JET2 Task 2

Topics: Management, Direct material price variance, Cost accounting Pages: 19 (3967 words) Published: December 14, 2014


Summary Report Competition Bikes, Inc.

1. Discuss specific budgetary items that raise concern in the budget planning (Spreadsheet Tab: Task 2_Budgets_and_Proformas). In this discussion, I want to focus on some concerns in the budget planning for Competition Bike’s Inc. (CBI) for year nine. A budget for a company “…represents a detailed analysis of how a company expects to spend money in future time periods.” (Vitez, 2014) Sales: The first budget item I want to focus on are sales forecasted for year nine which are $5,247,450. Let’s review sales from prior years. Sales for years six were $4,485,000, an increase by 33.3 percent to $5,980,000 in year seven. Between years seven and eight, sales dropped 15 percent to $5,083,000. From the storyline, we find out that the economy had worsened and many sponsors had cut back on their support of professional riders. We also learn that professional riders still prefer CBI’s bikes to the competitions. For year nine, CBI’s management forecasts a 3.24 percent increase in sales from the prior year. CBI’s management seems to be only moderately confident about sales in years nine. Looking at advertising or R&D for a hint on how CBI’s management intends to increase sales does not give us any leads. Utility cost: The second budget item I want to focus on is utility cost. Utility costs are budgeted at $150,000, but a review of prior years tells us that CBI’s management is too optimistic. Utilities at the end of year six were $130,000, and then increased 3.8 percent at the end of year seven to $135,000. From years seven to eight, utilities increased 11.1 percent to $150,000. A review of the percentage rate for utilities in the vertical analysis shows us that utilities have increased over the years. Nevertheless CBI’s management intends to increase sales from the prior year and expects to pay the same amount. Given the prior increases in the cost of utilities, that seems to be an unattainable goal. Costs for distribution network support: The third budget item I want to focus on are costs for distribution network support. At the end of year six, costs for distribution network support was $14,950. Between years six to seven they increased to $59,800, which is an increase of 33.3 percent. Between years seven and eight, costs for distribution support dropped to $50,830, a decrease of 15 percent. CBI’s management forecasts costs for distribution network support at $50,830. A review of the vertical analysis reviews costs for distribution network support was always at one percent of total of total net sales. One percent of $5247,450 would be $52,474.50. Either CBI’s management decided to reduce costs for the distribution network slightly or CBI’s management used the wrong dollar amount for the cost of distribution network. R&D: The fourth budget item I want to focus on is R&D spending. At the end of year six, R&D spending was $71,460. Between years six and seven, R&D spending went up to $98,280, equating to 37.5 percent. Between years seven and eight, R&D spending went down to $82,284,000, which equates to a 1.6. percent. A review of the vertical analysis shows us that R&D spending was always 1.6 percent of total revenue. One point six percent of total forecasted revenue for year nine would equate to $83,959,20. Ergo the forecasted amount for year nine is either incorrect or CBI’s management decided to increase the budget for R&D. Advertising: The fifth budget amount I want to focus on is advertising. At the end of year six costs for advertising were $23,820. Between the years six and seven, costs for advertising increased to $32,769 an increase of 37.5 percent. Between years seven and eight, costs for advertising dropped to $27,428 a decrease of 16.3 percent. Costs for advertising were always 0.5 percent of total revenues. Zero point five percent of forecasted revenues of $5,247,450 equates to $26,237,25 and not $28,412. Ergo the forecasted amount is wrong or...

Cited: Accounting Coach. (2014). What is a flexible budget? Retrieved 11 20, 2014, from ww.acocuntingcoach.com: http://www.accountingcoach.com/blog/flexible-budget
Accounting Tools. (2014). Retrieved 11 20, 2014, from www.accountingtools.com: http://www.accountingtools.com/questions-and-answers/what-is-a-budget-variance.html
Accounting Tools. (2014). Accounting Tools. Retrieved 11 24, 2014, from What is management by exception?: http://www.accountingtools.com/questions-and-answers/what-is-management-by-exception.html
AccountingTools. (2014). Retrieved 11 22, 2014, from www.acountingtools.com: http://www.accountingtools.com/price-variance
Acoounting Coach. (2014). Introduction to Manufacturing Overhead . Retrieved 11 23, 2014, from www.accountingcoach.com: http://www.accountingcoach.com/manufacturing-overhead/explanation
Investopedia. (2014). Investopedia. Retrieved 11 22, 2014, from www.investopedia.com: http://www.investopedia.com/terms/e/efficiency-variance.asp
Vitez, O. (2014). Why Is it Important for a Business to Budget? Retrieved 11 15, 2014, from http://smallbusiness.chron.com: http://smallbusiness.chron.com/important-business-budget-385.html
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