Budgetary Items & Concerns, Flexible Budget & Its Variance - Competitive Bikes Inc - Case Study Example

Table of Contents Introduction 2 Budgets 2 Budgetary Items & Concerns 3 Flexible Budget & its Variance 5 Corrective Actions based on Variance Analysis 7 Management by Exception and its application 8 Conclusion 8 References 10 Introduction Organizations which are able to identify their future needs and develop strategies will increase their chances of being successful. This will require careful planning and developing budgets so that the future needs and requirements can be identified and the resources which will help to satisfy the future needs can be gathered. This requires understanding both the internal and external environment and based on it needs to develop future strategies. This report focuses on the future budgetary requirements of Competition Bikes Inc who has developed a budget for the future based on different assumptions and factors. The overall indication will help to find out the methods which will be employed to fill the necessary gaps and ensure smoothness in production. This report will dwell on the different budgetary items and the different factors which have been integrated while planning for it. This will be followed by finding out the variance and determining the corrective actions which needs to be undertaken for the future. This will help to reduce the variances and multiply the effectiveness in planning for the future. The report will then use the concept of management by exception and its applicability to the field of budgets and variance so that better strategies for the future resource requirements can be ascertained. The overall aspect will thereby help to improve productivity and reduce the chances of misuse of funds and increase the chances of being successful over a longer period of time. Budgets Budget is a detailed plan which highlights the manner in which different resources will be acquired and used over a period of time which is clearly indicated. A budget is further prepared in quantitative terms and helps the management and the organization to prepare for the required resources so that the different resources which has been identified can be acquired (Dropkin and LaTouche, 2008). Budgets hold an important aspect in the overall planning process as it determines the future strategies and provides the working force with a direction through which the resources can be planned. Competition Bikes based on the different dimensions and expectations has developed a budget and identified the different needs and requirements for the future based on which the resources have been planned and allocated. It is important that the variances are limited as it could result in either shortage or excess of resources which is fatal from the financial and operational viability of the organization. This is an aspect which Competition Bikes needs to consider and based on the future needs and requirements need to develop strategy for the long term growth and success of the business. Budgetary Items & Concerns The budget prepared by Competitive Bikes Inc highlights certain areas which are of concerns and requires focusing on areas through which better standards and strategies for the future can be identified. The budget prepared by Competitive Bikes Inc highlights areas of concerns which needs to be analyzed and understood and timely changes need to be made so that the variances reduces and the overall effectiveness of budgets is achieved. Looking at the sales budget it is seen that the expected sales in year 9 is 3510 units which has increased over the year where it was expected to sale 3400 units. This shows an expected growth rate of 3.23% but considering the fact that the economy is under recession as the expected sale is decreasing by 15% so the expected sales in year 9 is too high. This could lead towards unnecessary production and over estimation of the different cost. This could be fatal for the long term planning as it would make many resources to be wasted and would thereby multiply the risk for resource manager. The selling price has also be kept constant at $1495 which shows that the business hasn’t accounted for inflation and other increase in cost which is bound to happen. Increasing the cost will have an impact on the future sales as well and will impact the different cost function differently which would thereby have an impact on the overall demand for goods and services. A look at the schedule of cash receipts shows that the business expects to work on the fundamentals that cash will be converted within 15 days and the sales have been spread proportionately over the 12 months. There could be a situation where goods are sold at the end of the year and could make the accounts receivable section to go high up. This is an aspect which Competition Bikes hasn’t considered and needs to be analyzed and integrated in their planning process. Another concern for Competition Bikes is the inventory schedule where the closing and opening inventory hasn’t been identified. This will lead towards increased production as the production unit will procure the raw materials for 3510 units and produce the same. In case the organization has higher ending inventory the situation will persist in the next year leading towards increased risk of the bikes becoming obsolete and excessive money being parked in inventories (Paul, 2009). The raw materials shows that the procurement has been made for 3510 units which they expect to sale and in case the sales is not according to the expected one then it will lead to huge inventories and will make the valuable resources to be wasted and is an area which needs to be considered. Competition Bikes needs to ensure that the cash disbursement should match the cash received as it could lead towards a financial shortage. The business expects to pay $2324027 and collects $5227716 which is a good sign but also has to consider the other expenses like direct labour which is $1053000, manufacturing overhead which is $331798 and other overhead which makes it to $1260038. The management needs to match the inflows with the outflows as it could lead towards a financial shortage and could have an impact on the long term performance as the business will be engulfed in a cash shortage. The cash balance cycle shows that they will have a cash balance of $523492 if they are able to work according to the determined budgetary conditions but need to be careful and match the inflows with the cash outflows for each month and monitoring the same so that the business is able to gain the required effectiveness. Any mistakes in the calculation or expected expenses or income will lead towards long term problems and needs to be carefully analyzed by breaking the entire budget into smaller months so that better monitoring and working patterns can be developed. Flexible Budget & its Variance Organizations planning might not always fetch and work in the same direction as desired. There are situations where the actual result is different from the planned ones. This requires analyzing and finding out the reasons for changes and taking appropriate steps so that differences can be removed (Hope & Fraser, 2003). This helps to maximize the gains and ensures that the budget for the business improves and long term gains are achieved. A look at the revenues from sales shows an unfavourable variance highlighting a deficit of $130065 as planned. This will have an impact on the other resources which has been employed and used and requires appropriate steps to be implemented so that the variations are reduced and better planning can be achieved in the future (Sharon and Cheryl, 2007). Analyzing the different variables cost shows a mixture of both favourable and unfavourable results. It is seen that the overall variable cost shows a favourable balance of $64,212 which shows that the business has reduced and cut down the expenses than planned and has thereby helped to gain efficiency. A break up shows a favourable balance of $200,000 with regard to direct materials and has been due to the reduction in the goods produced. The other expenses like direct labour shows an unfavourable balance of $100000 which is a situation to look at as despite lower production the cost of labour has increased. Direct manufacturing overhead shows an unfavourable balance of $26,426, advertising expenses have an unfavourable balance of $3754 are areas which needs to be fixed. A breakdown of the fixed and general administrative expenses shows a favourable balance of $3,751 which shows reduction in indirect expenses. These have been contributed by a favourable balance of $2000 from executive compensation, utilities have a favourable balance of $1777 and research & development has a favourable balance of $2,397. This is aided by the unfavourable balance by salaries which are $1000, followed by other general and administrative expenses of $2000. These are areas which need to be fixed for better performance and standards. Analyzing the spending variance shows a price variance and an efficiency variance. It is identified that Competition Bikes Inc has a favourable balance with regard to price variance in direct materials which reduced to $300000 and is due to reduced production. This is followed by an unfavourable balance in direct labour of $150000, manufacturing overhead by $24000, and advertising by $5000. The efficiency variance on the other hand shows an unfavourable balance of $100000 for direct materials, favourable balance of $50000 for direct labour, manufacturing overhead has an unfavourable balance of $2426 highlighting areas which needs to be looked at. Developing and ensuring that the budgets are developed and based on real estimates will help to maximize the overall gains and ensure that the resources will be allocated correctly. The variance in the budget arises due to the following reasons Unplanned demand for the future where consideration to different factors like employment, growth rate, liquidity and market conditions is not considered Changes in the cost associated with different resources at the time when it is actually purchased while comparing it to the time flexible budget was prepared Overestimating the different incomes and underestimating the expenses based on improper and wrong forecasting Lack of skills in identifying the future needs of the business and planning and allocating the required resources based on it. Corrective Actions based on Variance Analysis The variance analysis requires Competition Bikes to work on areas and improve the budgetary requirements so that correct and appropriate forecast can be made. This will require working on the different areas and improving the overall budgets by working on different dimensions. Some of the corrective actions which Competition Bikes Inc needs to take based on the variance analysis Competition Bikes Inc needs to improve the process of forecasting sales as the unfavourable balance has resulted in over production. This has also resulted in the over estimation of resources which will be required and has thereby impacted the finance as unnecessary money had to be parked in different areas. Competition Bikes Inc has to aim towards reducing the direct labour cost as despite a reduction in the overall demand for products the direct cost for the product has risen (International dimension, 2005). This is on the backdrop that the company has been unable to take care and control over its cost and has resulted in over estimation of the expenses Competition Bikes needs to understand the future earning potential and the mechanism which will help them to finance the expenditure as the operating income has reduced which shows an unfavourable sign and will have an impact on the overall future potential of the business (International dimension, 2005). Competition Bikes Inc needs to include different dimensions and areas through which the overall future forecast for the future improves and the business is able to determine the mechanism through which overall productivity will improve. The mechanism will be aimed towards maximizing the gains and ensure better forecast for the future (International dimension, 2005). Management by Exception and its application Management by exception is a method which helps to examine the actual result with the operational results so that the issue can be brought to the attention of the management and appropriate steps can be taken to correct those (Atrill & McLaney, 2006). This will help Competition Bikes Inc as using the practice of management by exception will help them to find out areas which are of concern and will bring the same to the notice of the top management. This will provide an opportunity where changes and rectifications can be made. Management by exception will help Competition Bikes Inc to bring to the notice of the management the manner in which the sales have decreased as compared to the estimated demand. Further, despite the decrease in sales the overall direct cost of labour has increased and is an area which needs to be brought to the top management as it has impacted the bottom line. The process will also help to inform the management regarding the steps which needs to be taken through which better future forecast can be made and directions can be developed through which overall performance improves. The process will help to bring a change in the overall functioning of the business process and through which better decisions regarding the future will be taken. Conclusion The report analyzes the manner in which the budgets vary from the actual figures and the areas which needs to be stressed on. The analysis highlights the dimensions and areas which need to be worked on and highlight the different areas which will help to improve the performance. The overall analysis also highlights the different gaps which have to be filled and the mechanism which will improve their future forecasting. References Atrill, P. & McLaney, E. (2006). Accounting & Finance for non specialists, 3rd edition, Prentice Hall, Pearson Education Dropkin, M and LaTouche, B. (2008). The Budget-Building Book for Non-profi ts: A Step-by-Step Guide for Managers and Boards, San Francisco, Calif.: Jossey-Bass Publishing Hope, J. & Fraser, R. (2003). Who needs budget. Harvard Business Review, Product Number 306, Harvard Business School Publishing International dimension. (2005). Managing Human Resource: Productivity, Quality of Work Life & Profits. 7th edition, The McGraw Hill Companies Paul, C. (2009). Accounting for Managers: Interpreting Accounting Information for decision making. 3rd Edition, Prentice Hall Sharon, G. and Cheryl, D. (2007). Thinking Broadly: Financing Strategies for Youth Programs, Washington, D.C.: The Finance Project. Retrieved on Dec 10, 2013 from http://fi nanceproject.org/publications/Thinkingbroadly_PM.pdf Read More