Importance of budgeting in business
Instructions:-
Write a three to four (3-4) page paper in which you:
• Briefly discuss the ways a good budget will benefit the owner of babycakes versus no budget. Use the specific company and product details in your explanation.
• Prepare a Sales Budget for the LA store for 4th quarter of 2016 for babycakes. Present the number of units, sales price, and total sales for each month; October, November, and December, and a total for the quarter. Use one half of the Valentine’s Day (one day) of sales as the basis for a normal day of one product. This information is in the babycakes video provided in Week 8.
• Create three (3) new products, one for each of the three (3) holiday seasons in the fourth quarter. Estimate the sales units, sales price, and total sales for each month. Describe the assumptions used to make these estimates. Include an overview of the budget in the report, presenting the actual budget as an appendix with all data and calculations.
• The owner of babycakes is interested in preparing a flexible budget rather than the static budget she currently uses. She does not understand why when sales increase her static budget often shows an unfavorable variance. Explain how a flexible budget will overcome this problem. Use the details of your newly prepared budget for the 4th quarter of 2016 to address her concern.
• Imagine that babycakes is facing a financial challenge that is causing the actual amounts of money that it spends to become signifcantly more than its budgeted amounts. Include a discussion of your own unique cause of the overspending. Explain the corrective actions needed to correct the challenge .
• Integrate relevant information from at least three (3) quality academic resources in this assignment. Note: Wikipedia and other Websites do not quality as academic resources. Do not use the textbook.
Your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required page length.
• An abstract is not required.
The specific course learning outcomes associated with this assignment are:
• Evaluate management control systems and examine their relationship with accounting and planning, including feedback and non-financial performance measurements.
• Evaluate decision making tools for capital investments, budgeting, and budgeting controls.
• Analyze financial accounting tools and techniques that convert financial accounting data into information for decision making.
• Use technology and information resources to research issues in financial accounting for managers.
• Write clearly and concisely about financial accounting using proper writing mechanics
Solution
Importance of budgeting in business
In finance theory, budgeting is defined as the art of expressing, in financial terms, managerial plans for a specific period of time. Organizations prepare budgets for a number of reasons;
Budgets help organizations to determine how much resources are available and how those resources should be utilized for maximum profitability. In the case of baby cakes, a good budget would help the management to enhance efficiency by reducing wastage in the production process. Lack of proper budgeting would lead to excess production with the associated subsequent wastage, or underproduction leading to shortages which is not good for business.
Budgeting will help babycakes to project her future financial performance. For instance, the budget for the fourth quarter of 2016 will help babycakes to project how much revenue will be available to the business, the associated costs and ultimately the profitability for the business. This should inform the management of the business on whether there is need for additional resources to sustain the projected business levels
As explained by the manager, a budget will assist in instilling a culture of responsibility in spending. It helps organizations become more conscious of their financial decisions, reduces unnecessary expenditure and ultimately improves efficiency and financial performance of the organization.
As a projection of future performance, a budget will act as an early warning system, informing the management of any projected future shortfalls so that management can take the necessary steps to plug any such deficits. For instance, if the projected budget indicates that there is a likely shortfall in production during Christmas period for instance, the management will work towards addressing such shortfalls well in advance.
Well drawn budgets are known to act as motivation to employees in the performance of their work. Setting reasonable targets to employees is a key factor in employee motivation as it makes them feel that their work is appreciated across the organization.
Sales budget for the fourth quarter 2016
| 2016 | Number of days | Units per day | Total number of units | Sales price $ | Total revenue for the month |
| Valentine | 1500 | ||||
| October | 31 | 750 | 23,250 | 3.5 | 81,375 |
| – | |||||
| November | 30 | 750 | 22,500 | 3.5 | 78,750 |
| – | |||||
| December | 31 | 750 | 23,250 | 3.5 | 81,375 |
| Grand total | 69,000 | 241,500 |
Note:
Sales price is assumed to be constant @$3.5
Valentine’s Day sales is assumed to be 1500 units
3 new product sales budget for the fourth quarter 2016
In creating the 3 new product budgets, the following assumptions were made;
- For the three products, there was a sustained 10 percent increase in each month. For instance, for the first product, the quantities increased from 1,000 in October, 1100 in November and 1210 in December.
- The prices for the 3 new products were different (first product $3.5, second product $2.5 and third product $4.5). The prices for the products however, remained constant during the period.
- It was assumed that business was conducted in all the days of the month during the period
Report
The table below (Appendix 1), shows that the company made total revenue of $713,000 during the fourth quarter of 2016 from the 3 products with the first product raking in $322,000, second product $184,000 and finally $207,000 for the third product.
- Flexible budget
One of the shortcomings of a fixed/static budget is that it doesn’t take into consideration changes in activity levels. This means that even with changes in sales or production levels, a fixed budget may not reflect the associated changes in, say, production costs, thereby indicating an unfavorable position. A flexible budget addresses this challenge by capturing all changes in the activity levels into the budget. It does this by separating both fixed and variable costs.
Fixed costs such as rent expenses may remain constant for a period but variable costs such as operating expenses like marketing, distribution costs, water and electricity costs are often tied to the activity levels. Varying these costs in the budget in line with the activity levels ensures that a flexible budget reflects the actual business levels.
If baby cake expects a particularly large order during a holiday season for instance, the expense budget for the same period must be based on the anticipated number of units that are expected to be produced. If a holiday in October for instance is expected to increase the daily sales from the usual 1000 to, say 1500, and the variable cost of producing one unit is $1.5, the production budget increases by 500 units per day, multiplied by 31 days and then further multiplied by $1.5 to arrive at the incremental budget for the period.
Causes of overspending and corrective measures
One of the reasons why babycakes could be spending more that is budgeted is probably because the budgeted amounts may not reflect the actual business projections and therefore the budget overflows arise.
Another reason for the overspending could be that the business is experiencing unnecessary wastages in the production process, with some supplies getting spoilt and thus increasing the costs.
Lack of discipline in the procurement process, where purchases are made without due consideration for the existing budgetary controls could be a major reason why the company is facing these challenges.
In order to correct the problems, the budgeting process should try as much as is practicable to project the actual activity levels so as to avoid large variances leading to the overspending. Reducing wastages in the production process means that only what is needed for production is just what is procured. Lastly, ensuring that all procurement processes reflect the existing budgetary allocations would go a long way in reducing the budgetary problems currently experienced.
Appendix 1
| ITEM 1 | ITEM 2 | ITEM 3 | ||||||||||||
| 2016 | No. of Days | Units per day | Total No. of units | Sales price $ | Total revenue for the month | Units per day | Total no. of units | Sales price $ | Total revenue for the month | Units per day | Total No. of units | Sales price $ | Total revenue for the month | Total for the 3 items |
| Oct | 31 | 1000 | 31,000 | 3.5 | 108,500 | 800 | 24,800 | 2.5 | 62,000 | 500 | 15,500 | 4.5 | 69,750 | 240,250 |
| – | – | – | – | – | – | |||||||||
| Nov | 30 | 1000 | 30,000 | 3.5 | 105,000 | 800 | 24,000 | 2.5 | 60,000 | 500 | 15,000 | 4.5 | 67,500 | 232,500 |
| – | – | – | – | – | – | |||||||||
| Dec | 31 | 1000 | 31,000 | 3.5 | 108,500 | 800 | 24,800 | 2.5 | 62,000 | 500 | 15,500 | 4.5 | 69,750 | 240,250 |
| Total | 92,000 | 322,000 | 73,600 | 184,000 | 46,000 | 207,000 | 713,000 |