching profit goals.
Finally, charts produced monthly display budgeted items versus actual results. Although not required
to do so, most plant managers publicize the charts and use them as a motivational tool. The charts
allow department supervisors and staff to compare activities in their department to similar activities in
other plants around the world.
CEO's Message
Cindy Wilkins, CEO of River Beverages, looks to the future and comments, "Planning is an important
aspect of budget preparation for every level of our organization. I would like to decrease the time
spent on preparing the budget, but I believe that it keeps people thinking about the future. The
negative aspect of the budgeting process is that sometimes it overcontrols our managers. We need to
stay nimble enough to react to customer demands while staying structured enough to achieve
corporate objectives. For the most part, our budget process keeps our managers aware of sales
goals and alerts them when sales or expenses are off track."
Required
a. Discuss each step in River Beverages' budgeting process. Begin with the division
manager's initial reports and end with the board of directors' approval. Is each step necessary?
Explain.
b. Evaluate River Beverages' responsibility-accounting system. Specifically, should the plant
managers be held responsible for costs or profits? Why?
c. Write a report to River Beverages' management stating the advantages and disadvantages
of the company's budgeting process. Start your report by stating your assumption(s) about
what River Beverages' management wants the budgeting process to accomplish.