Assume that The AM Bakery is preparing a budget for the month ending November 30. Management prepares the budget by starting with the actual results for August that are shown below. Then, management considers what the differences in costs will be between August and November. THE AM BAKERY Bakery Sales Actual Costs For the Month Ending August 31 Actual Budgeted Difference Ingredients Flour $ 3,900 $ 3,700 $ 200 Butter 3,500 3,400 100 Oil 1,700 1,800 (100) Fruit 1,300 1,000 300 Nuts 900 800 100 Chocolate 800 800 - Other 400 300 100 Total ingredients $ 12,500 $ 11,800 $ 700 Labor Channel manager $ 4,500 4500 - Other 10,700 10,900 (200) Utilities 2,400 2,300 100 Rent 3,600 3,600 - Marketing 200 100 100 Total bakery costs $ 33,900 $ 33,200 $ 700 Revenues $ 52,200 $ 52,200 - Management expects revenue in November to be 30 percent higher than in August, and it expects all ingredient costs (e.g., flour, butter, and so on) to be 25 percent higher in November than in August. Management expects “other” labor costs to be 30 percent higher in November than in August, partly because more labor will be required in November and partly because employees will get a pay raise. The manager will get a pay raise that will increase his salary from $4,500 in August to $5,000 in November. Rent, utilities, and marketing costs are not expected to change. Now, fast-forward to early December and assume the following actual results occurred in November. THE AM BAKERY Bakery Sales Actual Costs For the Month Ending November 30 Actual Ingredients Flour $ 4,950 Butter 4,600 Oil 2,030 Fruit 1,550 Nuts 1,200 Chocolate 1,030 Other 460 Total ingredients $ 15,820 Labor Channel manager $ 5,000 Other 14,120 Utilities 2,400 Rent 3,600 Marketing 200 Total bakery costs $ 41,140 Revenues $ 68,000 Required: Prepare a statement that compares the budgeted and actual costs for November. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Problem 1-49 (Static) Cost Data for Managerial Purposes—Budgeting (LO 1-3)
Assume that The AM Bakery is preparing a budget for the month ending November 30. Management prepares the budget by starting with the actual results for August that are shown below. Then, management considers what the differences in costs will be between August and November.
| THE AM BAKERY | |||
| Bakery Sales | |||
| Actual Costs | |||
| For the Month Ending August 31 | |||
| Actual | Budgeted | Difference | |
|---|---|---|---|
| Ingredients | |||
| Flour | $ 3,900 | $ 3,700 | $ 200 |
| Butter | 3,500 | 3,400 | 100 |
| Oil | 1,700 | 1,800 | (100) |
| Fruit | 1,300 | 1,000 | 300 |
| Nuts | 900 | 800 | 100 |
| Chocolate | 800 | 800 | - |
| Other | 400 | 300 | 100 |
| Total ingredients | $ 12,500 | $ 11,800 | $ 700 |
| Labor | |||
| Channel manager | $ 4,500 | 4500 | - |
| Other | 10,700 | 10,900 | (200) |
| Utilities | 2,400 | 2,300 | 100 |
| Rent | 3,600 | 3,600 | - |
| Marketing | 200 | 100 | 100 |
| Total bakery costs | $ 33,900 | $ 33,200 | $ 700 |
| Revenues | $ 52,200 | $ 52,200 | - |
Management expects revenue in November to be 30 percent higher than in August, and it expects all ingredient costs (e.g., flour, butter, and so on) to be 25 percent higher in November than in August. Management expects “other” labor costs to be 30 percent higher in November than in August, partly because more labor will be required in November and partly because employees will get a pay raise. The manager will get a pay raise that will increase his salary from $4,500 in August to $5,000 in November. Rent, utilities, and marketing costs are not expected to change.
Now, fast-forward to early December and assume the following actual results occurred in November.
| THE AM BAKERY | |
| Bakery Sales | |
| Actual Costs | |
| For the Month Ending November 30 | |
| Actual | |
|---|---|
| Ingredients | |
| Flour | $ 4,950 |
| Butter | 4,600 |
| Oil | 2,030 |
| Fruit | 1,550 |
| Nuts | 1,200 |
| Chocolate | 1,030 |
| Other | 460 |
| Total ingredients | $ 15,820 |
| Labor | |
| Channel manager | $ 5,000 |
| Other | 14,120 |
| Utilities | 2,400 |
| Rent | 3,600 |
| Marketing | 200 |
| Total bakery costs | $ 41,140 |
| Revenues | $ 68,000 |
Required:
-
Prepare a statement that compares the budgeted and actual costs for November.
-
Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different?
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