Budget Analysis of Competition Bikes Inc.

Budget Analysis of Competition Bikes Inc.

Introduction

Competition Bikes Inc. produces professional bicycles and bicycles for riders who are highly accomplished and compete in biathlons, triathlons and bike races. The company's only competitor is Two Wheel Racing. The report analyzes the budget and budget planning of the company to assure adequacy of funds for capitalizing on business opportunities. For this purpose, the various budgets and pro-forma statements are analyzed and compared with the actual outputs. The flexible budget and the variances occurring with respect to the actual output are evaluated and analyzed. The variances are identified and corrective actions are recommended for such variances. Further the application of management by exception is also presented in the report to overcome the issues of budget variances.

Discussion

Concerns in Budget Planning

Sales Budget

The sales budget is based upon the estimate that 3,510 units are forecasted to be sold during the year 9. The actual units sold during the year 8 were 3,400 and management has assumed that the market would moderately improve during the year 9. Based on the economic situation due to which sales declined by 15% in year 8, it is less likely that the sales would increase noticeably.

Budgeted Income Statement

The budgeted income statement for the year 9 anticipates that 72.93% of the sales being the cost of goods sold, 25.54% being the selling, general and administrative expense and 0.85% of net interests. Overall the earnings before tax are only 0.69%. This indicates that the company would be earning a very low net profit margin. In year 8, the company posted earnings before tax of 0.9% even though the sales were comparatively lower.

Figure 1: Composition of Budgeted Net Sales for Year 9

Budgeted Schedule of Cost of Goods Sold

The cost of goods sold comprises of nearly 60% direct materials, 27.5% direct labor and the rest is manufacturing overhead. Amongst the manufacturing overhead, the largest portion is of depreciation and the quality control, accounting for 3.2% of the total cost of goods sold. The composition of the budgeted cost of goods sold for the year 9 is exhibited in figure 2.

Figure 2: Composition of Budgeted Cost of Goods Sold for the Year 9

Raw Materials Budget

As per the concept of zero inventories, the company has planned to carry a certain level of both the raw materials, components and carbon fiber sheets. The raw materials used and purchased would be those in accordance with the units sold throughout the year.

Production Budget

All the orders would be made to order and the company would not be holding nay finished goods inventory. Though having zero inventory levels could aid the company in avoiding the inefficiencies of high inventory level related to tied up resources and changing demands but carrying zero inventory requires high level of operational efficiency and high levels of organizational commitment (Hansen, Mowen & Guan, 2009).

Figure 3: Composition of the Budgeted Selling, General and Administrative Expenses for the Year 9

Selling General and Administrative Budget

The composition of the budgeted selling, general and administrative expenses ...