Budget Planning free essay sample

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 it raises some concern when the budget does not allow for any wiggle room with the labor hours. This would be an area in the budget that would make sense to allot some extra time/money. CB would be wise to be sure each unit is manufactured properly, with absolutely no mistakes after coming off a sales year which yielded less than ideal results. If riders do actually decide to continue buying CarbonLite bikes, CB must be extremely confident in the units they are selling. Even allowing for an extra hour per unit would help to cushion this part of the flexible budget. In the selling, general and administrative budget for year 9 there are a few areas of concern. The advertising budget is 2% of the projected Gross Margin. CB should increase their advertising budget. Coming up with a new phrase or slogan will help CB stand out in the consumer’s mind. Especially after the economic decline in year 8, CB will want to make sure that their customers know they are still here and better than ever. The budget lists Utilities at $150,000. This is the same as year 8. Still a concern from year 8 is the line item- Other General and Admin Expenses. This area has $170,000 budgeted for it. This is an area where CB can cut some spending to lead to more profitable end of year results. If it cannot be cut, then the details should be spelled out in the budget. As it stands now, one cannot ascertain what that money is being used for, which raises some red flags. Also listed is the line item-Utilities and Services. Why would there be an additional line added for this in the flexible budget. This is not something listed for the previous year. With $150,000 for Utilities and $170,000 for Other, what additional utilities and services are they budgeting $54,000 for and why? Year 8 did not result in an increase in sales for CB. In fact, year 8 resulted in a 27% decrease in overall gross profit, due to selling fewer units than anticipated at the start of the year. After reviewing the flexible budget for year 9, it is apparent there are areas of concern which should be addressed and corrected, if possible. Along with the areas noted above, under Current Liabilities there are two different line items: â€Å"Accrued Salaries and Related Expense and Other Accrued Expenses. † With a total of nearly $40,000, an explanation is needed as to what this money is being budgeted for. CB is also estimating that they will have over $30,000 less money owed for Accounts and Noted payable in year 9. I’m not confident that if year 8 ended at a certain point, with a dollar amount being owed, how year 9 wouldn’t be budgeted for that same amount from the beginning. Although a minor detail, it appears that some sections of the budget are off by $1 when double checked. Even though it is only $1, it perhaps shows reveals something about those creating the budget or those who are in charge of the numbers. The flexible budget for year 9 has CB selling 3,510 units. This is an increase from year 8 of 110 units. Coming off a 15% sales decline, it might have been wise to aim a little lower in the budgeting. The actual number of units sold in year 9 was 3,423. This is 87 fewer units that anticipated. (Please note that the number of units sold for year 9 under Task 2 states 3,400, but the Contribution Margin Income Statement states 3,423. I will be using 3,423. ) Net sales for year 9 were over $130,000 less, or around 2. 4%. This is an unfavorable variance due to the fact that it really just means that CB made less money than they were hoping for. The areas of direct materials, direct labor, manufacturing overhead and variable selling expenses all had favorable variances. Although the variances are favorable, it is because fewer units were sold than the budget listed. Transportation Out is set at $30/unit. This is a contract that is agreed upon with CB and the common carrier. The budgeted amount for Transportation Out was $105,300 for 3,510 units. The actual amount spent was $108,297. If each unit costs $30 to transport, then this number shows that 3,609 units were transported. Year 9 only resulted in the sale of 3,423 units. This many units should have cost CB $102,690, resulting in a variance of $2,610 or 2. 4%. Advertising expenses are supposed to be 2% of the projected gross income. CB spent around $3,000 more than they budgeted for in year 9. This is still only about 2. 2%, but it was not accounted for in the flexible budget therefore resulting in an unfavorable variance. Website Creation and Maintenance has a fixed budget of $6,000. This item resulted in neither a favorable or unfavorable variance in year 9. Distribution Network Contracted Support is supposed to remain fixed at $50,830. However, year 9 shows that $370 less was spent in this area. This is a small favorable variance in CB’s favor, but still needs to be addressed. 1,000 more went to Administrative Salaries, leading to an unfavorable variance. Perhaps someone received a bonus or other Human Resource issue? Executive Compensation has a favorable variance of $2,000. Employment taxes were slightly lower in year 9, by $77. Utilities and services were managed well, resulting in savings of close to $2,000. Research and Development shows a favorable variance of $3,020. This number is set at 6% of the Gross Margin. The previously discussed area of mystery, Other General and Admin Expenses, had an unfavorable variance in year 9 of $2,000. This area is still of concern at the end of year 9. Also discussed, Other Utilities and Services resulted in a $500 favorable variance. The Operating Income for year 9 shows an unfavorable variance of 48%; $38,478 less than anticipated in the flexible budget for CB in year 9. It is recommended that CB estimate a lower number of units sold in future flexible budgets. This will be especially true after suffering a 15% decrease in sales in the current year. It never hurts to be optimistic, as long as CB also remains realistic with their numbers. I recommend detailing the line items Other General and Administrative Expenses and Other Utilities and Services. This will help CB determine what this money is actually being spent on. Hopefully there will be a way to reduce costs once the area is broken down into finer details. Although not too big of a concern, the variances in salaries for Administrative and Executive should be uncovered. It never hurts to know why employee compensation is different than budgeted for. CB should reach out to their contracted support company to find out why they were undercharged by $370. When working with a budget it is important to know where the money is going, especially when there is a variance on what is supposed to be a fixed amount. It could be something as simple as a loyalty credit from the contracted support company. More money was spent on advertising than was budgeted for. Although advertising is a great way to reach current and potential customers, the overspending needs to be addressed. Advertising should be 2% of the gross margin. If CB made less money in year 9 due to low sales, it doesn’t make sense that over 2% went to advertising. If CB is thinking about upping their advertising efforts, this will need to be accounted for in the flexible budget. Lastly, Transportation Out resulted in an unfavorable variance of nearly $3,000. This is of great concern because there is a contract that states each unit will be $30 to transport. From this variance it appears that CB was overcharged for transportation on 186 extra units. With a little investigating, CB might just discover it was a clerical mistake and perhaps they will be due a refund. The bottom line is, shipping fewer units than anticipated should not cost CB more money. The CEO of CB practices management by exception. This means that she only feels it is necessary to follow up on significant variances in cost. Because a budget is not perfect, each and every line item will not match exactly as predicted. But when there is a large difference, or an unusual difference, she will investigate why. There are several variances in year 9 that require no follow up. The variable cost area (direct materials, direct labor, manufacturing overhead, variable selling expenses) are all tied to how many units were actually sold compared to how many the budget allowed for. Advertising expenses were supposed to be set at 2% of the Gross Margin, but ended up being a little higher than 2%. The company brought in less profit, so the amount of money spent on advertising should have been less. Transportation out is set at $30 per unit. The Contribution Margin Income Statement shows that CB paid for 186 extra units. This is not an item the CEO would want to apply Management by Exception. When a certain price is established with a vendor or partner, it should be honored. Anything other than the agreed upon price should be looked into. A minor difference in the results for Administrative Salaries and Executive Compensation does not raise too much concern. But many of the variances are small. This variance, however, should have some explanation. The CEO will want to make sure that the employees are not being compensated unfairly or that money is being paid to someone for no good reason. The CEO most likely knows what each line item consists of. However, as stated previously, the $170,000 budgeted for Other General and Administrative Expenses and the $54,000 budgeted for Other Utilities and Services deserves an explanation. The Operating Income has a variance of 48% for year 9, compared to the flexible budget. It is worth it to the CEO to further look into why exactly there is such a large variance.