Areas of concern:
Projected sales are the first area of concern in the budgeting of the Competition Bikes Company. The company has recorded greater than average performance since its inception. A company that experienced a growth in sales of more than thirty-three per cent in its second period of business should not be modest. It is a classic case of misplaced priority. The disparity could have been innocently informed by the prevailing financial crisis. The crisis has cleared, and recovery is on the path. The projected sales should be close to four thousand units. The company has the facilities to ensure that the demand for such units is met. It bothers targets and objectives to set an easily achievable standard.
Operational efficiency requires an overhaul to bring the budgets close to a realistic standard. The projected production affects the entire budgeting process because costs and revenues are based directly on the units produced in a given year of accounting (Shim et al, 2012). The capital budgeting allowance for anticipated purchase of Canadian Bikes would not suffice in such a state. Situational analysis could assist in budgeting because it would allow the forecasting of sales. Bikes are durable commodities. In this case, durable commodities do not require unique storage, and they do not perish or go rancid. A sufficient budget should present an accurate view of the objectives of the company on the strategic level.
Projected figures of accounts receivables should reduce by a large amount. Accounts receivable tend to tie down the working capital of a firm. Tying the working capital in debtors increases the provision for bad debts and likelihood of defaulting. In the same vein, accounts receivables are not favourable for maintaining a sustainable working current ratio. The current ratio should be lowered to levels that are conducive for sufficiency of current needs. Accounts receivable also increase the credit period if they accumulate uncontrollably. They reduce the turnover of the business. The business requires liquid cash to operate at optimum. Under the current budget, it is visible that the company may encounter hurdles in meeting the demands to customers and utility payments. The existing low current ratio is detrimental to loan facilities. Lenders prefer giving money to firms that would demonstrate a potential to pay up the money.
Working capital is used to meet the immediate needs of a firm such as minor running expenses. If a firm cannot be able to pay for these facilities because the cash is tied up in credit sales, the firm would collapse. A credit policy should be instituted to override the current policy. The payment terms and period for credit customers should be reviewed to turn the situation around. The discount terms availed to distributors; up to half the cost, should be altered, as well. Such a hefty discount allowance does not effectively increase sales. In the interest of reserve preservation and maintenance, customers should be given a generous discount if they pay up promptly. This approach would be more effective than dishing out the discounts to distributors. Distributors rely on appending a mark up to the price of commodities they sell (Hughes et al, 2012). A large gap between the sales price and the discounted price favours them, but it is detrimental to the company.
Rigorous scrutiny of the production budget reveals an instance of significant weakness in the budget. A relatively feasible approach would involve the manufacture of units prior to sale. It is, nonetheless, commendable to approach a just-in-time manufacture method for an assembly firm. Given the prevailing conditions, it would be unwise to institute the method while the firm is still young. Two reasons inform the decision; the firm is still under scrutiny from the public to establish a reputation. Prompt delivery helps retain and acquire recurring customers. It is also cheap to manufacture units in large quantities because of the economies of scale. Firms stand to reap from establishing a nature of reputation in keeping with the ideals of reliability. Under the same budget, it is evident that the firm has allocated units to the wastage. The normal loss allocated in this case is exceptionally high. An overhaul of the entire system to prevent such enormous waste will reduce the instances of wastage.
A comprehensive budget should not allocate a substantial amount of money towards wastage. In keeping with the anticipated reforms, processes and job design need, to be carried out. Wastage should be curbed because through it leads to massive wastage of worthy resources. In the quest to establish the growth of the firm in recovering from the menace, efficient pricing policies come in handy. Effective budgetary control increases the chances f reigning in the rampant waste of resources. In a firm that uses prefabricated components, the wastage rate is unbearable high. Remedial measures include the sourcing of efficient assembly techniques and tools (Hughes et al, 2012). Wastage of the assembly material does not comprise accepted normal wastes.
The manufacturing overhead budget is skewed in an unfavourable way. The quality control costs are more than all the other individual costs. Quality control refers to the systems that are instituted to make sure that products are up to par, and other associated wastage does not occur. The cost of control should not override that of others pertinent to the controlled variable. In this respect, the control costs should be reduced. The most effective method for implementing this decision is to ensure that the interval controls are effective. An initial outlay would suffice for this purpose. Advertising commissions have an allocation that is five times lower than the sales commission. This represents a tendency of inefficiency. Advertisements are more cost effective for high-end products than sales drives (Stringer et al, 2012).
In respect of this, advertisement allocations should be increased at the expense of sales commissions. Research and development costs allocation deserve increments. A crucial aspect of high-end products is continuous research and design. Efforts invested in the research maintain the required high standard of the products and guarantee a market. Research and development would easily substitute the need for sales representatives because they give rise to effective word of mouth advertising. In the quest for sustainable growth and development, the budget requires urgent revision of figures and allocations.
Deviation of production units from the budgeted figure to a lower output is unfavourable. This arises from the decreased revenue that will be expected. Decreased revenue is undesirable because it cuts back on the gains of economies of scale. For example, from the information provided it is evident that at the end of year nine the projected output was 3510 will the recorded output was 3400. This variance is unfavourable. The result will be lower profits and impaired investment and earnings.
Direct material usage and reduction is favourable because materials represent an expense. Reduction in expenses leads to increase in profits under constant conditions (Shim et al, 2012). This is what is viewed from analysis of Competition Bike’s reports. For example, direct materials showed a favourable variance of 72, 8268 and direct labour shows a variance of 10,398. Use of less labour also presented a desirable effect because it reduced payable expenses and mitigated impending loss. Variable manufacturing overheads are bound to scale down with reduction in production capacity. They rely on the output units and essentially directly related. The variable costs are the sources of the economies of scale in a firm.
In the same vein, variable selling expenses are expected to tumble down when production is low. From the information provided the variable selling expenses had a favourable variance of 4,934. The reduction in selling expenses is a direct result of reduction of the need to sell (Stringer et al, 2012). They represent the expenses incurred to secure and follow through the sales of bikes in this case. Advertising expenses recorded a high increase; this reveals an unfavourable difference in two ways. In the first instance, the increased costs lead to a drain gross on profits that erode net profit. In the second instance, the advertising expenses should logically lead to improved sales. Contrary to that, they have culminated in lower sales. This inconsistency reveals an underlying issue with the efficiency of advertising. Carriage outwards increased by a small figure in absolute terms. In relative terms, conversely, the increase is large.
The carriage outwards incurred for a larger volume of products is less than what was incurred for the decreased output. As mentioned before at the end of year nine the projected output was 3510 will the recorded output was 3400. This shows that the performance of the organization. A decrease in contribution margin proves that the actual units produced contribute less, per unit, to the net profit than the standard case (Stringer et al, 2012). This is mainly because contribution margin indicated an unfavourable variance of 49, 397. Increase in relative cost and decrease in relative revenue, per unit, cause the situation. Research and development costs were low and represented a favourable deviation. In real terms, decrease in research and development costs contributes to poor performance of products in the future.
It is favourable only in the short term or at cessation of business. Total general expenses showed a marked decrease that increases the levels of profits for the business. Total operating expenses were less than the convention and thus their variance was favourable because it increases profits. Operating income slumped by a huge figure which affected the overall profit. Operating activities are the main sources of profits supplemented by investing and financing activities (Lalli, 2012). This signifies a clearly unfavourable situation for the firm.
Corrective actions for areas of concern based on a variance analysis:
One of the largest variance has been noted with the number of units that were projected to be sold. The variance is 164,450, which shows that the organization is not performing close to its goals and objectives. There are a number of ways through which sales can be improved. One is by using effective marketing campaigns. The organization should market its products in order to attract new customers as well increase its market share. This would help improve the number of units sold. The organization can aim at reducing the cost of each unit they sold. This can be achieved by streamlining production to ensure that the production process runs smoothly. This will ensure that the cost of the goods being produced by the company is low, thus, attracting customers that are price conscious
The company should seek to reduce expenses that are high. One of the high expenses with great variance is the advertising campaign. Having a new advertising campaign would help to correct the unfavourable variance that has been noted in its current advertising and marketing campaign expenses.. The company should seeks a new carrier since the current carriage cost of $30 is very high. The company should seeks a carrier that will charge less in order to reduce this expense. The company should overhaul the distribution part of the business. Outsourcing is costly because, the distributor makes a mark-up above the real cost of distribution. The overall picture shows that costs incurred were less than standard and; consequently, they represented a favourable deviation. Reducing this expenses the company can be able to make positive revenue.
Management by exception:
Management by exception is an effective tool that could be used concurrently with a rolling budget. The concept can be applied at Competition Bikes. Exceptional events, when managed at the time of their occurrence, could make the difference between profit and massive losses (Truss et al, 2012). For example, the numbers of units that have been sold record the largest deviation from the projected figures. Therefore, the company should have a committee that will discuss the issues that have led to low sales and come up with measures that can help the low figures from happening in the future. The company should select a group of managers responsible for instituting the measures discussed to address the constantly changing needs of the organization. The annual budgeting is proving to be too rigid for activities that require urgent address. These activities are untapped chances and unaddressed weaknesses. Management by exception focuses on fixing those areas of the organisation that do not function well. For example, a sales manager can be employed to ensure that sales are kept at the desired level. This adds on to the synergy of the areas that function decisively. Management by exception will, therefore, assist the budgeting committee and the production team to minimise wastage and effectively cut wastes.
Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond. Hoboken, N.J: Wiley.
Hughes, R., & Thompson, J. (2012). Business budgeting. Bondi, N.S.W: National Core Accounting Publications.
Stringer, C., & Shantapriyan, P. (2012). Setting performance targets. New York, N.Y.] (222 East 46th Street, New York, NY 10017: Business Expert Press.
Truss, C., Mankin, D., & Kelliher, C. (2012). Strategic human resource management. Oxford: Oxford University Press.
Lalli, W. R. (2012). Handbook of budgeting. Hoboken, N.J: Wiley.