Within the Budget Schedule and Proforma the factory Total Overhead for FY 9 is $481,798 with the Depreciation value listed as $150,000. Total depreciation for FY 6, 7 and 9 has remained at $130,000 as noted on the balance sheets. The increase of the factory depreciation of $150,000 for FY 9 is considerably high given a lack of identifiable rationale as to a major machinery purchase, utility usage, or increased expenses due to supplies or personnel acquisition. Even though depreciation is not actual cash flow it does define the reduction of company assets and should be reported accurately; where depreciation is defined as “the value of an asset net of all accumulated depreciation that has been recorded against it.”2 A recommendation would be for CBI to adequately document the reasons for the depreciation levels. A further suggestion would be to closely monitor each quarter going forward possible opportunities to maintain the value of overhead while reducing depreciation.
Supply Chain Distribution Costs
Analysis of the Cost of Distribution for FY 9 is $50,830 which is equal to that of FY 8, displaying a disparity in the amount of units sold. The cost per unit of distribution network support is equal to $14.95 when comparing the previous three years data, this means that the forecasted budget of estimated 3510 units should be set to $52,474.50, given the cost distribution cost factored in getting the product from the manufacturer to the retailer and eventually the consumer. To avoid unforeseen and unnecessary losses in the supply chain distribution process, it is advised that CBI adopt the Just in Time methodology. The Just in Time methodology involves operating with the leanest of inventory stock levels, ensuring the sales force has access to the product selection most desired by the customer basis resulting in less waste and a reduced level of common stock and a reduction in the negative Retained Earnings.
1. The primary cause of the current system to fail is the use of a single burden rate. Burden costs of the testing rooms as well as other costs such as admin were grouped into a single cost pool and then divided by the total labor dollars. This resulted to a single burden rate of 145% of direct labor dollars (cost driver). This method is not appropriate for Seligram because the information on the ...
When implemented, the “Just in time ” method can help CBI improve in such areas as quality, efficiency, as well as the return on investment, with the only draw-back being the re-order level, which is often determined by the previous demand. If the demand rises, then inventory will be depleted a lot faster than usual and might cause customer service problems. In order to maintain contractual service agreements with suppliers and distributors CBI should maintain constant lines of communication with all supply chain partners. By keeping lines of communication open between the operations manufacturing teams, the raw material suppliers, inventory and wholesale and retailers, the entire supply chain will experience a reduction in redundant inventory while improving the end consumer fulfillment levels all resulting in improved profit margins.
Executive and Administration Compensation
The Executive and Administrative compensation allocation during FY 7 and 8 have remained stagnant without increases budgeted at $220,000 and $170,000 respectively. As a means to improve employee attrition and retention while striving to improve morale within the organization CBI, should consider measures to provide an incentive plan for employees who meet and or exceed production and operation goals that may or may not be specific to salary increases. According to HRWorld.com, “frequent recognition of accomplishments” was the top non-monetary compensation named by full- and part-time office workers”.4 Examples of non-monetary employee incentives that could benefit CBI include, offering flexible schedules, creating a reserve parking spot, providing telecommuting options where applicable, create team seasonal picnics or parties and failing all else, Larry Ferguson should follow the lead of AdvancedMD CEO Jim Pack and handwrite thank-you notes to employees on a $2 bills5. Above all else, CBI should strive to allot for salary increases for employees of all levels in the organization for FY 9, if not FY10.
Chapter 1.INTRODUCTION 1.1 Concept of employee engagement 1.1.1 Defining Engagement One of the challenges of defining engagement is the lack of a universal definition of employee engagement, as a research focus on employees’ work engagement is relatively new. More often than not, definitions of engagement include cognitive, emotional, and behavioral components. The cognitive aspect of engagement ...
CBI experienced an increase in utility expenses of 2.3% while experiencing a decrease in overall production in FY 8, which reflects as unnecessary expenditure on cash reserves. The operation utility costs appear to be increasing without justified production increases. The disparity of utility expenses with the contrary production level decreases, an investigation by an independent energy consumption audit firm is recommended. The independent audit should determine whether there is a need for refitting the manufacturing facility to eliminate potential waste and determine any possible utility cost effective savings measures which can be implemented any so as not to increase any further increases in utility costs. Along with the utility audit should be a campaign to reduce energy consumption in non-manufacturing departments of CBI, including repeating the audit on a quarterly or biannually basis to prioritize energy improvement measures. Energy improvement measures undertaken by CBI should include, the installation or replacement of outdated or inefficient manufacturing and office administrative equipment, reducing water consumption by installing low-flow equipment and fixing leaks and most importantly by educating employees, vendors and suppliers about the benefits of energy-wise behavior.
According to Hilton (2009) “The sales budget is based on projections that take into account trend information as well as market, competitor, and other econometric information to provide an accurate forecast of future sales.” 6 In FY 8 CBI sold 3,400 units which is a marked decrease of 15% over the 4,000 sold units in FY 7. FY 8 reduced sales was primarily due to a downturn in the overall economic situation which affected professional rider’s sponsorship. CBI also disclosed that there was an anticipation that future sponsorships would be declining in the coming years. While the Budget reports for FY 9 predict an increase in units sold, with a decline of $1000 in the Advertising budget, it is challenging to imagine an increase in sales. A solution would be to either have Marketing and Advertisement budget remain the same or be increase to account for the projected increase in sales. Similarly, by using social media to launch a creative targeted and yet fiscally responsible marketing campaigns, CBI can gain increased product and service awareness and gain added customer base and ultimately increase sales and revenue. Flexible Budget
(a) Refer to the Kinkead templates provided on the unit website. Template (A) calculates the market size, market share, sales mix, sales price and variable cost variances for each product and, Template (B) calculates the market size, market share, sales price, and variable cost variances for each product. Which analysis is most appropriate for Kinkead? A or B? Give reasons. Templete (b) What ...
A flexible budget is a budget with figures that are based on actual output; this number is then compared to a company’s static budget (fixed) to determine variances or differences. A flexible budget adjusts for changes in the volume of activity. The flexible budget is more sophisticated than a static budget. A flexible budget allows for increases in sales and product demand, it allows for a larger than normal purchase of raw materials if a tremendous price reduction becomes available. The budget is used to determine how effectively a company is planning and performing. Unlike the static budget, the flexible budget provides management with the actual number, rather than the planned number. CBI must weigh budgeting choices carefully as business activities and performance can be affected by budget analysis. Favorable and Unfavorable Variance
According to Investopedia “An unfavorable variance is the opposite of a favorable variance where actual costs are less than standard costs.” 7 Analysis of CBI’s favorable and unfavorable variances will include price, volume, direct materials and advertising. A favorable revenue variance occurred since while there was no plan to increase prices of the bicycles for the coming year, the planned sales of $5,247,450 was decreased by a variance of -$20,538 resulting in actual sales of $5,096, 847. A possible solution at the end of the 2nd quarter once it was realized that sales were not as profitable as were projected, would have been to raise prices to accommodate the increased material, labor and manufacturing costs. While increasing product pricing could further add to the unfavorable revenue variance, this could create an opportunity for CBI leadership to encourage creative advertising and customer service exposure thus increasing brand loyalty and encouraging additional purchases of bicycles if not immediate so as to be a boost to the FY 9, sales, then possible in the coming future.
Executive Summary In 1974, Berkshire Toy Company (BTC) was founded by Franklin Berkshire, Janet McKinley’s farther. Janet was soon became the CEO of the company when her father retires on 1993. After two years, BTC was acquired by Quality Products Corporation, a manufacturer of different products, for a common stock of $23.2 million. The preliminary statement of divisional operating income for the ...
Since CBI experienced a decrease of 87 bicycles during FY 9 from the planned units of 3,510, this provides a valuable opportunity for the Manufacturing, Advertising and Sales teams to reevaluate the entire operations strategic plan to take in to account this loss of -$130,065, this affects current and future profitability. Businesses that appear to overestimate customer demand end up suffering high inventory and operation costs and the possibility of not appearing relevant in the changing market once customers do seek to purchase products. In contrast, by not having sufficient products in stock CBI could lose revenue and may risk losing customers to its competitors. An important factor in variance analysis is reviewing the efficiency of the variable costs. In regards to the Advertising and Direct Material costs, the planning budget and activity variance are within a healthy range, the unfavorable variance of 1,246 and 100,000 respectively. Having an unfavorable efficiency level provides CBI with opportunities to improve upon internal operation processes.
For the Direct Materials the operations and manufacturing teams can analyze the procurement and inventory levels for potential waste given the raw materials and work in progress levels are anticipated to remain the same for the current year. In relation to the Advertising, CBI is known for implementing limited efforts relying heavily on word of mouth to promote sales. A more efficient use of budget and skill would be the use of strategic marketing to attract riders who take part in bike races, biathlons and triathlons. By purchasing ad space, in top selling biking enthusiast magazines, creating a media presence on typically free blog sites and other social media sites such as Instagram, Facebook, Vine and Twitter, CBI can gain from the ‘word of mouth’ increase visibility among the biking community and above all possible decrease expenses while increasing sales. By carefully assessing the disparity in the lines items of the Variable Costs segment of the Flexible Budget Performance reports there are key indicators that CBI management needs to make a number of changes in order to improve operation processes and in general retain the general health and welfare of the organization.
The behavioral aspect mainly focuses on people and culture, of which are means of managing the activities and behavior that cause costs. "The Seven Cs Model" is used to manage the cost-generating activities. The seven Cs are: culture, champion, change process, commitment, controls, compensation, and continuous education as illustrated in the exhibit below. Culture. "Corporate culture is the ...
The below diagram displays advantages and disadvantages of flexible budgets: Disadvantages of Flexible Budgets
Advantages of Flexible Budgets
Requires constant monitoring and can be time consuming
Effective at making timely adjustments
Probability of inaccuracy due to fluctuating costs of raw material, interest rates, degree of competition, employees’ skill and technology efficiency Able to predetermine sales and production quantities – and also enables business to control costs, as it shows where the actual performance deviated from the planned performance The business must clearly and effectively categorize expenses into fixed, variable and semi-variable expenses, without doing this the entire process can be jeopardized. Enables the business to measure variations in the cost of materials, selling price, wages and production overhead using variance analysis variations in the cost of materials, selling price, wages and production overhead Master Budget
A master budget is created is to provide the business owner and company executives with a comprehensive overview of the company’s budget. Typically divisions and departments each design their budget requiring leadership to further analyze in order to get the big picture of overall earnings and spending of the company. The master budget reveals how much the company is earning and spending as a whole and shows the company’s financial health and welfare. The master budget should be prepared in quarters to accommodate the frequency and fluctuations of cost of materials, selling price, wages and production overhead as opposed to an annual budget. This simple adjustment would allow management the flexibility to adjust expenses based on actual sales revenue. This would address concerns as quarterly expenditure and sales and actual expenses and revenues are realized.
Sales projections are more difficult to project a year in advance than a few months in advance. If CBI does realize an increase in sales, management can increase production and order more raw materials keeping in mind the Just in Time inventory supply chain methodology. If CB realizes a continued decrease in sales then reductions can be initiated sooner to prevent an accumulation of antiquated raw material or un-installed parts and modify advertising and sales expenses lending towards the variance allowance.
Introduction Management control is to ensure that the organization achieves its objectives. Once the objectives have been agreed, action plans should be drawn up so that the progress can be directed towards the ends specified in the objectives. Such objectives are used to make comparison with alternatives in decision making & are also the critical elements in evaluating the success or failure ...
In FY 8, CBI was successful in their resolving of delinquent accounts. By initiating an aggressive accounts receivable policy and internal procedures centered on managing delinquent payments including more 30 days net from their suppliers and 15 days net from their own accounts; the results can be reviewed more frequently resulting in fewer errors and increased revenue.
CBI had a previous policy to order raw materials based on a static budget. With the implementation of a flexible budget and the Just in time supply chain methodology, CBI can adjust their need and supply of materials on a more regular schedule. Their previous compliance issue concerning purchase orders and deliveries could be more closely monitored in this quarterly budget. Vertical Analysis for FY8 displays Raw Material Inventory as $91,573 with FY 9 CarbonLite Raw material budget ending as $965,250, without an expectation of change in the sales for the 3510 units CBI should closely monitor all Sales and Advertising initiatives in order to reach a wider audience. Sales Commissions were lower due to the lower sales, an indication that CBI has established sales commissions according gross sales. Sales commissions have maintained at 3% of net sales from FY 7 to FY8. In FY 9 the Sales Commission increased to $157,424, indicating the popularity of the CarbonLite product 3510 units sold and should be monitored closely throughout FY9 for the possibility of brand expansion.
Given market variations, sales projections are often challenging to project a year in advance than a few months in advance. If CBI does realize an increase in sales, management should use the Just in Time method of increasing raw material procurement and production manufacturing. If CBI realizes any future fluctuations in sales revenue, it is therefore advised plant leadership reduce orders to prevent a surplus of antiquated parts and head off unnecessary sales expenses like advertising, not effective for the market trends. Variance analysis would also aide in improving manufacturing downtime and overall operation efficiency resulting in an increase of General and Administrative costs from $935,119 in FY 8 to a Planning and Flexible of $992, 073 for FY 9, the spending variance is indicative of a savings on labor expenses.
Specific to utility usage, a steady increase of utility consumption from FY 6, 7 and 8 of $130,000, $135,000 and $150,000 respectively appears to have plateau due to a detection of utility waste and placement of energy consumption measures in FY 9 with a projected cost of $150,000. By continuing to monitor and reduce consumption, CBI serves to promote the benefits of conservation throughout CBI and its employee ranks and potentially to other Supply chain vendors and partners by example.
Management by Exception
Management by Exception is the practice of examining the financial and operational results of a business, and can best be illustrated by the 4 % annual increase in the utilities expenses. When a projected budget is exceeded, plant management and overall company leadership need to take corrective action and at the very least undertake a utility usage and financial analysis. The increase of utility usage by CBI necessitates action by plant facility management and not primarily by Larry Ferguson.
In a company’s budget variances, management needs to take decisive action. Management by exception is illustrated best below: Dramatic sales or profit decreases analysis reports are key factors of management by exception, requiring Larry Ferguson and other senior management to devise strategic planning and possible corrective action. Management by Exception dictates that a manager’s attention should not be focused on the segments of the organization where budgets are not being exceeding or that facility or departmental managers have the skill to correct, wasting the expertise of leadership and senior management who are typically better skilled with strategic planning as opposed to day to day running of the company. Additionally MBE encourages workers to exercise judgment when doing their work. As long as they are within the guidelines that have been established, they can continue working as they see fit.
Further analysis CBI’s Variable Costs include:
Planned Variable Costs
Direct Materials planned budget include $ 2,292, 028 and experienced an efficiency variance of $100,000 While the actual Price Variance experienced was favorable the efficiency of the material usage causes concern. By adopting the inventory management process of Just In time, CBI would take advantage of limited inventory on hand specific to only what is needed to manufacture the already ordered bicycles as well as reducing specialty part losses- mid-level operations teams can share their hands on experience and will gain accountability which will no doubt lead to company efficiency levels increasing and an overall level of professionalism and job satisfaction. Variable labor costs typically go up or down with production levels. Current Direct labor costs include a $100,000 spending variance. By adopting flexible schedule and overlapping shifts CBI can reduce the possible overtime wages and the amount of temporary staff required to meet demands during peak production periods. Altering the schedule of the production teams should fall to the operations managers who are able to determine the time of greatest efficiency and production levels.
Transportation Costs – currently the price variance of $3,207 places an unfavorable variance on the shipping and distribution budgets A possible option is to negotiate a with the current contractor to either reduce the current $30 per unit fee, suggest a by order fee or attempt to find an alternative vendor who has either seasonal or volume focused rates rather than per unit. The negotiation of transportation contracts should be tasked to the purchasing, inventory and warehouse managers who work closely with the vendor and are aware of possible trends. Advertising Expenses are essential to any organization- CBI has an unfavorable price variance of $5,000 with an efficiency of $1,246. While advertising results in increased sales, ultimately the efficiency or inefficiency shows that the $5,000 could have been better spent. Namely create a media presence on typically free blog sites and other social media sites and by removing the advertisement focus from leadership to the hands on operations teams and possibly with partnering with distributors who see the customers face to face, CBI gains opportunities to gain from inexpensive if not free advertising solutions, increasing efficiency and revenue while decreasing expenditure. Utility Expenses
While utility expenses are not listed within the variable costs- this is another area to mid-level managers and operations teams to recommend energy improvement measures which will ultimately improve the utility consumption but also moral as it can educate employees, vendors and suppliers about the benefits of energy-wise behavior Budgets don’t guarantee success, but they certainly help to avoid failure. The budget is an essential tool to translate general plans into goals and objectives while providing a mechanism for identifying and focusing on departures from the plan. The budget communicates the benchmarks against which to judge success or failure in reaching goals and facilitates timely corrective measures. “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” 8 Vice President Joe Biden (2007).
1. Nobles, T, Mattison, B, Matsumara, E (2013) Horngren’s Accounting 2. Definition of Depreciaiton derived from http://www.investopedia.com/terms/d/depreciatedcost.asp 3. Heizer and Render, (2011) Operations Management, Principles of Operations Management 4. Employee Rewards derived from: http://www.hrworld.com/features/25-employee-rewards/ 5. CEO Handwritten Letter derived from: http://hrempowers.blogspot.com/2013/09/showing-appreciation-round-table-when.html
6. Hilton, Ronald W. ( 2009 ) Managerial Accounting: creating value in a dynamic business environment 7. Definition of Unfavorable and Favorable Variance derived from: http://www.investopedia.com/terms/u/unfavorable-variance.asp 8. Biden, J,
(2007) Promises to Keep: On Life and Politics