Budgeting for Marketing Expenses; Strategy You have been recruited by a former classmate,Susanna Wu, to join the finance team of a company that she founded recently. The company produces a unique product line of hypoallergenic cosmetics and relies for its success on an aggressivemarketing program. The company is in a start-up phase and therefore has no significant history ofexpenses and revenues upon which to rely for budgeting and planning purposes. Given the restriction on available funds (most of the available capital has been used for new-product developmentand to recruit a management team), the control of costs, including marketing costs, is thought by themanagement team to be essential for the short-term viability of the company.You have held a number of intensive discussions with Susanna and John Thompson, director ofmarketing for the firm. They have asked you to prepare an estimated budget for marketing expensesfor a month of operations.You are provided with the following data, which represent average actual monthly costs over thepast three months:Cost AmountSales commissions $120,000Sales staff salaries 40,000Telephone and mailing 38,000Rental—office building 25,000Gas (utilities) 12,000Delivery charges 70,000Depreciation—office furniture 8,000Marketing consultants 25,000Your discussions with John and Susanna indicate the following assumptions and anticipatedchanges regarding monthly marketing expenses for the coming year:∙ Sales volume, because of aggressive marketing, should increase by 10%.∙ To meet competitive pressures, sales prices are expected to decrease by 5%.∙ Sales commissions are based on a percentage of sales revenue.∙ Sales staff salaries, because of a new hire, will increase by 10%, regardless of sales volume.∙ Because of recent industrywide factors, rates for telephone and mailing costs, as well as deliverycharges, are expected to increase by 6%. However, both of these categories of costs are variablewith sales volume.∙ Rent on the office building is based on a 2-year lease, with 18 months remaining on the original lease.∙ Gas utility costs are largely independent of changes in sales volume. However, because of industrywide disruptions in supply, these costs are expected to increase by 15%, regardless of changesin sales volume.∙ Depreciation on the office furniture used by members of the sales staff should increase because ofnew equipment that will be acquired. The planned cost for this equipment is $30,000, which willbe depreciated using the straight-line (SL) method, with no salvage value, over a 5-year useful life.∙ Because of competitive pressure, the company plans to increase the cost of marketing consultantsby $5,000 per month.Required1. Use the preceding information to develop an Excel spreadsheet that can be used to generate a monthlybudget for marketing expenses. (Use the built-in function “SLN” to calculate monthly depreciationcharges for the new equipment to be purchased.) What is the percentage change, by line item and intotal, for items in your budget?
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.
Budgeting for Marketing Expenses; Strategy You have been recruited by a former classmate,
Susanna Wu, to join the finance team of a company that she founded recently. The company produces a unique product line of hypoallergenic cosmetics and relies for its success on an aggressive
marketing program. The company is in a start-up phase and therefore has no significant history of
expenses and revenues upon which to rely for budgeting and planning purposes. Given the restriction on available funds (most of the available capital has been used for new-product development
and to recruit a management team), the control of costs, including marketing costs, is thought by the
management team to be essential for the short-term viability of the company.
You have held a number of intensive discussions with Susanna and John Thompson, director of
marketing for the firm. They have asked you to prepare an estimated budget for marketing expenses
for a month of operations.
You are provided with the following data, which represent average actual monthly costs over the
past three months:
Cost Amount
Sales commissions $120,000
Sales staff salaries 40,000
Telephone and mailing 38,000
Rental—office building 25,000
Gas (utilities) 12,000
Delivery charges 70,000
Depreciation—office furniture 8,000
Marketing consultants 25,000
Your discussions with John and Susanna indicate the following assumptions and anticipated
changes regarding monthly marketing expenses for the coming year:
∙ Sales volume, because of aggressive marketing, should increase by 10%.
∙ To meet competitive pressures, sales prices are expected to decrease by 5%.
∙ Sales commissions are based on a percentage of sales revenue.
∙ Sales staff salaries, because of a new hire, will increase by 10%, regardless of sales volume.
∙ Because of recent industrywide factors, rates for telephone and mailing costs, as well as delivery
charges, are expected to increase by 6%. However, both of these categories of costs are variable
with sales volume.
∙ Rent on the office building is based on a 2-year lease, with 18 months remaining on the original lease.
∙ Gas utility costs are largely independent of changes in sales volume. However, because of industrywide disruptions in supply, these costs are expected to increase by 15%, regardless of changes
in sales volume.
∙ Depreciation on the office furniture used by members of the sales staff should increase because of
new equipment that will be acquired. The planned cost for this equipment is $30,000, which will
be
∙ Because of competitive pressure, the company plans to increase the cost of marketing consultants
by $5,000 per month.
Required
1. Use the preceding information to develop an Excel spreadsheet that can be used to generate a monthly
budget for marketing expenses. (Use the built-in function “SLN” to calculate monthly depreciation
charges for the new equipment to be purchased.) What is the percentage change, by line item and in
total, for items in your budget?
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