A. Prepare a summary report in which you do the following:
1. Discuss budgetary areas that raise concern in the budget planning.

Competition Bikes, Inc. - Year 9 Budget Concerns

The master budget for year 9 of Competition Bikes, Inc. contains all the required schedules. In general the information is sound and there are only a few concerns in regards to presentation and content.

Concern 1 – Quarterly Activity
The first concern is that all activity is not divided by quarter. Because the sport of bicycling is generally practiced outdoors and is likely to be weather dependent, then we should assume that there are seasonal trends to competitions and events involving professional bicycle teams.

Without the separation of production activity by quarter we cannot see and respond to peak seasons and low seasons. An optimal example of this is that materials are purchased without regard to seasonal activity, so that If the peak is summer, the company should be building up inventory in the spring, and lowering inventory in the fall. This way the company avoids having higher inventory levels than it needs. This also helps the company utilize its reserve inventory for its true purpose, to cover unexpected increases in sales, not to cover budgeting issues.

Concern 2 – Sales Projections
The sales budget is based on projections that take into account trend information as well as market, competitor, and other econometric information to provide an accurate forecast of future sales (Hilton, 2009).

The projected sales figure of 3,510 units for year 9 is not supported by past sales performance. For year 8 there was a 15% decrease in units sold in comparison to year 7 levels.

According to information provided by the company this is due to the economic situation which affects professional rider’s sponsorships. The company also states that this trend (decrease in sponsorship) is expected to continue for another three years (year 9 through 11).

Concern 3 – Uncollectable Accounts
The cash budget schedules of the company’s master budget fail to specify any level of uncollectable receivables.

The company manufactures very high quality and highly specialized goods that are high in cost. Client issues with quality, loss of sponsorship, and economic issues for the distributors can generate unpaid accounts which can turn into uncollectable accounts.

Concern 4 – Components and Materials Inventory Levels
Although the company is budgeting for nearly 140 unproduced bikes (140 sets of parts and 5,880 strips of carbon fiber) it is budgeting for the labor which may be required to convert these “reserve” bikes into actual bikes.

Another issue in this area concerns the parts kits. Because these are very expensive and specialized bicycles, it stands to reason that the component kits are also highly specialized.

If older part models sit in inventory too long they may become obsolete and the company may lose the entire value of those kits. This can be due to a new type of gear, an improved material alternative, a new patented design. If the stock is not rotated in a specific manner the company can be left with outdated parts to cover new orders.

Concern 5 – Utilities Costs
In the manufacturing overhead schedule the company is accounting for utilities at a fixed facility level independent of production amount and efficiency. The actual amount spent on utilities can vary by any of these two factors.

Another concern is that the SG&A schedule has two separate utility line items. One is “Utilities” and the other is “Utilities and Services” both under “Facility and General Operations”. This can become confusing as both are part of the same category and are grouted in the same area. In addition to this duplication, the concept of utilities is already a fixed cost under manufacturing costs schedule.

2. Evaluate the flexible budget and its variances.

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

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