ACC 556 Week 10 Assignment 2 Budget Planning and Control

BUDGET PLANNING AND CONTROL

Reality Budget

For any business to succeed there is need to be a budget that can oversee the entire activities of the company or the business. Having a reality budget, the business sis able to know the forecasted future sells and the same time the finance needed for any manufacturing processes. Babycakes need to have such a budget especially keep in mind that sales in bakery industry fluctuate from time to time. The budget will be helpful in the provision of insights in the financial management and on the other hand reduce cases where the business might fall into a financial crisis (Schlipfinger, 2010, p. 18). A business like Babycakes might fall into the temptation of overspending in a bid to keep up with the competition from other firms among other reasons and a budget will help the company void such scenarios. It is very challenging to have control over expenses control and tracking performance as well. Some of the other challenges include the fact that overproduction, inventory accumulation and underproduction as well as stock issues.

Based on the video, a conclusion can be made that Babycakes made good use of their budget on their store based in New York. This is evident looking at how effective they were able to manage the sales of the red velvet cakes on Valentine’s Day. In the event where they would have had failed in budgeting effectively, it is almost certain that the store based in Los Angeles would not have been in a position to understand the high demand, and might have run into stock shortage on the said Valentine’s Day. This means that they would have reacted by overproduction which could have ended up as not being a very good idea (Wiley, 2011). For any business to succeed there is importance in prioritizing on having a good and effective realistic budget.

Quarterly Sales

	Number of days in a month	Units sold*	Selling price per unit	Total sales
October	30	750	$3.50	$78,750.00
November	30	750	$3.50	$78,750.00
December	30	750	$3.50	$78,750.00
Total				$236,250.00

* Half of Valentine’s Day demand = 1,500/2 = 750 units sales.

Holiday Season

October, November and December has three holiday seasons and Babycakes will introduce new product in each season.

October - Strawberry cream cake.

November –Blueberry muffins.

December – Irish chocolate cake.

            The Appendix contains a more detailed calculation of the budget. The main assumption made is the fact that on the month of October, the total number of sales will be equal to the number of sales made on Valentine’s Day. The other assumption is that there will be no increase in the product cost rather it will be the same. The assumption is also the same for the month of November but in the month of December, the assumption made is that the sales will be higher. The cost for very product will be at $3.5

Flexible Budget vs. Static Budget

            When talking about a static budget, the first thing to keep in mind is that it is not flexible and does not change whether in the quantity of the sales made in the bakery. The static budget remains the same despite cases where there might be an increase or a reduction in the quantity sold. This is not the same as with the case of a flexible budget. The changes can take place depending on the quantity sold and other factors. When Babycakes are selling more, it is obvious that there will be rise in the cost of production and this will be reflected in the static budget. The static budgets come as a result of comparison of the actual cost that has been incurred because of the sales unit to the budget cost. This can be determined by the use of unit budgeted unit sales.

            The budget sales as per static budget in this case are $10,000 and the cost is $20,000 but coming to the actual units sold we get the number as 20,000. This will result to $24,000. It is unavoidable expenses and in this case, it will result in $4000 of expenses that are unfavorable. But then it is hard to justify the actual expenses incurred in the business. Such problems can be solved using a flexible budget because depending on the cost, there is that space where it can be adjusted. Because the company is using a static budget, it is limited to the production of 750 units each day for a period of 30 days assuming that there will be no higher sales in the enter month. It is however important to note that the bakery will definitely sell more during the holiday season. This means that the production cost will be higher. It is therefore important for the business to consider having a flexible budget that will take care of the extra expenses the static budget might fail to address (Drury, 2012, p. 480).

Overspending

Overspending is something that businesses in most cases find it very hard to contain. For this company most of these factors are controlled by bakery;

• Excess of inventory wastage.
• Over production.
• New employees recruited who perform more mistakes.

Cause	Solution
Excess of inventory wastage.	Effective inventory management.
Over production.	Proper production planning.
New employees recruited who perform more mistakes.	Providing training and deploying experienced employee for training and supervision.

Every problem has a solution to it, and the company needs to come up with a very good solution if it wants to continue trading effectively. Babycakes should prepare a master budget and operation budget. There should be a clear understanding about the requirement of inventory and the demand for the product. An effective inventory management policy is essential to curtail the cost and reduce the wastage (Muller, 2011, p. 49). Similarly, employees should be given the training to reduce the wastage.

Appendix

	Ordinary sales (1)	Units sold (2)	Selling price per unit (3)	Total sales (1*2*3)
October	29	750	$3.50	$76,125.00
November	29	750	$3.50	$76,125.00
December	20	750	$3.50	$52,500.00
Total(I)				$204,750.00
	Holiday (1)	Units sold (2)	Selling price per unit(3)	Total sales (1*2*3)
October	1	1500	$3.50	$5,250.00
November	1	1500	$3.50	$5,250.00
December	10	1500	$3.50	$52,500.00
Total(II)				$63,000.00
4th quarter sales projection(I + II)				$267,750.00

 

 

References

Drury, C. (2012). Cost and Management Accounting: An Introduction (6th ed.). London: Thomson Learning.

Muller, M. (2011). Essentials of inventory management (2nd ed.). New York, NY: AMACOM.

Schlipfinger, T. (2010). Sound Recording in Low Budget Productions: The Importance of Sound. GRIN Publishing.

Wiley. (2011, September 28). Budgetary Planning featuring Babycakes [Video file]. Retrieved from https://www.youtube.com/watch?v=frh3I2rVDzs