Benefits for Baby Cakes
Baby Cakes is a leading bakery famous for its cupcakes. It is located in New York City. The company is planning to expand its business by opening its second branch in Los Angeles. The new branch will require a considerable amount of investment and operational expenditure. Therefore, the company will need a master budget to plan its capital and operational expenditures. The discussion describes the sales budget part of the master budget.
Baby Cakes will need a budget to analyze the performance of the company and to become efficient in managing its expenditures by controlling waste overheads. It is only through budgeting and planning that the company would be able to control its expenses related to each process and eventually increases its revenue. If Baby Cakes does not prepare a budget, then there will be no control over expenditures and the gross margin will subsequently decrease (Thukaram, 2007). Moreover, the product of Baby Cakes is highly perishable. Therefore, the absence of a sales budget or production budget will result in overproduction that will create excessive inventory and overheads. Conversely, underproduction may also occur that would result in the loss of sales (Drury, 2008). The use of a budget would assist Baby Cakes to manage its production and sales effectively, and it can plan ahead of different sales periods based on different factors that affect its business. The preparation of budget can help the company to control its business activities to reduce the production costs.
Sales Budget for Cupcakes
Table 1. Sales budget for the LA store.
Sales Budget for Three New Products
Table 2. Sales budget for three new products.
Baby Cakes has decided to launch three new products for the holiday season in the fourth quarter. The products are pancakes, vanilla cakes, and Santa Claus cakes. It is expected that the initial demand for these cakes will be 450 units, 500 units, and 300 units respectively. The price of pancakes, vanilla cakes, and Santa Claus cakes will be $2.50, $2.00, and $4.00 respectively. The company has determined that the demand for each product will increase by 50 units every month as the company would increase expenditure on marketing and advertisement, and the demand will reach its maximum level in the Christmas season. The company expects to generate additional revenue of $345,000 from the sale of these new products.
Benefits of Using Flexible Budget
Static budgets remain constant during the production period, and no changes are made to them based on the level of activity (Lalli, 2011). Baby Cakes uses static budgets to analyze its revenue. However, static budgets are not an effective tool to evaluate the performance of cost centers. The reason is that managers reduce their spending on business operations to meet the budget requirements. They must understand that if sales decline then it would also decrease expenses. On the other hand, if the revenue of Baby Cakes increases, the company’s expenditure would also increase.
Since static budget figures are fixed the difference between actual figures and static budgeted figures is quite large, and it results in an unfavorable variance. Changes in budgeted sales and expenditures are necessary to reduce the variance (Harrison & Petty, 2002). However, changes are not considered in static budgets, and the resulting variances are normally higher than flexible budgets. A flexible budget can assist the manger in solving the problem. It considers changes in the level of activity during the sales period (Oliver, 2000). The expenses to be incurred by LA branch could vary from the planned static budget. Therefore, a flexible budget will be more effective in this case as it will provide a real-time view of the company’s revenue and expenditures.
Possible Reasons of Overspending
The expenditure of Baby Cakes is significantly higher than its budget that has created a financial challenge for the company. The analysis of overspending by the company reveals that one of the possible reasons could be the selection of the wrong vendor for purchasing raw materials. The company does not obtain quotations from multiple vendors, and it relies on purchases from a single vendor that might be supplying items at higher rates. The manager of Baby Cakes should request quotations from other vendors and reduce the cost of raw materials.
Another reason for the unfavorable variance could be indirect costs that do not change with the level of activity (Whittington & Delaney, 2007). The company could be recording high depreciation expense due to its old machinery. The problem could be overcome by purchasing new and advanced machinery that will not only reduce costs but will also improve the quality of the product.
Finally, the company should hire skilled laborers rather than unskilled laborers. Although skilled employees demand high wages, their efficiency is significantly more than unskilled employees that would eventually reduce the cost of labor and improve the quality of the product. Hence, Baby Cakes can overcome its problems of high budget variance by performing these steps (Oliver, 2000).
References
Drury, C. (2008). Management and cost accounting. Andover, MA: Cengage Learning EMEA.
Harrison, D., & Petty, D. (2002). Systems for planning and control in manufacturing. London, U.K.: Butterworth-Heinemann.
Lalli, W. (2011). Handbook of budgeting. New Jersey, NY: John Wiley & Sons.
Oliver, L. (2000). The cost management toolbox: A manager’s guide to controlling costs and boosting profits. New York, NY: AMACOM.
Thukaram, R. (2007). Management accounting. New Delhi, India: New Age International.
Whittington, R., & Delaney, P. (2007). Wiley CPA exam review 2008: Business environment and concepts. New Jersey, NY: John Wiley & Sons.