JET 2 Task 2

Topics: Management, Income statement, Budget Pages: 8 (1851 words) Published: March 9, 2015


Financial Analysis
JET 2 Task 2
March 1, 2015
Mariana Marquez Sital

A. 1.Budgetary items that raise concern for Competition Bikes, Inc. in the budget planning reports. In year 9 there are several areas of concern with the budget planning report for Competition Bikes, Inc. The sales projection in units for year 9 is set at 3520. However, only 3423 bikes were sold. The sales budget has projected, for year 9, revenue from sale of $5,247,450 million that is showing a 3.2 % growth in sales. However, in year 8, Competition Bikes, Inc. is coming off a year where the company lost 15 % in sales, the economy just turn bad, and the sponsorships have pulled some of their funding for professional riders to buy bikes. In comparison to the previous years, Competition Bikes, Inc.’s sales will continue to decline. A 3.2% increase in sales is not an accurate representation of Competition Bikes, Inc.’s future sales. Other expenses of concern are advertising, administrative salaries, and executive compensation. Advertising is a concern as the company budgeted 2% of gross profit for previous years 6, 7, 8 and is budgeting 2% for year 9. The company should increase advertising to increase profits by bringing in more buyers. The company had just turned bad and therefore it should increase its advertising budget more than the previous years as it will need to increase its sales. The executive compensation should be decreased by not bonusing executives until the company’s sales increase. For year 7, executive compensation had increased by $50,000 dollars; which made sense given that in year 7, there was an increase in sales by 33%. On year 9, it is not financially sound to continue with the same executive compensation when 3.2% is optimistic. On year 7, other general administration expenses were budgeted at $158,000. In year 8, general administration expenses were budgeted $170,000. For year 9, other general administration expenses were budgeted at $170,000. This is an area of concern as the total budgeted for general administration expenses did not decrease given that fewer bikes that were ordered. Other utilities and services expense is a concern because this is a new expense. Other utilities and services expenses were not budgeted on year 6, 7, and 8. These costs just popped up on year 9 as a new projected expense. This is a concern and the company should investigate if this expense can be eliminated or reduced given that these costs are new. Evaluation of Flexible Budget and Variances

According to the website Accounting Coach a flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than static budget, which remains at one amount regardless of the volume of activity. The difference between the planning budget and the flexible budget is what is called an activity variance. Accounting Coach (2014). A. 2. a. Corrective actions for areas of concern based on a variance analysis The only reason we have the net sales variance and the total activity cost variance because of the difference in activity level. The company sold 87 fewer bikes and therefore there is a net sale variance of 130, 065 (unfavorable) and a total variable cost (favorable) of 98349 because the 87 were not made. The revenue and spending variance is calculated by the difference between the flexible budget and the actual output. The new flexible budget is the new planning budget. The actual output is what the company ended up receiving and spending in cost. The difference between the flexible budget and the actual output is what is called the revenue spending variances. Competition Bikes Inc.’s net sales had an unfavorable variance of 20,538 as the company actually had net sales of only $5,117,385 and the company had budgeted 5,247,450 for year 9. That is a 3.2 % increase/growth. The net sale actual output has an unfavorable revenue variance of...

References: Accounting Coach. (2014). What is a Flexible Budgets? Retrieved, March 1, 2015 from http://www.accountingcoach.com/blog/flexible-budget
Management by exception. (2014). In Wikipedia, The Free Encyclopedia. Retrieved, February 23, 2015, from http://en.wikipedia.org/w/index.php?title=Management_by_exception&oldid=632717512
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