Budget Analysis

2108 words - 8 pages

A budget is a planning tool that is usually prepared prior to the start of the period being budgeted. In manufacturing, the single most important measure of output is the number of units to be produced. The static budget is based on this projected amount of output prior to the beginning of the period.
In reviewing the Competition Bikes budget projection for year 9, the first thing that strikes me was the increase in projected sales units. Looking back to year 8, there was a 15% decrease in net sales, with this decrease there is absolutely no need to increase the sales the following year unless they have a solid proof that the economy will recover fully. My projection would have been to leave sales as it is and plan on reducing costs so that the company can make profit. In the line item budget, I also noticed that the accounts receivable was increased by the sum of $19,734 in year 9, as I stated in my task one that management needs to reduce this number, because it is a very big weakness in their ability to collect their receivables from their purchasers.

My main concern is on the general and administrative budget, where there is an increase of $102370 compared to year 7 when the company had their highest sales. Management needs to decrease this number; emphasis should be laid on reducing cost of utilities, executive compensation and administrative salaries. I am concerned on the amount allocated to advertising, as I stated in task one that during time of economic downturn companies need to increase advertising so as to be able to increase visibility and take advantage of the few market shares available. Looking back in year 7 again the amount spent in advertising was $32760 as opposed to the budget $28412 a decrease of $4348. You can see that because of the under budget of advertising, the company still used $3000 more than budgeted and still did not make their budgeted goal in year 9. So because the company did not spend enough in advertising, it did not yield the expected result. Based on their projected trends analysis, Competition Bikes who projected to sale 3510 units failed short of their projection by 110 units. This proves that the management is not able to analyze market conditions using the available market information. On transportation, the company spent more than projected, considering the fact that their projected unit sales was not met, they should have spent less than going over budget. They need to renegotiate with their transportation clients to get a better pricing.

Flexible Budget:
Flexible budget is a form of performance evaluation that evaluates how well a company performed in the static budget, so it cannot be prepared before the end of the period. Its main function is to adjust the static budget for the actual level of output. It is used to compare how well the company performed based on their projected budget. With competition Bikes, they projected to sell 3510 units, but their actual units sold...

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