In this task, the budget schedule and proformas as well as the flexible budget were reviewed. Below you will find my analysis and recommended corrective actions as well as how management by exception applies. Budget Planning Concerns Competition Bikes has a good starting point for a budget but is overall weak and has several budgetary concerns. A few of those items are mentioned for budget planning below. Advertising & Research Development. Competition Bikes is expecting an increase in sales in year 9 yet they are not investing in any more in advertising or research and development.
In year 7 when sales were the highest, Competition Bikes spent $32,760 in advertising. In year 8 when the advertising budget fell to $27,428, so did the sales. Although management is predicting an increase in the market for year 9 and the advertising expense is 2% of projected gross margin, this may be unrealistic. Annual Budget. Quarterly budgets are more efficient for planning, coordinating, evaluating, and controlling costs. The budget for Competition Bikes only shows annually. Sales differ by season with the company so their budget should reflect a similar breakdown.
Quarterly budget would be closer to the seasons than just an annual one. Further breakdown of the budget will help spend money more wisely not only where it is needed, but when. Vague Line Items. The budget shows many lines with broad terms and some with no description at except “other”. Other long term liabilities in the amount of $75,000, other accrued expenses $26,000, other utilities and services $54,000, and $170,000 in other general and admin expenses. A more specific budget will help the company identify where money is being spent, assist management in making better budget decisions, and minimize fraud.
The Term Paper on Budget Planning
The sales forecast predicts that CB will recover over the next 3 years. CB estimates over $100,000 more in cash and cash equivalents for year 9. This is, of course due to the increase in unit sales that is worked into the budget. It might be a better idea to underestimate rather than overestimate when it comes to cash on hand. Retaining a quality labor force has never been a problem for CB. I feel ...
Smaller, individual budgets such as a selling budget that itemizes things like equipment, sales salaries, radio advertising, and print advertising, would also prove helpful. Inconsistent Entries. Communication seems to be an issue in creating the budget for Competition Bikes. The production budget shows the plus desired ending inventory as made to order. Yet, the plus target ending inventory in the raw materials budget shows 140. The company can do either, have inventory on hand or not, but the budget should reflect consistency. Last year’s spending as a guide.
It does not seem that Competition Bikes took year 8’s end year budget into consideration when creating the budget for year 9. For example the Account and Notes Payable for year 9 is $229, 203, $31,997 less than year 8. Raw materials have increased year after year yet no increase was accounted for in this budget, despite the increase in sales expected. Inflation. Although depreciation is accounted for in the budget, the budget does not seem to account for inflation. The company budgeted the same amount for general utilities, $150,000 with no cushion for economic increase, for example.
Competition Bikes also did not account for the increase in utilities in relation to the increase in production it plans to have. More bikes equals more utilities, more labor hours, etc. Flexible Budget A flexible budget is exactly that, flexible. Based on needs of the company, the budget expenses can fluctuate based on volumes of activity and revenue generated. Variances, positive or negative, are the difference between the budgeted expenses and the actual costs. A flexible budget can be changed to meet the needs of the company while a static budget is one that remains unmoved.
Flexible budgets are particularly helpful since there is no way to actual predict exact sales accurately. The following is an analysis of Competition Bikes’ flexible budget and variances. Net Sales. This item is a negative variance for Competition Bikes. The company sold 87 (15%) less bikes than projected, bringing net sales down $20,538. A negative variance of $130,065. The company sold 110 more bikes than the previous year, but not as many as forecasted. Poor net sales projections impacts cash flow. Variable Costs. Overall the company had favorable variances in variable costs, excluding the efficiency variance.
The Essay on Marketing and Variable Cost Variances
(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 ...
As expected, since Competition Bikes sold less than predicted, their related costs: direct materials, direct labor, manufacturing overhead and variable expenses were less than budgeted amounts showing a favorable variance. The labor and overhead revenue and spending variances however, showed unfavorable due to actual output despite the changes to the flexible budget. With the prediction of decreases costs based on sales, these costs should have also decreased. There is no further information on why these rates were high, Competition Bikes will need to look into those expenses.
Advertising and transportation forecasted costs should have also decreased but instead, increased. Although an increase in advertising was recommended, the additional costs were not accounted for in the flexible budget. Transportation out is covered by a per unit contract so the decrease in sales should have reflected a decrease in transportation out costs. Both of these costs should have decreased with the decrease in sales like direct materials did. These negative variances indicate the company cannot control costs. This could be caused by a number things: fraud, miscommunication, poor forecasting, unexpected economic changes, etc.
Competition Bikes needs to investigate the problem(s) to come up with solutions. Contribution Margin. This unfavorable activity balance indicates poor profitability for Competition Bikes. The company’s direct materials cost kept the contribution margin actual output in good standing with a favorable $43,674 revenue and spending variance. Cash flow is a positive thing for a company when there is adequate amount to pay expenses however, too much cash flow can result in a high working capital ratio that is negative for a company.
Excess working capital indicates to stakeholders that the company does not know how to invest its money back into the company. Fixed Manufacturing and Selling Expenses. These remained the same, as they are fixed costs. The distribution network contracted support had a slight decrease due to less sales. This shows as favorable to the company assuming Competition Bikes knows where this fluctuation came from, a rebate for example. Fixed General and Admin Expenses. Overall favorable with a $3,751 revenue and spending variance. Employment taxes decreased. Utilities went down $1777 plus the $500 in other utilities and services.
The Essay on A campaign for the City Bike Company
The City Bike Company started in the United States as a sharing program. It situated in New York dealing with bicycles which are of high quality. Interestingly, it is the biggest bike sharing program in the country and even the whole world. The company was selected to advance and operate the system using a new technology. In that reason the company has a great opportunity hence enlarging its ...
There was no change in payroll services. All yielding favorable variances. Executive compensation went down but administrative salaries went up. Administrative Salaries and Other General and Admin Expenses. Both of these items had negative variances. An additional $1,000 was spent in administrative salaries that was not budgeted for, perhaps related to the decrease in executive salaries. Someone may have been demoted. Quality managers is an issue for Competition Bikes as we have seen in our analyses. There is no information available on the reason for salary changes but it does cause a negative variance for administrative salaries.
Again as discussed before, other general and admin expenses are higher than expected and no explanation of what the expenses are for. Competition Bikes should look into what is being spent in this line item. Operating Income. Operating income was nearly half of the forecasted amounts, showing a largely unfavorable variance for Competition Bikes. The drop in operating income is a weakness in Competition Bikes showing the company was not profitable and in addition to lower than expected sales, it is not controlling costs as it should. However, the revenue and spending variance yielded a favorable $47,795 with actual output of $96,665.
By decreasing the budget for variable costs, Competition Bikes was able to the operating profit margin. The company should continue to look at decreasing costs to lessen the gap between budgeted and actual output. Recommended Corrective Actions The biggest issues with Competition Bikes that we addressed were the decrease in expected sales and the way money is spent. A corrective actions plan should be developed and implemented to make for a better budget next year. Reasons for the decisions made in this budget planning are unknown but below are some recommended corrective actions to include in the plan, based on what information we have.
The Term Paper on Competition Bikes Cost Analysis
Every business is involved in production where some costs are incurred. In order for a business to allocate its selling price to its products, costing analysis is required.Costing which is a method of accounting used by financial management is a very essential process. It gives a full description concerning all costs incurred in the business either variable or fixed. It gives the final production ...
Specificity. Recommended action to have a quarterly budget. The quarterly budget should be transparent as to what is happening in the company financially. The needs of the company can also fluctuate from quarter to quarter and planning for those expenses will cut down on unnecessary costs and unfavorable actions. Research and Development. It is recommended that the company make research, development, and advertising a priority on the budget. Competition Bikes should increase research and development to help better predict the number of sales for upcoming years.
Estimating a closer number of sales would help better anticipate the numbers for much of the variable costs. Annual analysis should be conducted to better forecast costs, and a corrective actions plan should be developed after each analysis. This plan should be strictly implemented. Until the economy is back in an upswing, Competition Bikes should be more conservative in sales predictions. A 15% decrease in sales is too much of an unfavorable variance. Research and development will help the company make better decisions on where to spend the money for future years. The website for example is a fixed expense.
It could be discovered that some of Competition Bikes excess cash flow needs to be filtered into a new and improved website to maintain competitive and increase sales. Surveys could be done to determine the needs of the customers. Advertising. Research and development would also feed into the company’s advertising budget. With the proper research, Competition Bikes could advertise bigger and better than the competition, increasing their sales. This could also help bridge the gap between planned and actual outputs. The advertising budget should be increased to better sales as mentioned, but the budget amount should reflect that as well.
Year 9’s budgeted amount was less than what Competition Bikes actual spent. Advertising should remain about 2% of the gross margin. The economy does have an impact on sales however, so does a competing company. With the introduction of the competition in the past few years, Competition Bikes will have to remain diligent in remaining an aggressive player in the market using research and advertising. Manufacturing Overhead – Variable. Competition Bikes should investigate why costs are higher than expected here. Management should be looked into as well as the production line efficiency.
The Term Paper on Bitter Competition: The Holland Sweetener Company Versus NutraSweet
In late 1986, the Holland Sweetener Company (HSC), based in Maastricht, the Netherlands, was preparing to enter the European and Canadian aspartame markets. Aspartame, a low-calorie, high-intensity sweetener, had been discovered in 1965 by G.D. Searle & Co., a U.S. pharmaceuticals company. After having secured a number of patents on its discovery, Searle had gone on to develop markets for ...
Research and development can help assess if the company can reduce costs by automating some of the production processes. Transportation Out. Another increase in spending despite decreased sales. Since the contractual cost is $30 per unit, it seems as if Competition Bikes was overcharged. Recommend researching this and requesting a correction. If the transportation out costs increased due to contractor inflation, then this should be accounted for in the budget planning. Recommended corrective action would be to find out where the additional cost came from.
Then for future costs, a bidding process should be fine-tuned to determine the best rates and contractor for the company. Contribution Margin. This unfavorable variance shows poor profits for Competition Bikes. Recommended action is to reinvest excess cash into the company. General and Admin Expenses. Competition Bikes needs to look into why direct labor costs increased despite the decrease in bike sales. Whatever the results, mismanagement, faulty equipment, human resources issue, etc, the company should take steps to correct the problem for next year or adjust their estimations in the new budget.
The lines for other general and admin expenses and other utilities and services should be more specific. Recommended course of action is to create additional line items rather than use these as the catch all. This will help identify more specific areas of concern. Salaries and Compensation. It is recommended that Competition Bikes looks into why the admin salaries went up but executive compensation went down. If it was due to a demotion or something beyond control then documentation is appropriate. If something that needs to be addressed, such as excess overtime, the company should consider this change in the next budget.
Utilities. First recommended action would be to put this on one line item in the budget with sub items listing how the costs breakdown by service. More detail is needed here, particularly from the other utilities and services line. The company did well to reduce utility cost this year but it is unknown if that is because some of it was calculated in manufacturing overhead, which increased unfavorably. As utility costs typically increase every year, Competition Bikes should budget for a rate increase in utilities in future years.
The Term Paper on The Application and Assistance of It on the Management of Taxi Company Kingkabs
The Application and Assistance of IT on the Management of Taxi Company KingKabs Executive Summary Taking a look at the daily products around, it is not difficult to find out that competitions between companies are everywhere. Indeed, as market economy is developing rapidly, the level of market competition is also growing in an increasingly high rate. Therefore, companies are always seeking the ...
Competition Bikes can also have the utility company come out to do a free analysis of where their costs are coming from. Upgrading to more energy efficient equipment may prove beneficial not only in the annual budget but in tax write offs and environmental improvements. Management by Exception Management by exception is a business management style that addresses deviations from the norm. In this case, Competition Bikes would allow lower management to deal with variances and their appropriate corrective actions at the lower level. Only the issues of greater importance or significant variance would be addressed by upper management.
This allows more issues to be addressed at one time and frees upper management to focus on other matters of importance. Some items may not be addressed at all. Net Sales. This line item is critical to many other line items in the budget. A threshold should be set as to when upper management will be involved in net sales budgeting. Since there was such a significant decrease in sales last year, management by exception should have been set in place for year 9. Direct Labor and Manufacturing Overhead – Variable. This item should be investigated by upper management.
With the decrease in sales, it’s likely the lower supervisors are not appropriately managing time and resources. Advertising. Although it is recommended to increase the budget for advertising, the amount should remain at 2%. Since the company was expecting more revenue from units sold, this number was higher. Estimating closer to the number of sales should fix this issue on its own. Transportation Out. This variation is most likely due to an overcharge. An issue that can be handled by the finance department. A contractual cost is set for the transportation per unit so it should not be difficult to address.
Should it become a legal issue however, then the item should be escalated. Admin Salaries and Executive Overhead. This should be, and probably already is, identified at the lowest level and no action would need to be addressed by upper management. Clerical errors can be fixed, and if a bonus was paid, or someone was demoted, etc. , documentation is appropriate. After conducting a root cause analysis, lower management can take action as appropriate. For example, if the administrative salary increase was a $1000 bonus to an employee, then a line item for awards should be created.
The managers would be told they have a certain threshold to award their employees. No awards would be paid out exceeding the threshold. Others. The other general and admin expenses and other utilities and services, should be addressed by upper management. Lower management should provide the details so the company can review if management by exception should be implemented on any of these sub costs. They should also be included in all future quarterly budgets so management will not have to revisit with every review. Conclusion Competition Bikes has learned a multitude of information from its flexible budget.
Recommendations are to create quarterly budgets with more specific line items to determine where costs are coming from. Once identified, the company should try to reduce costs, reinvest monies into the company, and adjust the budget accordingly. Research, development, and advertising will play an integral role in improving the budget and sales for Competition Bikes. By using management by exception, Competition Bikes can address most, if not all of their budgetary issues at the lowest level possible, freeing upper management to focus on company expansion and, more sales.
