Budget Planning and Control

Question 1 

A budget is important for any business, and Babycakes is no exception. Without a budget, the operations of the business would be highly inefficient. A realistic budget provides a basis for measuring future performance. A sales budget, for instance, will be compared against actual sales at the end of the period to evaluate whether the business performed better or worse than expected. Budgets also act as a motivating factor for the employees. If the workers in Babycakes are aware that additional amounts of cake should be baked for Valentine, they will work a little harder to ensure that the budgeted units are produced. Business processes often result in a lot of waste and inefficiencies. A production budget partly cures for this. It the dream of Babycakes, just like other bakeries, to have sold everything at the end of the day. However, this is rarely the case. What is not sold at the end of the day will have to be sold the next day at highly discounted prices and in worst case scenarios, discarded. A budget that states the daily production levels as informed by the projected sales thus cuts down on waste. A budget would also act as a siren in the case of business problems. For instance, if the sales of red velvet have been on a downward trend, the monthly budget will show the unfavorable variance. The highlight gives the management an early warning and allows them to consider the cause before it gets out of hand (Sivabalan, Booth, Malmi, & Brown, 2009). 

Question 2 

Question 3 

To estimate the units sold, the selling price, and the total sales of the newly introduced products for the holidays, the following assumptions were used. 

The prices of the new holiday products have been set slightly higher than the normal price based on the assumption that the customers will be willing to pay more for cupcakes on the holidays, due to the holiday spirit, as opposed to regular days. The increased price is also due to higher costs of production informed by the need of additional decorative pieces in addition to the regular frosting. Finally, on pricing, increase in the complexity of the production process where the decorations are complicated and require attention to detail also informed the growth in price. 

On the number of units, the assumption was that on Halloween, one-third more cakes would be demanded and on Thanksgiving and Christmas, one-half more cupcakes than the average days would be required. The demand for Thanksgiving and Christmas is higher than that of Halloween because it is assumed that on Halloween people prefer to buy candy that is singularly wrapped and thus can easily be shared out in a non-home setting. On the other hand, Thanksgiving and Christmas are more home oriented and sharing of cupcakes is plausible. 

Question 4 

A static budget is based on the projected output level based on data analytics from previous periods. It is prepared before the actual processes are carried out. On the other hand, a flexible budget is adjusted for the actual level of output. That is, it is prepared after the production processes have been carried out ( Horngren et al. 2002) . 

A static budget often shows an unfavorable variance when sales increase because it indicates that the sales have deviated from the budget on the upside. If the number of cupcakes sold in the month of October rose from 22,500 to 30,000. A static budget would show an unfavorable variance on the costs of production due to the additional 7500 units produced. The A flexible budget cures for this because it is adjusted for the actual level of production. That is, the costs incurred are changed from a projected figure to the real data considering the actual number of units that were sold. In the same case, the flexible budget would adjust the costs to reflect the actual units produced which are 30,000 cupcakes. 

Question 5 

Babycakes may be overspending due to increases in the general prices of raw materials in the market. The markets that supply the raw materials used by Babycakes may be reacting to some market or macroeconomic forces that cause the prices to increase. 

To cure for this, Babycakes could revise its budgets to reflect higher costs of inputs. Also, for raw materials that have a long shelf life, Babycakes could buy in bulk to saves costs due to economies of scale. Also, when they buy in bulk, they are better positioned to negotiate for bigger discounts. Lastly, the enterprise could source for cheaper suppliers to cut the costs of production ( Rigby, 2001). 

References  

Horngren, C. T., Bhimani, A., Srikant M. Datar, Foster, G., & Horngren, C. T. (2002).    Management and cost accounting . Harlow: Financial Times/Prentice Hall. 

Rigby, D. (2001). Management tools and techniques: A survey.    California Management Review ,    43 (2), 139-160. 

Sivabalan, P., Booth, P., Malmi, T., & Brown, D. (2009). An exploratory study of operational reasons to budget.  Accounting & Finance ,  49 (4), 849-871. http://dx.doi.org/10.1111/j.1467-629x.2009.00305.x 

Appendix 

Budget