Western Governor’s University
Competition Bikes Budgeting and Variance Analysis Report
Competition Bikes, Incorporated (Inc.) makes bicycles for professional and other highly accomplished riders who compete in bike races, biathlons, and triathlons. Approximately sixty percent of all race winners have been victorious using bicycles designed by Competitions Bikes, Inc. This extraordinary success rate is a topic of conversation among racers and has led to exponential success for founder Larry Ferguson who formed the company in 2001 in his garage. Competition Bikes is known for quality products and is leader in the market with the CarbonLite products they provide. These results are transparent in the budgets from the last few years; however, the most recent budget contained several unfavorable variances that may be an indication that some changes are needed. Budget planning, identifying unfavorable variance, and correcting those variances can make or break the financial position of a company. The following is a summary report that discussed budgetary areas that raise concern in budget planning; evaluates the flexible budget and its variance; recommends corrections actions for areas of concern based on the variance analysis; and discusses how the concept of management by exception could be applied to the variances. Budget Planning, Allocation of Resources, and Management Control A master budget provides a forecast based on sales projections for the next budget period. The three major budget process activities can be summed up as planning, allocation of resources, and management control. Planning a budget involves assessing all the issues integral to meeting the goals of the company. Allocation of resources involves an analysis of how scarce resources are distributed among producers, and how scarce goods and services are apportioned among customers (WebFinance, 2012). Additionally, this analysis takes into consideration the accounting cost, economic cost, opportunity cost, and other costs of resources, goods, and services (2012). In essence, allocation of resources is a study of how resources are allocated and is associated with economic efficiency and maximization of utility (2012). Management control involves the control systems used for monitoring the implementation of plans through performance reviews, reports, comparing actual results with objectives, and measuring how successful an organization has been in achieving its financial goals and objectives. During the budget planning process, one may discover budgetary areas that raise concern. These issues should be identified, discussed, monitored, and corrected. Competition Bikes Budget Planning Concerns
A sales budget is based on the sales projections or forecast for products sold or services provided during a particular time frame (Hilton, R., 2009). After careful analysis of the budget prepared for Year 9 for Competition Bikes, the following concerns were identified. Competition Bikes projected their sales to reach 3510 units for Year 9 at a 50% trade discount to distributers which total $1495 per unit. The actual units sold in Year 9 were 3400 and immediately, an area for concern is identified. When analyzing the budget from Year 7 and Year 8, sales volumes decreased by $164,450; therefore, Competition Bikes should have been more conservative by limiting their sales projections for the coming year. In Year 8, the projected sales volume and subsequent sales revenues are greater than realized which may be attributed to a slow economy and a reduction in sponsorships for professional riders. The operating income for Year 8 decreased by over 60% to $97,533 and net earnings dropped by 80% at $36,100 which again indicates a strong need for more conservative forecasting. When forming a budget, economic climate, funding and revenue gained from sponsorships should be...