Budget Planning and Control

Briefly discuss the ways a realistic budget will benefit the owner of Babycakes versus having no budget at all.

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Budgeting is a critical aspect of any business since it gives the business the required capacity to meet its long-term and short-term goals while keeping expenditures, income and related costs in check (Lomova et al., 2016). It is critical for Babycakes bakery to have a budget compared to operating without a budget. A budget would provide the required outline of what the bakery needs in terms of the input and the cost required for the input. A budget would permit the owner of Babycakes bakery to make prior planning of the estimated budget she will use to make the cakes during special occasions. Planning involving the acquisition of raw materials such as flour, yeast sugar, flavors, fat, and salt. A budget would help keep track of costs and ensure they do not deviate to other activities that can prevent them from attaining a specific target. When Babycakes bakery operates without a budget, it is more challenging for the management to keep track of their spending as well as their expenditures versus the sales revenue. Babycakes bakery will overspend, and there will be a prevalence of lack of financial accountability, and further development could be hindered due to poor strategic planning. Chittenden & Derregia (2015) explains that budget is a reflection of the predicted plan and inspires future behaviors and outcomes of the specific plans. A realistic budget will assist Babycakes to evaluate future performance, promote efficiency, motivate workers to meet objectives, better control, and plan for the business that will significantly assist is attaining an expansion and success.

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; include October, November, and December, and a total for the quarter

A sales budget primarily details information on the expected sales of a particular business within a particular period. A sales budget is a component of a sales budget and entails the expectations of the sales and revenue within the specified period. Concerning, Babycakes bakery, the sales budget includes the bakery expectations of what it intends to sell in the number of units and price. The bakery specifically deals with cakes. Table 1 below gives a forecast for the sales of the 4th quarter of 2016. The variations in the expected units sold depend on the availability of customers and the number of holidays within the month. Babycakes bakery anticipates that in December, there will be more units sold

Sales Budget for the LA store for the 4th quarter of 2016 for Babycakes

October November December Quarterly Totals

Expected Unit Sales 22,500 (a) 22,500 22,500 67,500

x Price Per Unit $3.50 $3.50 $3.50 $3.50

Equals Total Net Sales $78,750 $84,000 $89,250 $252,000

750 expected units sales x 30 days =22,500 for the units sold on normal days of the quarter.

The expected unit sales are one-half of the units sold during Valentine's day.

Create three (3) new products, one (1) for each of the three (3) holiday seasons in the 4th 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. Add these amounts to your sales budget.

The holiday days in the fourth quarter of 2016 include Christmas, , and Halloween. The three products added include Chocolate Pumpkin Cake during Halloween, Thanksgiving muffins with an apple pie and Cream Xmas during the Christmas holiday. Appendix II indicates the breakdown of the sales units, price per unit, and the total sales during the occasions. The assumptions include; during the holidays, it is anticipated that the unit sales is similar to that of Valentine's day in 2016; therefore, there will be an of 750 more units sold during the holiday sales. Valentine day's sales in 2016 were 1500 units. Moreover, of Valentine day sales are used as the central figure for this forecast. During holidays, people like spending time with their families as well have fun; therefore, there is goodwill to try on cakes from Babycakes.

It was assumed that each month has 30 business days. Hence, for October, one day of Halloween holiday (1500) units sales and 29 days of 750 units sales for average daily sales. Therefore, the total units sold during October was 23,250 while the price is $3.5*23,250=$81,375. The formulae used in October was subsequently used for November and December. With the holidays expected in the 4th quarter, the expected total unit sales are $244,125.

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 4th quarter of 2016 to address her concern.

A flexible budget adjusts or stretches to accommodate changes in the volume of activities within a business (Di Francesco & Alford, 2016). A flexible budget is more advantageous compared to a fixed budget, when a specific variable changes in price, the price of the particular item changes as well as the total amount accordingly. A flexible budget is more effective since it permits a business to maintain a realistic view of the business activities. When an unfavorable variance arises from the budget, the implication is to reduce the price of cakes or the units sold to minimize wastes, which is beneficial to Babycakes as opposed to a fixed budget. The decrease can affect the revenue gains from the sales and can imply that the price of raw material increased, affecting the profit margin. Therefore, a flexible budget will significantly assist Babycakes management in allocating enough funds and making better forecast by making appropriate changes to the budget concerning the cost of materials, product prices, and operating expenses.

Imagine that Babycakes is facing a financial challenge that is causing the actual amount of money that it spends to become significantly more than its budgeted amount. Include a discussion of your own unique cause of the overspending. Explain the corrective actions needed to address these challenges.

A primary source of overspending is a result of poor budgeting; the management was most using a fixed budget or a rigid-flexible budget (Shim, Siegel & Shim, 2011). The owner did not take into consideration price variations in the supply of raw materials as well as staff management during different periods of the financial year. The owner of Babycakes should practice on making her budget flexible to accommodate adjustments during the quarter. Appropriate corrective action is to compare the current spending with the projected budget and make adjustments. A careful comparison of the variations should identify loopholes and develop a better budget for the following financial year or the next quarter. Developing a sufficient budget would assist Babycakes to promote efficiency as well as serve as an early warning system to the business to minimize in overspending.

References

Chittenden, F., & Derregia, M., (2015). Uncertainty, irreversibility, and the use of 'rules of thumb capital budgeting. The British Accounting Review, 47(3), 225-236. https://doi.org/10.1016/j.bar.2013.12.003

Di Francesco, M., & Alford, J. (2016). Flexibility, Inflexibility, and Budgeting. In Balancing Control and Flexibility in Public Budgeting (pp. 17-28). Palgrave Macmillan, Singapore. DOI: 10.1007/978-981-10-0341-7_3

Lomova, L. A., Mamycheva, D. I., Rovovaya, T. A., Romanova, I. A., Nekrasova, M. L., & Anisimova, V. V. (2016). Modernization as a means of improving financial and economic adaptability hotel business. International Review of Management and Marketing, 6(1S), 279-286. https://doi.org/10.14505/jemt.v8.8(24).18

Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting basics and beyond (Vol. 574). John Wiley & Sons. Retrieved from www.r-5.org/files/.../Jae_Shim_Joel_Siegel-Budgeting_Basics_and_Beyond-EN.pdf

Appendix I

Table SEQ Table \* ARABIC 1: Sales Budget for the LA store for the 4th quarter of 2016 for Babycakes Bakery

LA Babycakes

Sales Budget for the LA store for the 4th quarter of 2016 for Babycakes

OCTOBER NOVEMBER DECEMBER Total

Expected Unit Sales 21,750 (a) 21,750 21,750 65,250

x Unit Selling Price $3.50 $3.50 $3.50 $3.50

Total Sales $76,125 $76,125 $76,125 $228,375

Add: Holiday Unit Sales 1500 (a) 1500 1500 4,500

x Unit Selling Price $3.5 $3.5 $3.5 $3.5

Holiday Total Sales $5,250 $5,250 $5,250 $15,750

Total Combined Sales $81,375 $81,375 $81,375 $244,125

Assumptions

750 units x 29 days = 21,750 for normal days and a single day for each month for a holiday (1500 x 1 day=1500)

The estimated unit sales during the holidays were similar to that of valentines day i.e., 1500

NB: of Valentine day sales are used as the central figure for this forecast. Valentine day's sales 2016 were 1500 units

Appendix II

Table SEQ Table \* ARABIC 2: Holiday Specialty Cupcakes

Holiday Specialty Cupcakes Total

Month OCTOBER NOVEMBER DECEMBER Holiday and cake type Halloween- Chocolate Pumpkin Cake

Thanksgiving- Thanksgiving muffins with an apple pie Christmas- Cream Xmas Estimated Unit Sales 1500 (a) 1500 1500 4,500

Estimated Unit Selling Price $3.5 $3.5 $3.5 $3.5

Estimated Total Sales $5,250 $5,250 $5,250 $15,750

Assumptions

The estimated unit sales during the holidays were similar to that of valentines day i.e., 1500

NB: of Valentine day sales are used as the central figure for this forecast. Valentine day's sales 2016 were 1500 units