The company line items
The major line items that raise concern in the pro-forma budget are sales of 3510units at 1495, labor of 1,053,000, raw materials 2,324,027 and selling expenses. The targeted sales of year 9, it represents the revenue stream of the business and are very critical for the success and profit for the company.
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What CB budgeted?
The target has been set at 5,247,450.This has been derived from a target production and sale of 3510 units for the year.
The company could have understated the expected sales value thereby underestimating the expected revenue. It is important for any organization to set high and achievable targets in order to build a strong pace of work right from the start of the trading period. This will enable the company to make good profits and recover the losses.
The difference between year 9 budgeted sales and year 8 actual sales is only $ 164450 which is a relatively small increase in the net sales. It is recommended to target a value of 5,450, 000 followed by a marketing campaign to the target groups to drive these sales and achieve the targets. The year of comparison/ base year (2008) the company had under produced and thus an increase of 3.2 in the trend analysis is low as the company also reduced the actual selling price. This is justifiable as a the company is experiencing a decline in sales as a result of sponsors cutting their funding level to the riders but this problem is solved as the company is determined to increase the manufacture of more advanced CarbonLite bicycles which are most preferred in the market thus expected to increase the market share bicycles which is expected to increase the future production in the levels of sales. This product is new in the market and once it’s accepted by the clients the company will resume and increase the sales level as well as the company overall profit.
The budgeted cost of sales for the organization is $ 3,826,828.
The cost of sales is significantly higher than the previous year’s value of $3,711,600.The difference between these two figures is 115 228 $. It is not very clear where this value has been derived but it seems a culmination of increased cost of each operation. It is always important for the organization to identify ways of cost cutting that would help it in reducing the cost of operation and maximizing the profits. The organization should focus on various innovation measures such as seeking to develop products using cheaper materials available without having to compromise quality. Streamlining the efficiency of production is also critical to cost cutting in the company such as ensuring the procurement process is controlled and regularly audited to avoid misrepresentation of the figures. On the other hand if the new product is well received in the market the cost of sales can increase as a result of increase in the level of production. The purchasing department needs to check on the cost of raw materials as it leads to the increase in the level of cost of sales. A reduction of sales cost results to a reduction of net profit and this must be closely watched as if the company reduces the level of production the sales cost should also reduce unless in the production of the new product as in the case with the company but immediately the product peaks in the market the lost profit should be realized.
General Operating expenses
These are the expenditure used up in the running of the company. They include the selling, general and administrative expenses.
The budgeted figure for competition bikes limited is 1,340,038 $.
The base year 8 actual operating expense is $1,273,867.Therefore there has been a budgeted increases in the operating expenses of $ 66,171. There is a huge shift in these expenses and can reduce the profits significantly. It is important for the management to keep track of the daily expenditure and look for ways of managing these expenses in a profitable way. The company may also consider restructuring its distribution channel such as undertaking a onetime purchase of company truck in order to cut down on the distribution expenses by subsidizing on the hired transport. By doing this, saving is achieved in that the cost is only incurred during transportation. Distribution related costs are eliminated such as distribution network support charges, thereby reducing the operating expenses and increasing the operating income. The increase in the level of advertising expense is justifiable as the company is producing a more advanced type of bicycle but this is only supposed to affect the company for one year only i.e. from 27428 to 28412 in the year 2009 after the company’s new product is accepted this should go hand in hand with the level of production.
This is performance measurement tool. It compares the original budget with the actual results. Its variance measures any difference between line item in flexible budget from that in the actual results. It enables the managing staff to calculate the variance between the actual and the budgeted amount. It is mainly used in variable cost analysis, performance measurement and budgeting efficiency (Palmer, 2012).
A variance is a difference between the standard and the actual cost, variance analysis entails the determination of the difference between the actual and the standard cost. The management of the competition bike Inc will obtain the pointers to the resultants of the off- standards performance and improve the sales as illustrated below
The reduction of sales volume by 87 units and the reduction of selling price per unit from 1495 to 1489 the company hoped that by reducing the price it could increase the sales volume but this did not happen. This did not affect the contribution margin adversely since there was a reduction in the company’s variable costs especially the cost of direct materials. The company management should watch the selling price of 1489 as it is unfavorable since it is not resulting to an increase in the overall sales unit. The deviation from the original plan can affect the company negatively (Hansen & Mowen, 2000).
The Competition Bikes Inc management should also reduce the labor as the volume of production reduces as this reduces the overall company contribution margin. The company’s reduction of fixed selling expense by 370 and fixed and general expenses by 47795 had a positive impact as it resulted to increase in the company operating profit. There was a favorable variance in the material cost which could have resulted as a result of better negotiations, discounts, and decrease in price or purchase of sub standard material. The purchasing managers should be very keen as purchase of lower quality raw material results to the drop of the sales even if the selling price reduces. This leads to a decline in the company sales volume and profit.. If the favorable variance in the cost of the material is as a result of reduction in the unit price, bargaining and efficiency in use, the company will be able to save a large amount of money and increase the company’s contribution. The purchasing managers should be encouraged to reduce the material cost using the stated methods but not purchase of inferior materials as it will result to poor quality products.
The management of Competition Bikes Inc management reacted to the changes in the sales volume by reducing the expenses cost in order to realize profit by the end of the year. The major reduction was on the material cost and the expenses i.e. 200,000 favorable.
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The corrective actions
The sales variance is one of the areas that I could adjust the reduction of sales unit and price per unit should not go hand in hand, I would reduce the selling price to 1350 and increase the volume of production by 4000 units this could results to increase in the sales volume. The increase in sales will result from the production of the quality and more preferred CarbonLite bicycles with the expectation that once the product is accepted in the market the sponsors will increase the level of funding which will go hand in hand with the increase in price. The new type of the bicycle will also increase the company’s market share and competitiveness in the market.
I would also take notice on the large variance on the material cost as this could affect the of Competition Bikes Inc Company negatively especially if the materials purchased were of poor quality. A slight reduction in the price per unit is acceptable but a significant fall in cost causes an alarm. This slight reduction in price will be compensated in the increase in the sales volume and the slight reduction in the selling price. By purchasing quality products the company will be able to produce a quality CarbonLite bicycle and thus increase the gross profit which will compensate for any increase in material cost. Due to these factors I prefer just a slight reduction in the cost of material which should balance with the quality and volume of production.
Due to the increase in the total sales expenses It is wise to increase material cost and labor cost but not very high so as to reduce the company overall expenses, (Lucey, 2002). I would increase the cost as to cater for the increase in the volume of sales to 4000 units since this will require a huge work load which will also require quality personnel to guarantee good quality to attract back the sponsors and beat the competitors.
I would also reduce the transport cost as it’s too high with the current level of production this will be achieved by advertising reducing the carrier cost by delivering having the company deliver to the clients which is cheaper and convenient in the long run, it also reduces the recurrent transport expenses as carriers are expensive in the long run. Once the company acquires a transport vehicle it just have to cater for the fuel expenses that are no too high.
I would also recommend for advertisement through internet as I would reach a large number of clients internationally in addition, this methods is very cheap as compared to selected, pre-qualified privately owned distributers.
Management by Exception
This is a practice of putting more attention on the areas of less performance and putting less effort on areas performing better. Combined with the variance analysis they will help the managers of competition bike identify and improve on areas not performing as expected. The greater the variance the more the possibility that a certain area is not performing as expected.
The major benefits that the managers of the Competition Bikes Inc can derive from management by exception are: They will be able to focus more on areas that have more issues especially material, labor and sales, it will enable the managers minimize frequency in the decision making, help in the identification of the company’s critical issues and enables good flow of information.
The management of the Competition Bikes Inc can use its analyses on the large variances on the material cost through favorable and the direct labor cost. The reduction in the sales volume and price also need to be evaluated as it can contribute to a decline in the company operations/ performances in future. Generally the major items that rise concern in this area are sales, material cost and labor cost.
Hansen, D.R, & Mowen, M.M. (2000). Management Accounting 5th ed., Ohio: South-Western College Publishing
Lucey, T. (2002). Costing 6th ed., London: Book Power
Palmer, A.(2012). Budgetary control and variance analysis Washington, D.C.: Urban-Brookings Tax Policy Center.