Briefly discuss the ways a realistic budget will benefit the owner of Babycakes versus having no budget at all. Be sure to use Babycakes as the company and any specific product details in your explanation.
The process whereby people or organizations plan how they are going to spend money is referred to as budgeting. The method assists in determining whether an individual or firm has adequate resources for carrying out its plans (Wiley, 2011). Budgeting helps in meeting the goals of a company by allowing the management to keep the expenses and costs in mind. In the case of Babycakes bakery, they will be well suited and productive if they have a realistic budget. Having a realistic budget created will positively impact how the management identifies their primary resources that serve specific purposes in their production line. The budget will prevent them from redirecting significant resources elsewhere. Resources will be well monitored, and their utilization will be tracked to avoid any misuse or depletion, which may leave them at a disadvantage in comparison to their competition.
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By having a budget, the business can make better and significant decisions regarding their products because they will have acquired a sense of direction and planning (Wiley, 2011). Furthermore, the budget allocated will allow the management to formulate an action plan on the number of cakes they are to bake.
Prepare a Sales Budget for the LA store for the 4th quarter of 2016 for Babycakes. Present the number of units, sales price, and total sales for each month; October, November, December, and a total for the quarter. Use on half of the Valentine's Day (one day) of sales as the basis for a typical day of one product.
Unlike the New York outlet, the Los Angeles store will experience lots of firsts because it has never dealt with the holiday season. Hence, the Halloween, Thanksgiving, and Christmas days and how they are celebrated in various regions, need to be considered when formulating the 4 th quarter budget.
Table 1. Halloween: Consumption of children and adults need to be considered because they all participate in this holiday.
|
Table 1. Halloween (Butter Finger Skull Cupcakes) |
October |
November |
December |
| Expected Unit Sales |
2,000 |
1,500 |
2,000 |
| x Price Per Unit |
$3.50 |
$3.50 |
$3.50 |
| Equals Total Net Sales |
$7,000 |
$5,250 |
$7,000 |
Table 2. Thanksgiving: flavored cake is ideal due to family theme
|
Table 2. Thanksgiving (Pumpkin Spice Cupcakes with Cream Cheese Frosting) |
October |
November |
December |
| Expected Unit Sales |
2,000 |
1,000 |
1,500 |
| x Price Per Unit |
$3.50 |
$3.50 |
$3.50 |
| Equals Total Net Sales |
$7,000 |
$3,500 |
$5,250 |
Table 3. Christmas: Similar to thanksgiving consumption.
|
Christmas (Chocolate Covered Pretzel Cupcakes) |
October |
November |
December |
| Expected Unit Sales |
2,000 |
1,000 |
1,500 |
| x Price Per Unit |
$3.50 |
$3.50 |
$3.50 |
| Equals Total Net Sales |
$7,000 |
$3,500 |
$5,250 |
Table 4. Specialty Items sales figure for the quarter: estimated quarter sales
| Specialty Items Quarterly Amount |
October |
November |
December |
Quarterly Totals |
| Expected Unit Sales |
2,000 |
1000 |
1,500 |
4,000 |
| x Price Per Unit |
$3.50 |
$3.50 |
$3.50 |
$3.50 |
| Equals Total Net Sales |
$7,000 |
$3,500 |
$5,250 |
$14,000 |
Create three (3) new products, one for each of the three (3) holiday seasons in the fourth quarter. Estimate the sales units, sales price, and total sales for each month. Describe the assumptions used to make these estimates. Include an overview of the budget in the report, presenting the actual budget as an appendix with all data and calculations.
The different cupcake types baked for the last three holidays of the year are; Candy Corn Ghost cupcakes for Halloween, Sweet Potato Pie Cupcakes for Thanksgiving, and Gingerbread Cupcakes with Cream Cheese Frosting for the Christmas holiday. The expected sales price, sales unit, and total net sales for these new products for each month are discussed below.
In October, the business would be open for six days per week, with the unit sales estimated to be 1500 every day for the next for weeks plus the 2000 units expected to be sold during the Halloween holiday. The total unit sales for that month would be at 36,500 units. Hence, the total net sales for October would be 127750 dollars. The formula used during October was repeated for November and December to help the management plan their budget system for each month correctly. The 4 th quarter budget was expected to be at approximately $380,000. It is important to note that the daily costs of the business are not incorporated in the estimated computations.
The owner of Babycakes is interested in preparing a flexible budget rather than the static budget she currently uses. She does not understand why when sales increase her static budget often shows an unfavorable variance. Explain how a flexible budget will overcome this problem. Use the details of your newly prepared budget for the 4 th quarter of 2016 to address her concern.
Several assumptions were made to arrive at the predicted numbers. It was assumed that during the holiday seasons, many individuals are willing to spend more time with their family and friends. Therefore, people will be ready to spend more money on cupcakes than they usually do because there is a lot of goodwill occurring. Additionally, it was assumed that there was a lot more money in circulation because people had saved more money to spend during the festive season.
Fixed Budget vs Flexible Budget
A fixed budget is regarded as the budget that does not change irrespective of the variable changes in the budget. Flexible budget, on the other hand, does change when there is a change to variables (Maher, Fakhar, & Karimi, 2018). For example, in a flexible budget, a change in the variable price causes a corresponding decrease or increase to the price of a product. The changes lead to an overall change in the total amount. The flexible budget enables a firm to maintain an accurate overview of the things occurring with the organization, making this type of budget very essential. An unfavorable variance in the budget indicates that there has been a decline in the volume of units sold, or there has been a decrease in the price of the cupcakes contradicting the original forecast. Subsequently, the fall caused a reduction in sales revenue. This could imply the decline in profit margin was caused by a rise in raw material costs. In a fixed budget, the variances in sales are not reflected.
Imagine that Babycakes is facing a financial challenge that is causing the actual amounts of money that it spends to become significantly more than its budgeted amounts. Include a discussion of your own unique cause of the overspending. Explain the corrective actions needed to correct the challenge.
Overspending refers to spending more than what was budgeted for, which is a problem for many firms. The Babycakes bakes produce more cakes than planned sometimes because they believe there may be an increase in sales during the festive seasons, but it might not occur. The company may overspend on resources basing this decision on increased sales that might not happen and, thus, making it a wrong decision because it locks up the capital – ingredients purchased earlier (Carlson, Wolfe, Blanchard, Huber, & Ariely, 2015). I think the overspending was triggered by insufficient prior knowledge and understanding of the budget. The manager may have been using the fixed budget, which is not ideal for this business practice because it is too rigid.
The managers did not conduct thorough research on the ideas of the products and how they would be marketed, and they did not account for the pricing variations of commodities various periods within the year. If the business had used a flexible budget, they would have been in a better position to make adjustments. The corrective actions that must be implemented are comparing the projected budget with the amount that was spent. By doing so, an enhanced budget can be formulated for the upcoming year.
References
Carlson, K. A., Wolfe, J., Blanchard, S. J., Huber, J. C., & Ariely, D. (2015). The Budget Contraction Effect: How Contracting Budgets Lead to Less Varied Choice. Journal of Marketing Research , 52 (3), 337-348.
Maher, M. H., Fakhar, M. S., & Karimi, Z. (2018). The relationship between budget emphasis, budget planning models and performance. Journal of Health Management and Informatics , 5 (1), 16-20.
Wiley. (2011). Budgetary Planning featuring Babycakes *FULL VIDEO*. Retrieved from https://www.youtube.com/watch?v=frh3I2rVDzs
