IMA EDUCATIONAL CASE JOURNAL XXXXXXXXXXVOL. 2 , NO. 2 , ART. 3 JUNE 20091
BACkgROUND
Buns Bakery is a medium-sized regional bakery that
specializes in providing orders to grocery and convenience
stores. Because of the popularity of its
and, it has also
opened a small café for walk-in business.
In order to maintain its high quality standard, Buns
produces only three products:
eakfast muffins, fresh
ead,
and chocolate chip cookies. Although business has been
good in the past few years, a lucky contact with a large chain
has recently allowed it to expand its
and out of the local
egion. Growth has been high since the new contract went
into effect.
Andy Griff, the chief executive officer (CEO) and
founder, has a
anged a meeting with a venture capital
firm next week. Hopefully the meeting will result in the
sale of some of Buns’ stock and an opportunity to establish
a significant line of credit with the venture capital firm.
These extra funds, if Andy can secure them, should provide
sufficient money to meet Buns’ growth targets for the next
few years. The venture capital firm’s assessment team has
asked Andy to provide a quarterly master budget for the
coming year, complete with pro forma financial statements,
at the meeting. They have expressed special interest in
Buns’ earnings per share (EPS), cash flow from operations,
and profit margins, indicating that good numbers in these
areas will be essential for final approval.
In typical managerial style, Andy immediately assigned
the task of creating the budget to Nicole Quarterman, who
has just been hired as Buns’ controller. Since this project is
her first assignment, Nicole started by making appointments
with each of the divisional managers to gather information
for the budget and also to learn more about the company.
PART I: CREATINg ThE BUDgET
MEETINgS wITh DIvISIONAL MANAgERS
MEETINg wITh ThE SALES DEPARTMENT
Walking down the hallway towards the office of Jeff Barza,
the sales manager, Nicole read the results for last quarter.
Buns Bakery sold 45,000 one-dozen packages of muffins for
$5.50 each, 65,000 one-dozen packages of cookies for $4.75
each, and 85,000 loaves of
ead for $5.25 each. When Nicole
got to Jeff’s office, he motioned her in to have a seat.
“Is it time for our meeting already?” he asked. “Where
does the day go?”
“Who knows? It seems like one minute I’m having
my morning muffin and the next I’m saying good-bye to
everyone,” Nicole said with a sigh. “There’s never time to
get everything done. And now I get to do the budget.” Jeff
started to laugh. “Thanks,” she muttered. “I knew I could
count on your support.”
“I’m so
y. I just have to laugh at the amount of time you
are going to put into something that isn’t really used anyway,
except for setting bonuses, of course.”
“Not really used? I don’t know how it’s been around here
in the past, but this year, at least, the budget will prove to be
a valuable tool.” Nicole waved away Jeff’s retort. “Anyway,
one way or another I have to create one and, as you know,
the process always starts with projected sales. Do you have a
copy of last quarter’s results?”
“Yes, right here somewhere,” Jeff said, shuffling papers
around on his desk. “Got it!” he exclaimed, waving it gently
as he pulled it from under a stack of other papers. “Now,
what do you want to know exactly?”
“Well, Andy thinks that since we have established a
strong following both locally and in our new markets, we
1
ISSN 1940-204X
Buns Bakery: Creating and Using a Master Budget
Jason C. Porte
University of Idaho
Teresa Stephenson
University of Wyoming
can raise our prices slightly next year without a sharp drop in
sales. He was thinking $6.00 for muffins, $5.25 for cookies,
and $5.75 for
ead. What do you think?”
“I agree,” Jeff said eagerly. “I’ve been pushing that for
years. Of course, I think that sales will drop some in the first
quarter of next year. They always drop off a bit after the
holidays anyway, but with the increase in sales price . . . I’d
say a 20 percent drop from the fourth quarter results we have
here.” He looked up questioningly and raised an eye
ow.
Nicole frowned. “That sounds kind of high. Based on
what I saw in the dairy industry, I was thinking the drop
would only be about 10 percent.”
Jeff looked a little uncomfortable and shuffled around in
his chair. “Well, it’s a little different for a bakery. Our price is
a little more elastic than dairy products. Besides, 20 percent
is a more conservative estimate and in the past we wanted no
surprises.” He looked at her and challenged, “Are you going
to change that?”
“Yeah, but we’ll be using this master budget to create
a cash flow budget and pro forma financial statements to
show our new investor. We need to look good, not bad.”
Nicole frowned. She didn’t want to start making changes and
enemies in her first few months.
“I guess so. But, look—my bonus is tied to how well I
meet my estimates. If we estimate low results and then go
up . . .” Seeing the look on her face, he quickly changed
direction. “Besides, Nicole, we are raising the prices. A 10
percent drop is normal after Christmas, but couple that with
the increased prices, and 20 percent is reasonable.”
Nicole frowned, and then sighed. She didn’t quite accept
his reasoning, but it would be better to have him on her
side until she understood the company politics a bit better.
“Okay, Jeff. I’ll take your word for it. We’ll use 20 percent.
After all, you’re the expert.”
“You’ve got that right!” Jeff said, trying to hide his relief.
He was obviously really counting on that bonus. He looked
at a couple of sales reports and market projections on the
desk in front of him. “After that, I think sales will grow
steadily at about 5 percent a quarter with these new prices.
Fourth-quarter sales will be high because of the holidays—
let’s say 20 percent, instead of 5 percent, from the third to
the fourth quarter. The first quarter of the following year will
continue the 5 percent growth as though the holiday jump
didn’t occur. And I’m not messing with those estimates.
That’s really my best guess, given what I’ve seen in the
past.” He looked up. “Does that give you all you need?”
“Just a few more questions. Have you made any changes
to the credit policy? The information I have from last year
says that we make about 10 percent of our sales through our
café and that we don’t sell to those customers on credit.”
Jeff smiled. “Yep. But we do sell on credit to the business
customers. If we didn’t, they’d definitely go somewhere else.
So, we give our business customers a lot of leeway in paying
us. It makes it a little hard on us, but it keeps them loyal.
Anyway, we collect 30 percent of the credit sales within the
cu
ent quarter, 45 percent in the following quarter, and 25
percent in the quarter after that. The good news is that we
don’t have any bad debt. Our customers are mostly large
chains with strong sales and even better reputations. Since
they are large companies, they take their time paying small
companies like us, but we get the money from all of them in
the end.”
“Then I have only two more questions. What were total
sales during the third and fourth quarters of last year, and are
we still collecting any of that money?”
Jeff pulled up a file. “Total sales were $802,000 and
$1,002,500, respectively, and we are still collecting quite a bit
of that money based on our collection
eakdown.”
“I think that does it, then. If I’ve forgotten something,
I’ll come back and bug you later. It’s more fun to inte
upt
you several times anyway. And you owe me one now.”
MEETINg wITh ThE PRODUCTION DEPARTMENT
Nicole sighed as she headed to her meeting with Phil
Mainster, Buns’ head chef. She wasn’t sure about that large
drop Jeff wanted her to use, but as the new member of the
staff she wasn’t sure what she should do. Of course, she
didn’t have much time to think about it now anyway. She
had met Phil before, so she knew that it was going to be an
interesting meeting.
As she had suspected, she found Phil in the bakery
instead of his office. “Phil,” she called as she hu
ied towards
him, “did you forget our meeting?”
“Me, forget?” Phil asked in a surprised voice. “I never
forget anything!” Nicole had to chuckle at the large streak
of flour across his face. “You said you wanted to see our
production facility, and I’m ready to show it to you.”
Nicole shook her head. “No, Phil. I didn’t say I wanted
to see the production facility; I said I wanted to talk to you
about the budget for next year.”
“Oh, of course you did.” Phil’s round face had turned a
deeper shade of pink. “Then why don’t we go to my office
and talk?”
Nicole sighed. “That’s a great idea, Phil.”
As they sat down, Nicole asked her first question. “Okay,
Phil, I need to know how much inventory we keep on hand.”
“Well, we can’t keep much in the way of finished goods
on hand. My cookies and
ead would dry out if we kept
IMA EDUCATIONAL CASE JOURNAL XXXXXXXXXXVOL. 2 , NO. 2 , ART. 3 JUNE 20092
them too long. I’d say that we normally keep only about two
days’ worth of inventory on hand to avoid shipping issues or
problems with the café.”
“Okay, and you make your estimates based on a 90-day
quarter?”
Phil nodded impatiently. “Please, Nicole, don’t ask
obvious questions.”
“I’m so
y. Let’s talk about your pantry. You take care of
purchasing too, don’t you?”
“Yessi
ee. We decided it would be easier for me to run
purchasing than to have a separate manager do it. After all, I
do everything else around here.”
“Well, we want it done right.”
Phil chuckled. “I’ll have to remember that one. Martha
will love it. Okay, let’s talk raw materials. Some days we have
to produce a lot to meet our orders, so I normally try to keep
15 percent of the next quarter’s raw materials on hand at all
times.”
“Is that what we’ve got on hand now for the coming
year?”
“Of course. Jeff and I had already talked about the
possibility of raising prices and his estimate of a 20 percent
drop in demand, so I’m ready to go.”
Nicole considered telling Phil that she was unsure the 20
percent drop would really materialize, but changed her mind.
There would be time to get the extra ingredients ordered if
sales only dropped 10 percent, and she didn’t want anyone
to think she had caved in to peer pressure. “Good. Can you
give me some estimates of how long it takes to make each
package of cookies,
ead, and muffins?”
“Are you kidding? We don’t really move each item from
start to finish. We do them in large batches, so I have no idea
how long each final package takes.” Seeing Nicole’s frown, he
quickly went on. “But, I can tell you that one of my mixers
can mix together either 12 dozen cookies, 8 dozen muffins, or
4 loaves of
ead in 15 minutes. The bakers then take another
half an hour to get the dough ready and bake it.”
“The batch sizes are the same for each product?”
“Yep. I try to keep things as standard as possible. The
packaging department is the slowest. They have to double
wrap the cookies and muffins—once to keep them fresh and
once in the fancy packages marketing came up with—so it
takes 15 minutes to package either two one-dozen packages
of cookies or two one-dozen packages of muffins. The
ead
is a little faster. In 15 minutes we can package about eight