Benefits of Budgeting Money
A budget is a financial plan for a defined period that allows one to estimate revenue and costs based on future objectives. It is considered that a budget helps a business remain on track financially while keeping costs and expenses at a predetermined minimum (Atrill & McLaney, 2017). Babycakes is a specialty bakery that is known for its vegan cupcakes. As the business expands to LA, much thought has to be devoted to deciding how to spend money rationally. The best way to organize financial resources avoiding waste and extra costs is to create a budget. It will allow the bakery owner, Erin McKenna, to track money spent on equipment and raw materials. Using a budget will help Erin judge the performance of the bakery and become more responsible with spending. In such a case, the possibility of overbaking or underbaking will be reduced, as Erin will have a better understanding of how many units need to be produced, both on ordinary days and holidays. For example, Erin can plan to bake more cupcakes on Valentine’s Day. Thus, budgeting money will help maintain accountability and allocate money where deemed appropriate.
Sales Budget for LA Babycakes
On Valentine’s Day, Erin plans to sell 1,500 red velvet cupcakes at $3.50 per cupcake. On a normal sales day, Erin sells half of 1,500 cupcakes (750 units) at the same price. Table 1 shows the budget for the fourth quarter of 2016 for the LA bakery. It is assumed that there are thirty days in each month. The total sales for each month are equal to $78,750, and the total sales for the fourth quarter are equal to $236,250.
Table 1. Fourth Quarter Sales for LA Babycakes.
Introducing Three New Products
Unlike the NY store, the LA Babycakes has never had to deal with the holiday season. Thus, when preparing the budget, Erin has to consider such holidays as Halloween, Thanksgiving Day, and Christmas. It is recommended that she also take into account some regional differences associated with these holidays. For the month of October (which includes Halloween), Erin can make cute bat cupcakes, which are allergy sensitive, totally black, and have a delicious chocolate taste. For the month of November (which includes Thanksgiving), Erin can make a gluten-free pumpkin pie. For the month of December (which includes Christmas), Erin can make peppermint reindeer cupcakes.
It is assumed that during the holiday season, people will buy more, so the number of units to be produced will increase. Apart from 750 red velvet cupcakes, additional numbers of three new products will be baked each month (see Appendix A for more information). 200 bat cupcakes will be produced each day during October and sold at $3.50. 250 gluten-free pumpkin pies will be produced each day during November and sold at $3.50. 300 peppermint reindeer cupcakes will be produced each day during December and sold at $3.50. It is expected that the introduction of new holiday-specific products will broaden Erin’s market, attract new customers, and boost sales.
Total sales of bat cupcakes are equal to $21,000, total sales of pumpkin pies are equal to $26,250, and total sales of peppermint reindeer cupcakes are equal to $31,500 (see Appendix A for more information). The adjusted budget that takes into account three new products is presented in Appendix B. It can be seen that total sales are equal to $315,00, which is almost 1.5 times greater than total sales without three new products.
Flexible Budget vs. Static Budget
Despite the palpable benefits of using a static budget over using no budget at all, it is worth mentioning that this type of financial planning does not take some important factors into consideration. The static budget on which Erin heavily relies in her financial decisions does not change with variations in activity levels. In other words, it does not show any expected differences in sales during the hot season and low season (Froeb, McCann, Shor, & Ward, 2015). Even though a static budget is useful for companies with predictable sales, for Erin’s bakery, whose operating results substantially depend on a season, a static budget may be viewed as a serious hindrance. In particular, the unfavorable variance is the direct cause of the use of a static budget that does not consider changes in consumer activity.
A flexible budget may overcome the problem of unwanted variance by considering industry trends, market research, and changes in price for supplies. It takes into account trends in the area in which a business operates more adequately (Hancock, Bazley, & Robinson, 2015). It is obvious that the budget figures cannot be the same for the NY bakery and the LA one due to changes in customer behavior. The budget presented in Appendix B reflects holidays in the fourth quarter of 2016 that are likely to affect consumer activity. Specifically, it is expected that people will buy more, which is why the number of units to be produced is increased. In order to attract more customers, three new products will be introduced for each holiday season. Such flexibility in a budget will allow for boosting sales and avoiding underperformance, which will lead to a loss in profit.
Overspending
One particular reason why the actual amount of money that the bakery spends is higher than the budgeted amount is that suppliers have raised their prices, but the products (cupcakes) did not increase in price. As a result, Babycakes produces the same number of units that are bought at the same price, yet the costs of these products are higher. To address this issue, the price per unit should be increased in accordance with the determined revenue per unit. However, it is not clear how the change in price will affect customer behavior. Another potential corrective action is to find a new supplier who sells at a lower price.
References
Atrill, P., & McLaney, E. J. (2017). Accounting and finance for non-specialists (10th ed.). Harlow, UK: Pearson Education.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2015). Managerial economics: A problem-solving approach (4th ed.). Boston, MA: Cengage Learning.
Hancock, P., Bazley, M. E., & Robinson, P. (2015). Contemporary accounting: A strategic approach for users (9th ed.). South Melbourne, Australia: Cengage Learning Australia.
Appendix A
Table A1. Assumptions.
Table A2. Holiday Sales Budget.
Appendix B
Final Sales Budget.