1. Discuss budgetary areas that raise concern in the budget planning.

The Sales during 2008 were 3,400 units and for 2009 a projected sale of 3,510 has been made this represents a 3.2% increase in sales while the sales for 2008 over 2009 reduced by 15%. Managements anticipation of moderate sales increase will need to come true for the company to meet the targeted sales of 3,510 units considering the current environment and expected trends for the next 3 years.

The Company has a gross margin of 27% however the operating margin is only 1.535% which is quite low considering that any costs increase even marginal or drop in sales or sales price could cause a the company to go form a relatively small profit to a loss. The company would have to have a relook at its operating expenses and find ways to reduce and find cost savings in that class.

Executive compensation is quite high at around 22% of selling and general expenses and much more then the 170,000 of all other administrative salaries. Executives may need to take a cut in compensation considering the underlying environment and load on the company.

The returns on equity and assets are also significantly low for the firm in the current year and these projections provided will most likely cause the stock price of the company to be under downward pressure. The company has not considered any dividend payouts making the company not very attractive to dividend seeking investors while growth is not strong so growth investors will also keep away this further supports that the firm will find it difficult to maintain its stock price or raise new equity capital.

The firm has a 12% accounts receivable average balance however there is no evidence noticed if the firm has had any provisions made for bad debts.

2. Evaluate the flexible budget and the variances.

The Flexible budget is a valuable tool to adjust the master budget to the actual sales output recorded. This is very important as it helps show the actual variable costs budgeted and adjusted to the new or actual quantity of goods sold. The fixed components of the income statement also reflect the per unit costs which would be higher if the sales quantity decrease while would be lower if sales decrease. This is a very helpful tool to management to decide if at times they could lower the selling price of items if the variable costs are covered as this would help cover some of the fixed costs and in general increase the share holder value.

The Flexible budget shows that the company has primarily failed to meet its targeted sales of 3510 units by 87 units or 2.47% less then budgeted this would mean that sales were depressed or part of the companies market share was taken over by competitors.

On the variances the first notable point of concern is that sales have deceased by 2.47% the second slight concern is the company has failed to maintain its targeted selling price, which has reduced from 1,495 to an average of 1,489.

Variable costs show a worrisome overall sign the only favorable item being a reduced direct material costs of 200,000 which is significant at close to 9%, however at the same time the efficiency variance was unfavorable this in part could be explained that the company may have purchased substandard materials thereby having a favorable price variance but an unfavorable efficiency variance part of these benefits were taken away by the increased other variable costs.

Increased labor costs of 100,000 (9.7%) this may be explained as the company having hired more skilled labor at a more expensive rate as the efficiency rate has increased favorably the favorable efficiency however has not covered the increase in labor costs if only due to skills factor.

Increased manufacturing overhead of 26,426 (8.1%) and are unfavorable both in terms of price as well as efficiency.

Increased advertisement costs of 3754 (13.5%) this is quite high as a percentage and is unfavorable as far as price variance is concerned but was partly offset by a efficiency variance of 2,426 indicating the company benefited partially from increased advertisement.

Increased transport costs of 5607 (5.4%) these costs are unfavorable both in terms of price as well as efficiency and are also deviating from the contract price of 30 per unit

On the fixed costs side as well there are variances in the actuals against the budgeted numbers however these are within expectable limits of just 0.3 % where total fixed expenses have reduced by 3,741 for the year.

The company’s operating income has basically increased by close to 20% this is a good sign but the major contributing facto has not been increased sales but reduced material costs. Had it not been for the reduced material costs the company would most likely have posted an operating loss.

a. Recommend corrective actions for areas of concern based on a variance analysis.

The company needs to review its budgeting process and improve its projections in terms of both variable as well as fixed costs, which have deviated considerably in actuals from the budgeted figures.

During the current year sales increased by a very negligible .67% for the year 10 sales are projected to increase by around 4% management will need to review this number and in order to meet the target think in terms of more advertisement, targeted marketing campaigns or finding new markets and distributors to boost the sales.

Variable material costs need to be reworked and the right balance of materials quality against price will need to be identified so that both the price and efficiency of the direct materials is favorable. The cheapest quote is not always the best product. Management cold also look beyond the 3 suppliers and test the quality of the other suppliers to see if the higher price quoted justifies or produces a favorable efficiency.

Variable labor costs need to be reviewed and the right balance of skilled and unskilled labor mix needs to be identified to balance the price and efficiency ratios which have been lop sided in the current year.

Variable manufacturing overhead needs to be relooked and a new more realistic rate per unit will have to be applied, as the current rate of 94.529 has not been efficient.

Advertisement expenses need to be better spent in terms of providing maximum efficiency and return. The company can look at targeting its niche market of riders rather then the general public in its advertisement strategies. The company can also look at trying to create a better brand image and target high-income recreational riders as a method of trying to increase both sales and profitability.

Further investigation may be needed to determine how the transport costs have increased by 5% despite the existence of an agreement at USD 30. Strict adherence to pre set agreements needs to be implemented.

On the fixed costs side the company would be better served if they can negotiate reduced executive compensation to a level that is reasonable and benefits both shareholders as well as staff. Further efficiencies and cost reductions in other general and administrative expenses will also help keep the company profitable for the next year.

b. Discuss how the concept of management by exception could be applied to the variances.

Management by exception is the practice of examining the financial and operational results of a business, and only bringing issues to the attention of management if results represent substantial differences from the budgeted or expected amount. The best way would be to determine a base dollar amount or a fixed deviating percentage as a base. In our presented example it would be more practical considering the variability in amounts to consider a percentage of variance in this case I will select a variance of greater then 5% to draw the attention of management to address the same. Sample of some items presented are listed below.

Item | Budgeted | Actual | Variance | % Of Variance | | | | | | Direct Materials | 2,235,219 | 2,035,219 | -200,000 | -8.9% | Direct Labor | 1,026,900 | 1,126,900 | 100,000 | 9.7% | Manufacturing Overhead | 323,574 | 350,000 | 26,426 | 8.2% | Advertisement Expenses | 27,708 | 31,462 | 3,754 | 13.5% | Transport Out | 102,690 | 108,297 | 5,607 | 5.5% |