A budget, as defined by Hilton (2009 pg 348), is a detailed plan, expressed in quantitative terms that specifies how resources will be acquired and used during a specific period of time. A budget is a financial document utilized to project future income and expenses. A budget is based on how much you make in income and what your monthly expenses are. Budgets evaluate performances while the plan is what is going to happen or refine what you want to accomplish by thinking ahead. The purpose of having a budget is it improves efficiency, assigns responsibility, provides direction, and helps businesses plans and control finances. Managers use the budget as a benchmark against which to compare the results to of actual operations.
There are budgetary areas that raise concern in the budget planning of Competition Bikes, Inc. One area is forecasting of the sales budget. The sales projection in units for year 9 is set at 3510. In comparison to year 8, there was a 15% decrease in units sold in comparison to year 7 levels. Due to the present economic situation, there is no support for the projected sales to reflect 3510, as professional rider’s sponsorship is at a decline. The decline is expected to continue for another three years. The sales projections does not seem realistic as going forward there are no discussions as to how to increase sponsorships in the declining market.
There is no breakdown in quarterly activity to better utilize forecasting for the master budgeting plan. Inventory purchases such as materials are not taken into consideration with seasonal activity. Biking is an outdoor sport which competition events take place from spring to summer. By highlighting seasonal trends, the company should have higher levels of inventory during spring and lower inventory during the fall. By having these figures divided quarterly would better provide an accurate forecast of future sales.
Another area of concern with Competition Bikes, Inc budget plan is that it does not specify any level of uncollectable receivables. Due to the economic climate, loss of sponsorships can lead to unpaid accounts which in turn leads to uncollected accounts. Having a budget that includes uncollectable receivables better identify realistic concerns and budget projections.
There are two areas for utilities costs which can be confusing. It is listed in utilities and services as well as utilities under the SG & A schedule. This is a duplication as they are both are a part of the same category. It is my recommendation that since it is already a fixed cost under manufacturing, it should be taken out of either the Facility and General Operations and Utilities and Services.
Another area of concern for Competition Bikes, Inc is its inventory levels. The company makes bikes once a sale is generated, however, the company is budgeting for 140 unproduced bikes (140 sets of parts and 5,880 strips of carbon fiber) which also budgets for labor of completing these reserved bikes into actual bikes. These unproduced bikes may lose its value as turnover for new parts and improved material may outdate items in inventory which is not a part of the just in time inventory process.
A flexible budget allows for a variety of levels of activity states Hilton (2009 pg 456). It measures on activity volume rather than being fixed in amount. A flexible budget with figures are based on actual output. A variance is the difference between a budgeted, planned or standard amount and the actual amount incurred or sold. Variances can be computed for both costs and revenues. A flexible budget (variable budget) adjusts for different levels of activities. Differences between actual results and the flexible budget variances. Favorable variances (F) arise when actual results exceed budgeted. Unfavorable variances (U) arise when actual results fall below...