Budgeting Essay Essay

A1 Prep atomic number 18 a synopsis report in which you do the following 1.Discuss specific cipherary tips reproof veneration in the compute planning (Spreadsheet Tab Task 2_Budgets_and_Proformas). rivalry Bikes has prep argond a reckon for course of study nine of operations. In retrospecting the budget presented several technical areas of use up have been noned. For ease of review, budgetary publishs that rustle concerns are presented in a bullet format. The kickoff issue of concern is in the contract worldlys budget, it appears to be missing the total direct heartys budget. thither is a raw materials budget and a components budget present, but the cardinal are never combined to complete the direct materials budget. On the pop out this omission does not appear to be particularly egregious. However, omitting a total for direct materials behind confuse the evaluation of how much money is liberation just to materials.The second issue of concern can be erect in the Manufacturing Overhead Budget. The budget lists attribute control to a lower place social unit Level Costs, and, quality control is a Batch Level Cost. whole Level Costs are apostrophize relating to activities performed on each unit. These be are incurred in a more or less elongated pattern which varies directly with the number of units produced. Examples accept the electricity use to swan output signal simple machines and the indirect material much(prenominal)(prenominal) as nuts and bolts used in intersection.oBatch Level Costs are monetary values related to achievement batches. They change in a more or less unidimensional way, varying with the number of batches run. Batch aim monetary values include costs such as machine set up costs, purchasing and material handling costs, and of course quality control and inspection.The third area of concern has to do with utility costs. Included in the manufacturing operating cost budget under(a) facility in universal op erations train costs $55,747 is budgeted for utilities and services. This foresee appears again on the budgeted schedule of cost of goods manufactured and sold under manufacturing bash and is again listed as utilities and services. It is unclear what this costs is for since it appears on the facilities and general operation aim set downs simply as utilities and is $150,000. Thereis the possibility that these are two different costs, however this question spends into the fourth area of concern. excessively on the facility and general operation level get downs is listed and expense for different utility services for $54,000. This additional budgeted expense serves to seriously confound the review of the budget and the determination of budgeted utility expenses.As troubling as entirely of the above concerns are, the final and most troubling technical aspect of the form 9 budget is the total of operating expenses. When total selling expense is added to total general admin e xpenses, the total is $54,000 short of the total operating expenses listed on the budget. The most credibly explanation for this diversion in sums is the exclusion of $54,000 for new(prenominal) utility services from the budgeted income disceptation. Examination of previous stratums income statements did not result in unbalanced totals only the course of instruction 9 budgeted income statement had this problem. In addition to the technical issues, the year nine budget withal has several budgetary stops that raise concern as well. The first issue of concern is the Other General and Administrative Expenses. oThese are expenditures related to the casual operations of rival Bikes. These expenses are operations expenses rather than expenses which can be directly related to the production of goods or services. General and administrative expenses broadly include rent, utilities, insurance, and managerial salaries. Since insurance is not specifically mentioned in the budget, it is likely captured by this expense as well as any other expenses such as office supplies, computer equipment for office personnel, and cleaning products for the plunder room.oHistorically this budget item has change magnitude from year to year. In year vi this item was $120,500, in year seven was $158,000, and in year eight-spot it was $170,000. The increase from year hexad to year seven was 31%, and part the 8% increase from year seven to year eight is humiliated by comparison, thither is no reason to believe that this budgetary expense would remain static from year eight to year nine. Even a minor increase in this figure would be plausible, but cryptograph change is highly unlikely.The second issue of concern is Administrative Salaries.oAt first glance this budget item doesnt seem to be of concern, however review of years six, seven and eight show that this give be the third year in a row with no budgeted raises for the administrative staff. In year six $140,000 was budgete d for this item, in year seven it was increased to $170,000, where it remains it remains. Management has made a point of noting the retention of superior production staff, so it stands to reason that competition bikes management would want to wait high-level administrative staff as well. High-level cannot be retained without compensation.The third area of concern is Cash and Cash Equivalents..oCash and Cash Equivalents is an summation that includes currency (coins and bank notes) held by a business (in hand and in bank accounts) and capital equivalents which are assets that are readily convertible into cash, such as money market-0 holdings, short-term government bonds-1 or Treasury bills-2, saleable securities-3 and commercial paper-4. (Cash and cash equivalents are the most unstable assets-5.) Cash equivalents are distinguished from other investments through their short-term existence they mature in spite of appearance 3 months whereas short-term investments are 12 months o r less, and long-term investments are any investments that mature in excess of 12 months.oHaving a high cash ratio (ratio of cash and cash equivalents to current liabilities) suggests that the business is liquid ( it should not have any difficulty in paying truly short-term liabilities). oThe concerning aspect of this budget item is its growth. In year six this item was $261,000. In year seven it fell to just $92,376. In year eight it jumped to $414,038, and in year nine, it is projected to be $523,492. Having cash on hand is a good thing, but holding too much cash at the expense of other investments is not such a good thing. Having this much cash sitting around, not works for Competition Bikes is irresponsible.The fourth area of concern is Utilities Expense.oUtilities expense reports the cost of the electricity, heat, sewer, and body of water used during the period. oThis budget item has grown year-over-year since year six, the first year of data provided. In year six this expen se was $130,000. In year seven and grew to $135,000, and in yeareight to $150,000. oGiven the yearly increase in this expense. It is not reasonable to budget the same amount in year nine as in year eight. At least a nominal increase in this budget item is mandated by the historic increase.A2a Evaluate the waxy budget and its stochastic inconsistentsA waxy budget is a budget that can be prepared for any level of operation by flexing to reflect an updated action level. It adjusts the static budget for the actual level of output. The activity that Competition Bikes uses to modify the ductile budget is units sold. Difference surrounded by the budgeted amount of expense, or taxation is known as a budget air division. The budget version is un approbative when the actual revenue is lower than the budgeted item or when the actual expense is higher than the budgeted item. In essence, the flexible budget is equal to what would have been budgeted had the actual output been known. T here are two eccentrics of disagreements considered on Competition Bikes ductile Budget Performance Report. The first type of division is an activity discrepancy, which is the difference betwixt a revenue or cost item static planning budget, and the same item in the flexible budget due to the level of activity assumed in the planning budget and the actual activity level.The second type of variance is either a revenue or a spending variance, which describes the difference mingled with how much the revenue or spending on a specific budget item should have been given the actual activity level and the actual revenue or spending for the period. Competition Bikes Flexible Budget Performance Report for year 9 shows that 3510 bikes were plan to be sold, but the actual unit sold was only 3423. Below I will list the activity variance resulting between each budgeted items plans. Revenue or expense and extended cost allowance on the flexible budget. Next, I will highlight the difference between the flexible budget and the actual output.Net gross revenueNet sales was budgeted to be $5,247,450, at the expected activity level, whereas the flexible budget predicted cyberspace sales would equal $5,117,385. Actual net sales were $5,096,847. This is an un well-to-do revenue variance of $20,538 resulting most likely from a higher than expected level ofnspoilage and greater than expected expenses. Management should investigate the production process to suffer that the raw materials consumption computer sciences remain accurate. postulate materialsDirect materials were budgeted to cost $2,292,028. The flexible budget calculated that the actual level of output direct materials would cost $2,235,219. The actual cost of direct materials was $2,035,219, which is a favorable variance of $200,000 and do most likely to purchasing obtaining materials at a lower than evaluate cost.The Direct Materials power air division was $100,000 and unfavourable. oAn unfavorable Direct Mate rials Efficiency sectionalisation indicates that more materials were used than needed or budgeted for the job. oFavorable direct materials strength variance results when fewer materials are used than planned.oThere are several possible reasons for this varianceA miscalculation in the accounting for materials may result in a one-time or temporarily unfavorable direct material talent variance. This could also be a systemic issue wherein Management has failed to include scrap or waste required for production into the calculations. oAnother possibility is small materials. Lower-quality materials may require the use of more units of a particular material, resulting in an unfavorable direct materials efficiency variance. oWorkers and equipment can also factor into a Direct Materials Efficiency Variance. Spoilage and damage to materials caused by workers, insufficiently deft workers on the production line, and/ or poor supervision can lead to an unfavorable direct material efficiency variance.Additionally, if equipment breaks down or there is a glitch in the operation of a vital machine that results in spoilage or destroyed materials an unfavorable direct material efficiency variance may result. The Direct Materials Price Variance was -$300,000 which indicates that direct material was purchased for a lesser amount than the exemplar scathe and is thereof favorable. oA favorable direct material price variance is not constantly good, however. It is possible that the purchasing department may have purchased lower quality raw materials to generate a favorable direct material price variance. Such a favorablematerial price variance will be offset by an unfavorable direct material measure variance due to wastage of low quality direct material.In Competition Bikes Case, given the Favorable Price Variance and Unfavorable Efficiency Variance the likely cause of this is the purchase of lower quality materials that resulted in greater than planned spoilage. Management sh ould adopt standardized supply chain practices so as to control the quality of materials used in production. This will flinch the amount of spoilage and wasted materials. Additional actions that management may way out to more accurately address the look of net salesDirect jobDirect labor was budgeted at $1,053,000. It is calculated $1,026,900 on the flexible budget. The actual cost for direct labor was $1,126,900. This is an unfavorable cost variance of $100,000 and most likely due to a higher than expected ripple of less experienced production workers who required more time than the standard to complete the manufacturing process. The Direct Labor Price Variance was $150,000 and unfavorable. oAn unfavorable variance means that the cost of labor was more expensive than anticipated, while a favorable variance indicates that the cost of labor was less expensive than planned. oNewly hired workers will likely get paid less which creates a favorable labor rate variance. oHigher skil led workers who are paid more can create an unfavorable labor rate variance.The Direct Labor Efficiency Variance was -$50,000 and favorable. oThis variance measures the productivity of labor time. oThe possible causes of an unfavorable efficiency variance include poorly trained workers, poor quality materials, untimely equipment, poor supervision, or insufficient demand for companys products. oA favorable labor efficiency variance indicates kick downstairs productivity of direct labor direct labor during the period. Possible causes of the favorable labor efficiency variance include the hiring of more high skilled labor, training of the workforce, and the use of better quality raw materials. The easiest way for Competition Bikes to more accurately forecast direct labor cost is to maintain a seasoned production force. Additionally, providing production staff with additional training may decrease production times.Manufacturingoverhead-variable uncertain manufacturing overhead was pre dicted cost $331,798. The flexible budget calculated this to be $323,574 at this activity level. Actual variable manufacturing overhead was $350,000, which is an unfavorable cost variance of $26,426 and which was likely due to greater than expected facilities and machinery maintenance. The variable manufacturing overhead price variance was $24,000 and unfavorable. oThe companys actual variable manufacturing overhead costs were more than the amount expected for the actual machine hours used. The variable manufacturing overhead efficiency variance was $2426 and also unfavorable. oThis number illustrates the difference between what was spent and what was expected to be spent in terms of the manufacturing cost per unit. It may be necessary for management to increase their estimations for facility and machinery repair, maintenance.Variable selling expensesThe static budget expected variable selling expenses to be $157,424, whereas the flexible budget calculated to be $153,522 at the lowe r level of activity. The actual cost of variable selling expenses was equal to the flexible budgets calculation of $153,522.Advertising expensesAdvertising expenses were calculated to be $28,412 on the static budget. The flexible budget predicted this cost to be $27,708. The actual cost of advertize expenses was $31,462, which is an unfavorable cost variance of $3754. This is most likely the result of an increase in fees for the production of advertising materials. The advertising expense price variance was $5000 and unfavorable. The advertising expense efficiency variance is $-1264 and favorable. Advertising expenses can be wily to curtail, but one way to keep these expenses down, and is close to the budgeted amount as possible is to require detailed weekly expense reports be completed. This metric function would allow management to more closely monitor expenses and hold purchasers responsible for their purchases.