Introduction
Into The Night PTY Limited is in the business of selling bicycles. The company has two major brands, Road Bikes (RB) and Mountain Bikes (MB). The brands sell at different prices in different market segments. This report focuses on the projected and actual performance of these brands and the business as a whole in the first quarter of 2012. Three months are covered, January, February, and March. To assess the business position, five computation reports have been prepared on Excel Worksheets. Please find these worksheets attached for your perusal. They are the purchases budget, sales budget, operating expenditure budget, profit and loss statement, and cash flow statement. Additionally, I have prepared a variance report based on both the budgeted and actual positions.
Sales Budget
The sales budget has been prepared for each product and month based on projected sales units and prices. January was predicted to be the poorest month in terms of total sales with the company projecting to make only $251,350. The actual position turned out to be worse than expected with the company selling 208 fewer Road Bikes than anticipated. Despite selling eight more Mountain Bikes, the variance was still unfavorable at -$99,030.
The company hoped to sell more Road Bikes in February and March. In March, the unit price was projected to be higher than in previous months. During this quarter, Mountain Bikes were predicted to perform the best in February selling the most units and at the highest price. MB met and exceeded expectations by seven units translating to a positive variance of $ 4956. Unfortunately, RB fell short of expectations by 155 units making the total variance to be unfavorable at $72,544.
March was a better month for Road Bikes. They sold 92 extra units while MB sold five units less. The total variance was therefore favorable. However, for the whole quarter, the variance was highly unfavorable at -$ 121,624.
Purchases Budget
This budget was prepared based on the projected sales of each bike type per month. Overall, the company seems to have spent $26,328 less on purchases than planned. This is a favorable variance. On taking each product separately, we discovered that this positive variance consisted of a negative MB variance and a larger positive RB variance. The company spent $133,688 less on RB. This could be explained by the corresponding decrease in selling units of this bike. An extra $ 107,360 was spent on purchasing Mountain Bikes. This is quite high considering only 10 extra Mountain Bikes were sold during the quarter.
Operating Expense Budget
These expenses have been split into three sub-categories to ease interpretation and understanding. These are selling expenses, administrative and finance expenses. The method of expense allocation is by sales value ratio. The result of using such a system is that the high-volume sales product Road Bikes is allocated a bulk of the expenses whereas Mountain Bikes is allocated a smaller portion. The company needs to investigate whether this is truly the case or it needs to switch to activity-based costing (Seal & Noreen 2008).
Selling expenses form the bulk of operating expenses. This scenario was maintained in both the budget and actual data. The company spent less than budgeted on administration and finance. However, much more was spent on selling expenses. Therefore, the total variance for operating expenses was unfavorable at -$3,935.
Profit and Loss
The company projected to make a net profit of $481,034 from both products. A closer look reveals that of this amount, $ 353,940 relates to Road Bikes while $ 127,094 relates to Mountain Bikes. The net profit of Road Bikes as a percentage of total sales is 40% while that of Mountain Bikes is 48%. Unfortunately, Road Bikes sell in much higher volumes than Mountain bikes. The cost of goods sold is also much higher than operating expenses.
Cash Budget
Preparing a cash budget enables a company to avoid cash-flow problems that could cripple the business (Marsh 2009, p.98). All cash expenses, regardless of whether they are revenue or capital are included in this budget. Into The Night is expected to have more cash inflows than outflows during this quarter. The company also expected to close the quarter with a positive bank balance of $ 132,890.
The actual cash position was quite different from the budget. The company collected less from debtors in January and March and paid much more to Sundry creditor Smith and other creditors. Much more was also spent on operating expenses and capital expenditure. This resulted in a negative variance of $ 22,424. However, the closing bank balance was still positive.
Conclusion and Recommendation
The budgets used in this report are accurate since they are based on industry data and the company’s previous quarter (Weetman 2007, p 65). The negative sales variance caused by poor Road Bikes sales affected all the other budgets. The company is spending too much on purchasing Mountain Bikes as shown by the negative purchases variance. Operating expenses did not vary much from the budget. This could be an indicator of the company’s proper expense management skills. Road Bikes contribute more to profit or loss than Mountain bikes due to high sales volumes.
The company needs to focus on selling more Road Bikes as they contribute to profit more than Mountain Bikes. There is potential for more sales. The company should raise its target from the current 15% of the market. Secondly, the company should re-think its cost allocation method and consider switching to ABC from the sales-volume-based system. Finally, the company should consider negotiating with its creditors to allow for longer credit periods. This will enable matching of the debtor’s and creditors’ policies.
References
Marsh, C 2009, Mastering Financial Management: A Step-by-Step Guide to Corporate Financial Management, Prentice Hall, Mumbai.
Seal, W & Noreen, E 2008, Management Accounting, McGraw-Hill, New York.
Weetman, P 2007, Financial and Management Accounting: An Introduction, Prentice Hall, Chicago.