Discuss budgetary items that raise concern in the budget planning
A master budget is the central planning tool for a company; it should include the following areas:
* Direct Labor Budget
* Direct/Raw Materials Budget
* Finished Goods Budget
* Manufacturing Overhead Budget
* Production Budget
* Sales Budget
* Selling and Administrative Expense Budget
Competition Bikes’ budget is subdivided into smaller budgets. The objective of the master budget is to provide a forecast based on sales projections for the next budget period (quarter, semester or a year). The master budget should meet the company goals.
After analyzing the master budget for Competition Bikes we found a few areas of concern: The first one was a disregard of previous years’ trends. When year eight was analyzed we discovered changes in the economy which negatively impacted the company because of a decrease in sponsorships affecting the company’s sales. Competition Bikes should have taken a more conservative approach and set the budget at the same level of sales of year eight or have a more conservative increase on sales projections at no more than 1.5%, to reduce the risk of creating over sales and as a consequence to trigger a ripple effect of over-budgeting the operational and production budgets.
Another area of concern is that utilities expenses were double recorded, once under “utilities” and another under “utilities and services”. In the same area of utilities we identified another mistake because they were accounted as a fix amount. Utilities should be a variable amount since they fluctuate based in production needs
One last area of concern is that the “Accounts Receivable Collection” time, has not been reduced, and it was one of the areas of improvement we recommended during the analysis of the six, seven and eight periods.
Evaluate the flexible budget and its variances
A flexible budget is created based on actual outputs and it determines variances when you compare it