Scenario
'ChickPea Delight' operates fast food restaurants in the food courts of shopping malls. Its main product is a serving of falafel that requires ground chick peas (direct material) and food preparation (direct labor). The April budget for ChickPea Delight's Parkside restaurant was:
· Sales 24,000 servings at $4.25 each
· Standard food cost of $0.50 per serving (1/4 pound @ $2.00 per pound)
· Standard direct labor of $0.60 per serving (1/25th hour @ $15.00 per hour)
· Fixed occupancy expenses (rent and equipment) of $7,500
Actual April performance of the Parkside restaurant was:
· Sales 26,000 servings at $4.50 each
· Food cost of $14,820 for 7,800 pounds
· Direct labor cost of $19,240 for 1,300 hours
· Fixed occupancy expenses of $7,200
In early May, the manager received the following financial performance report:
ChickPea Delight - Parkside
Performance Report - Month of April
Category
Actual
Budgeted
Variance
Revenues
$117,000
$102,000
$15,000 F
Food Cost
(14,820)
(12,000)
2,820 U
Labor Cost
(19,240)
(14,400)
4,840 U
Occupancy
(7,200)
(7,500)
300 F
Profit
$75,740
$68,100
$7,640 F
The above performance report is misleading!
Hint: ‘flex’ the budget to the actual output and compare this information to the actual figures given to develop the direct material and direct labor variances. See Module 23 in our textbook for a description of flexing the budget.
Required
You will, as an individual, write a memo with appendices. Requirements for constructing your memo and appendices are outlined below.
Memo and Appendices
The memo should address the following issues about budgeting process:
· Explain why 'flexible budget variances' are usually better indicators of performance than 'static budget variances.'
· For the month of April, what conclusions can you draw from the materials (price and efficiency) and labor variances (labor rate and efficiency)? (Remember to reference the appendices as support for your conclusions.)
· Must give recommendations of action items to address or explore. Improvements?
The appendices should provide a reference source for the memo. The following items must be included.
· Develop and show in one table (use Exhibit 23.1 as an example) the 'performance report for the month of April.' Include your static budget and flexible budget figures for all categories in this table.
· Analyze the direct materials usage and show price and quantity variances.
· Analyze the direct labor usage and show labor rate and labor efficiencies variances.
· Terminology as usual.
Example memo 1
The A group of Timber’s Department Store Financing Department has prepared the second quarter's budget. Budgeting is necessary because it helps the entity create financial stability, as it's a crucial step in managing cu
ent and future expenses. We start with the sales budget because sales are the first inflow of cash which the company sees, and according to this all the costs and expenses are linked, therefore at first, the sales budget is created which is then used to estimate the costs and expenses that can be incu
ed by the firm.
Budgetary slack is the cushion that managers often add to their budget to act as a buffer and to insinuate increased performance by intentionally lowering projected sales or increasing budgetary expenses. This is something that we suspect to occur because no estimate is full proof, especially when many people are involved in budgeting. However we can make over or underestimates based on the market circumstances and the historical data from past sales. We normally see this feature used in unethical situations, such as significant bonuses or other financial gain for the manager. For example, employees would overestimate budgeted costs because they can obtain favorable performance reviews when the real expense is lower than budgeted expense. As a result, the budgetary slack would increase unnecessary budgets and disrupt companies to efficiently assess their performance. The budgetary slack occurs more in a participative budget approach rather than an imposed budget approach because it encourages more employees to participate, allowing more room for employees to reflect their own interest on the budget. Slack can be minimized in an organization by limiting the amount of managers to a small, dedicated group of managers who will look at the budget creation, instead of many managers involved.
We have calculated the second quarter's budget, and were able to predict a net income of $15,500 (before taxes) by June 30, 2022. By using historical data we were able to determine the purchases budget for each month, allowing us to have a total of $134,000 to be divided appropriately over the 3 months. (Appendix A). Then using our sales revenue for each month, we completed a cash receipt that represents the cash received in a cash sale during the second quarter. This yielded a total of $199,000. (Appendix B). The budget of Timbers Department Store is good as the company can generate cash frequently through the sales it makes, and also for the quarter ending June 30, 2022, the company is profitable with a net income of $15,500, which reflects good performance. The best part of the budget of the company is that it can collect 50% of the cash of the sales it makes in any given month which gives the flexibility to the company to pay out its suppliers. Though in the first two months of the quarter (April and May) the company could not generate enough sales to reach the minimum cash level which the company requires and therefore the company had to bo
ow $22,000 in April, and $3,000 in May to reach the minimum cash level set by the company. (Appendix D, E)
The adequacy of the Cash Management Policy for the company is good but going forward the company will have to look to generate more cash sales due to the amount bo
owed, in order to reach the minimum cash level, plus the interest burden comes on the company which takes away the profit of the company. For future quarters, the company will have to improve the trade policy, which means that they will have to collect more sales in any given month in cash. Additionally, they should decrease the cash level necessary to pay off the loan taken because this builds onto the burden of the company even when cash flow is generated, which is more than the minimum cash level. Therefore, the company should be allowed to pay off the loan as soon as the minimum cash level is crossed in any month. Keeping the focus on the idea that all budgeting starts from predicted sales, it is crucial that those are accurate by preventing huge budgetary slack.
Appendix A.
TIMBERS DEPARTMENT STORE Purchase Budget for 2nd Quarter of 2022
April
May
June
Total
Budgeted Sales
$60,000
$70,000
$90,000
$220,000
COGS
$30,000
$35,000
$45,000
$110,000
Desired Ending Inventory
$42,000
$54,000
$60,000
$60,000
Total
$72,000
$89,000
$105,000
$170,000
Less: Beginning Inventory
$36,000
$42,000
$54,000
$36,000
Required Purchase
$36,000
$47,000
$51,000
$134,000
Appendix B.
TIMBERS DEPARTMENT STORE Cash Receipts Schedule for 2nd Quarter of 2022
Sales Revenue
Cash Collection Pattern
April
May
June
Total (2nd Quarter)
January
$70,000
Fe
uary
$60,000
$6,000
$6,000
March
$50,000
$20,000
$5,000
$25,000
April
$60,000
$30,000
$24,000
$6,000
$60,000
May
$70,000
$35,000
$28,000
$63,000
June
$90,000
$45,000
$45,000
Total Cash Receipts
$56,000
$64,000
$79,000
$199,000
Appendix C.
TIMBERS DEPARTMENT STORE Cash Disbursements Schedule
for 2nd Quarter of 2022
April
May
June
Total
Inventory Purchase
$31,000
$36,000
$47,000
$114,000
Wages and Salaries
$27,000
$27,000
$27,000
$81,000
Utilities
$1,500
$1,500
$1,500
$4,500
Rent
$3,000
$3,000
$3,000
$9,000
Cash Dividend
$15,000
$0
$0
$15,000
Total Disbursement
$77,500
$67,500
$78,500
$223,500
Appendix D.
TIMBERS DEPARTMENT STORE Overall Cash Budget for 2nd Quarter of 2022
April
May
June
Total
Cash Balance, Beginning
$4,000
$4,500
$4,000
$4,000
Add: Collection from Sales
$56,000
$64,000
$79,000
$199,000
Less: Total Disbursement
$77,500
$67,500
$78,500
$223,500
Ending Cash before bo
owing
epayments
-$17,500
$1,000
$4,500
-$20,500
New Loans
$22,000
$3,000
$0
$25,000
Repayments
$0
$0
$0
$0
Interest accrued
-$220
-$250
-$250
-$720
Interest Paid
$0
$0
$0
$0
Net Cash from financing
$22,000
$3,000
$0
$25,000
Cash Balance, Ending
$4,500
$4,000
$4,500
$4,500
Appendix E.
TIMBERS DEPARTMENT STORE
Budgeted Income Statement
for the quarter ending June 30, 2022
Particulars
Amount
Sales
$220,000
Cost of Goods Sold (COGS)
$110,000
Gross Profit
$110,000
Expenses
Wages and Salaries
$81,000
Utilities
$4,500
Rent
$9,000
Total Expense
$94,500
Income From Operations
$15,500
Less: Interest Expense
$0
Net Income from Operations
$15,500
Appendix F.
TIMBERS DEPARTMENT STORE
Budgeted Balance Sheet
June 30, 2022
Assets
Amount
Liabilities and Stockholders’ Equity
Amount
Cash
$4,500
Account Payable
$51,000
Accounts receivable
$52,000
Dividend Payable
$15,000
Inventory
$60,000
Interest Payable
$720
Prepaid Insurance
$1,500
Short term loan
$24,280
Fixtures
$24,460
Stockholders’ equity
$51,460
Total Assets
$142,460
Total Liabilities and equity
$142,460
Example memo 2
after consideration of the December 12th meeting where the cost accountant stated that the traditional use of target cost strategy will not give us accurate results to meet the expected profit that is equal to or exceeds 12% of assets, we conducted an analysis to determine if her assumptions were co
ect. In addition, we looked at a new approach of cost-based pricing. We are optimistic that next year’s profit of 12% total assets is an attainable goal if we increase the price per unit, and are able to cut back on variable costs per unit.
During the manufacturing process SCG has completed research to solidify that garden centers are their target market. The use of the target-cost strategy helped develop our cu
ent price by considering the market-driven strategy that is influenced strongly by competition, character of customers, and quality of customer intelligence. The goal of this strategy is to put a lot of pressure on the product designers to cut costs as much as possible. This however is a great model early in the product life cycle, as its primary advantage is to gain company success in any competitive market. The advantages of this method allows the prices to be more realistic and proactive, because it aims to calculate acceptable costs based on the price people are willing to pay and meet customers’ requirements.
Now that we have seen the demand of the market, we can find benefits from cost-based pricing. Calculations of the selling price are examined by the complete industry value chain as well as all of