Budget Planning and Control

4 

Budget Planning and Control 

Question 1 

Budgeting is a vital component of any successful business enterprise. A realistic budget can help the owner of Babycakes to plan how she can control her finances to continue funding the firm’s current commitments. It will also help her in making financial decisions confidently, which in turn allows the firm to meet its objectives. Such a budget enables the business to operate within its financial limits. It highlights what is needed as inputs for the production of the cakes. It also highlights the costs of the inputs, thus making it possible to plan ahead of the production process. By understanding the amount of money needed to produce the cakes, the company will avoid unnecessary expenses by ensuring that all resources are channeled to their allocated use. Budgeting also can act as an early warning system (Kimmel et al., 2019). In this case, it can alert the owner about potential problems, thus allowing her to make adjustments before the matter gets out of her hands. For instance, a realistic budget can show when the firm is overspending on some raw materials, and when there is a lack of financial accountability on the part of the staff. Also, a budget helps in coordinating activities (Kimmel et al., 2019). For example, the production team must produce cakes that match the expected sales. Through the coordination of activities within the business, the employees are motivated to meet their targets and overall business objectives (Kimmel et al., 2019). However, without a budget, the business is doomed to fail since the owner will lack awareness of the entity’s operations. In this case, there will be poor resource allocation, wastefulness, misappropriation of funds, and so on. Moreover, without a budget, the owner cannot use past business trends to plan ahead. 

Question 2 

The sales budget is the master budget for all the other functions, such as production and purchasing (Kimmel et al., 2019). It is prepared by multiplying the expected unit sales by the anticipated selling price to obtain the total sales for a given period. 

A total of 1500 units were sold on Valentine's Day. Half of the Valentine's Day's unit sales are the basis for a typical day in this quarter. Therefore, for each ordinary day, the expected unit sales are 750. Additionally, each of the three months has a holiday season with Halloween in October, Thanksgiving in November, and Christmas in December. The expected sales units for each of the three holidays will be the same as that of Valentine’s Day. Therefore, the sales budget for quarter 4 for L.A. Babycakes will be summarized, as shown in Appendix 1. 

Question 3 

The company will come up with three new cakes for each of the holidays in the quarter. The company will introduce Hallocakes in October to mark Halloween. Thankscakes will be available for the whole month of November to commemorate Thanksgiving Day, while Xmascakes will be available in the entire month of December to celebrate Christmas day. 

It is estimated that the daily unit sales of the holiday cakes will be 20% higher than that of the normal cakes. At the same time, the daily unit sales of the standard cakes are expected to drop by 30% as more customers shift to the holiday variety. The assumption made, in this case, is the fact that each of the holiday cakes is themed to resonate with the specific holidays hence leading to higher demand. The other assumption is that people tend to visit their friends and relatives more often during this time of the year, meaning that the demand for cakes will higher than usual. The final assumption is that people have a higher spending power during these holidays, for they have saved enough for the occasions. With this in mind, for usual days, the additional unit sales will be 20% of 750, totaling to 150 units while for the holidays, the other units will be 20% of 1500, amounting to 300. Thus, the total unit sales for the special cakes will be 900 units on each normal day and 1800 units during the holidays. On the other hand, the sales for the normal cakes will be 525 units on usual days and 1,050 during the holidays, representing a 30% decline from 750 and 1500 units respectively. The new sales budget incorporating the normal cakes and the holiday cakes will be as shown in Appendix 2. 

Question 4 

During the planning process, the owner of the business could have made some assumptions regarding the output levels or activity levels in a particular period. In a fixed budget, the owner cannot adjust the budget due to changes in the assumptions made on the expected activity levels or output levels (Mueller, 2017). On the other hand, the flexible budget can be adjusted whenever there are changes in the activity levels or output levels (Mueller, 2017). The main benefit of a flexible budget is that when sales increase, it allows for adaptability (Mueller, 2017). In the real world scenario, change is inevitable. When sales increase, it might be a result of changes in other variables. For example, it might be caused by spending more on advertisements and other marketing campaigns. Thus, the flexible budget takes into account both the fixed costs and variable costs and predicts how each might affect business operations during a given period (Mueller, 2017). In the end, the flexible budget offers the advantages of aligning with expected changes such as inflation, market demand, political situations, and so on. In my new budget for Quarter 4, variations in sales were catered for. It was projected that the newly introduced holiday cakes would slash the total sales units of the normal cakes by 30% as people will be more attracted to special-themed cakes. At the same time, more new buyers will increase the total unit sales of holiday cakes by 20% above the normal rates. 

Question 5 

There are several causes of overspending in a firm. The reasons can include overpaying for raw materials by not opting for better deals in the market, poor resource use, wastefulness, lack of analytic tools, not differentiating between wants and needs, and lack of proper planning (Worth, 2012). To correct these issues, the owner should always prepare a budget in advance. Secondly, she should compare the prices offered by different vendors for the required raw materials and services and choose the best deal. Thirdly, the business should only purchase what it needs and not what it wants to avoid impulse buying and reduce operating costs. Lastly, analytic tools will help the firm to understand the market it is operating in, which ensures that it avoids unnecessary expenditures such as hiring more staff than is needed. 

References 

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Accounting: Tools for business decision making (7th Edition). Wiley. 

Mueller, D. R. (2017, September 26). Static budget vs. flexible budget. Biz Fluent. https://bizfluent.com/info-7784641-static-budget-vs-flexible-budget.html 

Worth, J. (2012, October 23). Where is your business overspending? Entrepreneur. https://www.entrepreneur.com/article/224715 

Appendices 

Appendix 1 

Therefore, the total sales for each of the months will be $81,375, and the total for the quarter will be $244,125. 

Appendix 2 

Based on the assumptions, the new total sales for each month will be $168,562.50, while the total sales for the quarter will be $505,687.50.