RUNNING HEAD: BUDGET PLANNNG AND CONTROL 1

Budget Planning and Control

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BUDGET PLANNING AND CONTROL
Budget VS No Budget

Babycakes is a specialty bakery owned by Erin Mckeena and located in New York. This

is one of the popular vegan bakery in the city of New York. Erin expanded her company to Los

Angeles to open a second bakery. Erin should start by creating a realistic budget for her new

store. A realistic budget is needed to see where and how much money is spent on machinery (ie.

mixers, pans, & utensils) and cooking supplies (ie. mix, oil, sugar, flour, icing, and decorations)

for the bakery. Having a budget will play a critical role in helping Erin pay off debt, build for the

company and the most of her earned money from the cupcakes, doughnuts and pastries.

The first step Erin could take is using an efficient method in tracking her expenses for

each quarter by using a computer program such as word or excel which could help ease the

calculations. Once she is able to see where the earned is going from the bakery she will be able

to make decisions on how to allocate her profits. Secondly, to maintain a certain quality

Babycakes must make sure that they do not bake too much for a day because you do not want to

carryover so much extra baked items. Items would become stale and the cupcakes and

doughnuts that do not sell for half price the next would have to be thrown out. This would case

the company to result in a loss of profits.

Furthermore, Babycakes do not want to under bake goods because the idea is to always

try and meet the demand of your customers each day. When you are running a business and not

being able to meet the demands of the customers also contributes to the company loss in profits.

Lastly, going without a budget could cause Babycakes to go over or even under for the cost of

goods sold. As an owner of a company you want your business to succeed, make customers

happy so they will return as well as make profit however it all begins with a budget and

planning. The best way to be sure Erin is utilizing all her goods and services are by planning
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ahead and budgeting. According to Morini (2002), a flawed planning and budgeting process

can harm corporate performance and reputation which include loss of business opportunities and

lower than expected earnings (p. 48). Planning will allow the company to detail their short and

long term financial goals.

Sales Budget/New Products 4th Quarter

Going into Babycakes 4th quarter Erin would like to add three new products special

products to the bakery for the next three upcoming holidays. The month of October is

Halloween and Erin wants to create a delicious orange cream candy cone cupcake. November is

the month for Thanksgiving and Erin wants to create a scrumptious sweet potato cupcake.

Lastly, in December one of the biggest holidays of all time Christmas Babycakes bakery will

create a magnificent candy cane cupcake. Looking at Appendix 1.0 shows the sale budget

projections for October, November, and December. Babycakes sales unit for October 23100,

November 23000 and December 23300. Babycakes sales shows and increase during the 4th

quarter. Babycakes sales assumptions on a 30-day selling 750 units at sale price of $3.50.

Babycakes Holiday assumptions are as follows for Halloween estimated 600 units, Thanksgiving

500 units and Christmas 800 units sold with a production cost of $1.40. Per appendix 2.0 shows

LA Babycakes sales budget including half of her Valentine day sales. Babycakes gross profits

increased over 4th quarter.

Static VS Flex

In constructing a sound plan and budget institutions must shift from static or infrequent

planning and budgeting process to continuous, flexible process to be able to produce a reliable

budget ( Morini, 2002). For many new businesses, the most difficult task is determining how to
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budget. This process is made to be difficult because there arent any previous periods to guide

this company through the tedious times of budgeting season. With this scenario of Babycakes,

the owner has decided to use a static budget. In many cases, a static budget is a great option

because itll help you prepare for next years budget through showing you the many different

variances by line items.

The biggest downfall of a static budget is that it requires you to make an educated guess

based on numbers from previous periods and at this point the owner of Babycakes doesnt have

any previous numbers. Since this is a new location on the other side of the United States, the

only figures that the owner of Babycakes could use are previous numbers from the business

across country. Those figures dont take into account the culture or economic climate of LA.

With that being said it becomes virtually impossible to hit your targeted budget when you

budgeted using figures from a completely different climate. Hence, the reason Babycakes

continues to see unfavorable variances when her sales increases. This happens when using a

static budget with variable production costs when our sales outperform the budgeted amount.

As seen in appendix 2.1, we see how sales drives the production unit costs. October I

assumed that sales failed to reach the amount budgeted and we see how our sales variances are

unfavorable. Yet, our productions costs are favorable because we didnt have to produce as many

units as we budgeted due to lower demand for the month of October. In November and

December, we start to see an increase in our Sales which causes us to have a favorable amount of

sales but then our production costs start to flip unfavorably. The biggest problem with static

budgets is that we dont change them even if we start to see things trend differently. This is

especially concerning when we are a new company with no previous periods to observe and base

our budget on.

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The best option for a new business would be to use a flex budget. A flex budget would be

best because you arent too worried about variances at the start of a business, especially if this is

the first year of a business. You can flex the budget the first year and use the actuals from the

first year to create a static budget in the second year, which would allow you the best opportunity

to analyze the variances.

Financial Challenge

Overspending can stem from the cost of goods and the cost of services which are sections

on the income statement however sometimes they made end up under operating expense and

could be easily over looked. The harder it is to determine to which category a particular

expense belongs, the more likely it is that errors will occur in this part of the mental budgeting

process (Sussman & Alter, 2012). Overspending is caused by not knowing what you already

have, no plans, buying the wrong products and services, working with the wrong vendors, buying

too much of a product and using more than expected. Furthermore, if a product does not sell it

ends up going to waste which results in using too much products. However, planning how much

to use for each item would help to cut down overspending as well making sure you ordering the

correct goods and services. Using the correct amount of measurements and not baking too many

of a product would save on having to restock products several times throughout the week. For

example, Erin knows that her cornbread does not sell well so cutting back on the amount that she

bakes will help her save in buying products for making cornbread or those ingredients could be

use towards something that is a top seller.

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One way for Erin to manage overspending is by making sure she puts the correct cost

goods and services under the correct statements to be sure all products are correctly accounted

for. Additionally, Erin should plan how much of an item she needs to be made and only make

that amount fir that day. Babycakes could make sure they are using the correct amount of

ingredients and measurements when preparing and mixing the goods. This would ensure

products such as (ie. flour, sugar, oil, and baking soda) are used efficiently. Another corrective

action for Erin is to train her employees to ensure they are also using the right amount of

ingredients as well. Furthermore, they use extra dough to go towards making another pastry.

The main thing to not overspending is manage effectively of the products used, not using too

much of a product, make sure machinery is used correctly and keep daily records of whats

coming in and going out and items are listed correctly on income statements and operating

expenses.
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Appendix

Appendix 1.0

Babycakes 4th Quarter Sales Projections

4th Quarter
October November December Total Budget
Budget Budget Budget
Units 23100 23000 23300 69400
Sales $ 80,850.00 $ 80,500.00 $ 81,550.00 $ 242,900.00
Production Costs $ 32,340.00 $ 32,200.00 $ 32,620.00 $ 97,160.00
Gross Profits $ 48,510.00 $ 48,300.00 $ 48,930.00 $ 145,740.00
Rent (fixed) $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 15,000.00
Net Income $ 43,510.00 $ 43,300.00 $ 43,930.00 $ 130,740.00

Appendix 1.2

Sales Assumptions
Days per Month 30
Units Per Day 750
$
Sales Price 3.50

Holiday Sales Assumptions (1 day)

October November December
Units 600 500 800

Production Cost Assumptions

$
Production Cost per unit 1.40

Appendix 2.0
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Reference

Morini, M. (2002). Four steps to effective planning and budgeting. Bank Accounting & Finance

(08943958), 15(6), 47.

Sussman, A. B., & Alter, A. L. (2012). The exception is the rule: underestimating and

overspending on exceptional expenses. Journal Of Consumer Research, 39(4), 800-814.

doi:10.1086/665833