Budgeting At Babycake

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  Budgeting at Babycake Budgeting is an important function in the management of organization’s financial resources.  This paper will discuss the benefits Babycake will realize by having good budget in place. In addition, the paper will prepare sale budgets for the Babycake store as well as explain why the company need to shift from Static budget to flexible budgeting. 1.0 Benefits of good budget Budget is defined as the cost and revenue estimate for a given period of time (Collier, 2015). Every successful business must have a good budget in place. There are several benefits that Babycake would realize by having a good budget.  First, Budget is forward looking and as such it would enable Babycake forecast and prepare for the future (Collier, 2015). Secondly, budget put cap on spending and as such it would help Babycake   prevent overspending.  Operating without a budget put a company in an awkward position since it become hard to notice case of overspending (Oliver, 2000). Thirdly, budget motivates manager and employees as it act as benchmark for evaluating their performance (Anderson, 2013).  Therefore, by putting a good budget in place, the owner of Babycake will also benefit from increased productivity due to motivated workforce. 2.0 Sales Budget for Babycake’s L.A Store The following is the Sale budget for Babycake’s LA store for the 4th quarter.  Table 1; Sales Budget for Babycake‘s LA store.
Babycake’s Sales  Budget For the 4th Quarter 2016
  October November December Total
 Sales in units 31500 30500 31500 93500
Price per Unit 3.5 3.5 3.5 3.5
Total  sales 110250  106750 110250 327250
   Assumption made While preparing the sale budget above, there are few assumptions that were made. They are as follows
  • Babycake Company sells only on products (red velvet cake)
  • The product price does not change
  • Each of the month will have only one holiday
3.0Babycake’s Sales Budget for 3 New Products In the 4th quarter, Babycake will sell three new products namely black forest cupcake, Chocolate cupcake and merry cake.  Black forest cupcake will be sold throughout the month of October; Chocolate cake will be sold in the month of November while the merry cake will be sold on December.   It is projected that in the 4th quarter, 1000 units will be sold on normal day while on holiday the sale will be 1500 units. The total sale in units and $ for each month and products is as below;   Table 2; BabyCake’s Total sales for the 4th quarter
October (Blackforest Cupcake) November (Chocolate Cupcake ) December (merry cake )
Total sales in units 31500 30500 31500
Total sale in $ 110250 106750 157500
  There are several assumptions that were used when preparing the above estimate. They include;
  • The only holidays to affect Babycake’s sale are Hallowen on October, Thanksgiving on November and Charismas on December
  • The demand for Babycake’s product will remain unchanged at 1000 units on normal day and 1500 on holiday
  • Since the chocolate and black Forest cupcake will be similar in size to the Babycake’s red Velvet cake sold during valentine, they will cost similar amount to produce and as such they will be sold at a price of $ 3.5
  • The Merry cake will be larger that red velvet cake. it will therefore cost slightly high to bake and as such it retail price will be $5
    4.0 Flexible vs. Static Budget  Currently, the Babycake is using static budget. Static budget is one that does not change as the volume change.    Once approved, the budget remains unchanged for the entire budgeting period even if other factors such as sale changes (Oliver 2000).  Static budget usually work well when the sales and expenses are highly predicable and are not expected to change during the budgeted period (Warren, Reeve, $ Duchac, 2008).  Unfortunately, this is not the case in Babycake as its sales usually changes during holidays.   Using static budget in this case will therefore continue to show unfavourable variance whenever the sale increases. For Instance, if the actual sales for the Babycake’s LA store increase to 100,000 units from the budgeted sales of 93, 500 units (see section 2.0) unfavourable variance will occur. Let assume;
  • Raw material is the only variable cost for Babycake
  • Raw material used per Red velvet cake is $ 1.2
  • BabyCake’s fixed cost per quarter equal $20,000
Based on the sale budget created earlier and these assumption, actual spending based on 100,000 units and static budget based on 93,500 units  and the budget variance is a shown below .            
    sales (units) Sales  ($3.5 per unit ) Cost (F+V)   Gross profit Actual Spending  Static budget Variances
100,000 350000   170000   180,000 93,500  327250   136 875   190375     22750   (33125)   (10375)
   A comparison between static sale budget for Babycake’s LA and the actual Budget as contained in the table above, shows unfavourable budget variance. The actual cost of goods sold is higher than the budget cost by $33 125 while the actual gross profit is less than the expected gross profit by $10375. This Budget variance can misleading decision making at Babycake store as it does not take into account the change in level of activities.   Flexible budget can help Babycake address this problem by breaking down the cost into variable and fixed cost and making necessary adjustment to reflect level of changes as shown below.
  Actual Spending Flexible budget   Variances
 Sale  (Units) Sale in $ ($3.5 per unit) Variable costs  ($1.25 per units) Fixed cost Total cost Gross profit 100,000 350000 150000 20000 170000 180,000 100000 35000 150000 20000 170,000 180,000 0 0 0 0 0 0
    As it can be seen in the table above,   when the flexible budget is used, the variance between actual spending and budgeted spending is zero. This is so because flexible budget takes into account the changes in level of activities i.e. sales hence providing more accurate budget variance. 5.0 Corrective Action to Take when Unfavourable Budget Variance Occur In some cases, the actual amount of money spend may differ significantly with the budgeted spending. This difference is called budget variance (Oliver 2000). For instance,   in one occasion I had budgeted to spend  $2000  on my weekly budget  but  unfortunately I ended-up  spending $2500. In this case I had a budget variance of negative $500 (budget variance= Actual spending –budgeted spending). Just like other organization, Babycake is confronted by a case of overspending. As stated by DF (2010), the first thing to do when overspending occurs is to calculate the budget variance.  While a small variance can be overlook without any consequences, bigger variances need to be investigated in order to understand their cause. It is only after the cause is known can a business be able to take effective corrective measures (DF 2010). The unfavourable budget deficit in Babycake store has been mainly caused by financial challenges. Therefore, to address the variance, Babycake should seek ways to resolve the financial challenges it is facing. Some of the ways to resolve the issue including seeking additional fund, readjusting the budget and more importantly improve cost control system (Collier 2015). In conclusion,    Babycake should continue preparing a budget to guide it operation as it has more to gain from the practice. However, for budget to become more meaningful and relevant, the company must shift from static budgeting to flexible budgeting.     Appendix Sale budget For Babycake’s LA store (3 new product for each of the three holiday season)  
          Sales (Units)   price (unit) Total sale  October (Black forest Cupcake )   November (Chocolate  cupcake )      December (merry cake)
Normal day Holiday   Total Normal day Holiday Total Normal day Holiday Total
30000 1500 31500 29000 1500 30500 30000 1500 31500
3.5 3.5 3.5 3.5 3.5 3.5 5 5 5
105000 5250 110250 101500 5250 106750 150000 7500 157500
  Calculation Sales per month in Units = (number of normal days X units sold on normal day) + (Number of holidays X Units sold on Holiday) Sales per month in Units= (Total Units sold X Price per unit)   Therefore, October’s sale (Units) = (30 days X 1000 units) + (1 day X 1500 units) =31,500 units October’s sale in ($)   = 31500 X 3.5 = $ 110250 November’s sale (Units) = (29 days X 1000 Units) + (1 day X 1500 units) =30,500 units November’s sale ($) = 30500 X 3.5 = $106750   December’s sale (Units) = (30 days X 1000 units) + (1 day X1500 units) = 31,500 units December’s sales ($) = 31500 X 5 = $ 157500        
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Essays Stock (2023). Budgeting at Babycake. Essays Stock. https://essays-stock.com/blog/budgeting-at-babycake

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