TASK TWO Task Two AY . Concerns in Budget Planning: Budgetary Items. Depreciation: Depreciation is "the method that the accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement" (Barman, Knight, & Case, 2013). Depreciation is said to be based on the same fundamentals as accruals in that a company "wants to match as closely as possible the costs of products and services with what was sold" (Barman et al. , 2013).
The idea is to spread the cost of the expenditure over the useful life of the item over the course of time (Barman et al. , 2013). Depreciation carries too much of an increase in year 9. Year 8 totals for accumulated depreciation is at (-690,000). By year 9, depreciation is too fast and rises to a higher negative amount at (-920,000). There are ways to correct this issue. Competition Bikes could utilize new methods to determine fundamental accounting equations that would help to increase the company's "equity in the form of retained earnings" (Barman et al. , 2013).
For example, leases could be re-balanced and lengthened to record a smaller charge on the statement year to year (Barman et al. , 2013). Other equipment could be re-balanced or re-valued in order to crease operational costs and depreciation. For example, delivery trucks could be evaluated. If Competition Bikes determined that those trucks could last six years instead of three, then "a 50 percent smaller charge on its income statement" could be recorded (Barman et al. , 2013). Liabilities: Liabilities are "what a company owes to other entities" (Barman et al. 2013). Liabilities can also describe how a company obtains its assets because they show up in different explanations on the balance sheet (Barman et al. , 2013). For example, long-term liabilities are "those that come due TASK TWO over a longer time frame" and short-term liabilities are due over a short time frame (Barman et al. , 2013). For Competition Bikes, the long-term liabilities are a concern because it is not decreasing at a rapid rate. For example, in year 8, Competition Bikes balance sheet reflects a total liabilities number of 1,980,200.
Year 9 balance sheet reflects a total liabilities number of 1,843, 203. Other long-term liabilities in year 8 were at 80,000. Yet in year 9 disbursements, only 5,000 had been paid towards this liability. This reflects that the company is addressing its financing activity, but at a rate that will not cover any potential increases in other long-term liabilities; it assumes that these liabilities will not increase. As a possible corrective action, the company could re-balance terms of other long-term liabilities, or increase payment in order to reduce debt while managing depreciation (Barman et al. 2013). Additional Concern: Return on Assets: A return on assets, or ROAR, "tells what percentage of every dollar invested in the business was returned as profit" (Barman et al. , 2013). As a manufacturer, Competition Bikes has a lot of capital tied up in ruction equipment Ana Tactless (Barman et al. , 2013). Year B net earnings were 31,286, and total assets were at 4,285, 831. Calculated return on assets was at only . 07%. Similarly, net earnings in year 9 were 36,185, and total assets were at 4,185,019. The calculated 2 return on assets for year 9 was only . 08% a very slight increase.
When coupled with a similarly low net profit margin in year 8 of . 6% versus a 5. 1% net profit margin of a chief competitor, it is clear that Competition Bikes should attempt to streamline costs in other areas such as raw materials inventory, utilities and services, and remonstration out costs. This could improve ROAR and PM while reducing waste (Barman et al. , 2013). AY. TASK TWO Flexible Budget. Definition: A flexible budget is a budget that "considers different levels of sales or production" when making budget allotments to different departments ("Flexible Budget").
Variances. Definition: Variances are defined as a difference (Barman et al. , 2013). These differences may be "between 3 budget and actual for the month or year, between actual this month and actual last month, and so on" (Barman et al. , 2013). There are several ways to present a variance. For example, variances can be presented in dollars or in percentages (Barman et al. , 2013). Variances can be used to determine whether financial information is favorable or unfavorable for a company (Barman et al. , 2013).
Percentages are easier to work with and provide an easier way to compare changes than hard numbers although not all negative and parenthetical numbers represent unfavorable information (Barman et al. , 2013). Most positive variances occur, for example, in an increase in sales (Barman et al. , 2013). Negative variances might be found within an increase in "an expense line item" (Barman et al. 2013). Areas of Concern: Net sales standard output was at 5,247,450. Competition Bikes achieved only 5,1 17, 385 in net sales. This was unfavorable.
Standard output was slated at 3510 while actual output was only 3423. This immediately explains the decrease in expected net sales. As does the fact that the Competition Bikes storyline states that there was a recent economic downturn that affected sales. Competition Bikes simply undersold their product. TASK TWO As a result, Competition Bikes increased their advertising expenses within the flexible budget from 28,412 standard to 31,461 actual. This was unfavorable due to the fact that sales did not achieve the desired numbers regardless of the additional advertising expenditures.
Additionally, fixed general and admit expenses did not decrease in enough areas in order to attempt to cover the deficit in sales. For example, Competition Bikes paid 171,000 actual in admit salaries instead of the budgeted 170,000 standard. Executive compensation, utilities and services, and other utilities and services marginally decreased. Other general and admit expenses actually totaled 172,000 instead of the budgeted 170,000 standard. If operational expenses had been curbed in these areas, then operating income would have at least marginally increased. AAA. Corrective Actions for Areas of Concern.
Mitigation: In the future, Competition Bikes should monitor the economic climate before increasing advertising expenditures. The economic downturn clearly drove away sales, and it made any additional advertising efforts almost useless. Competition Bikes should also shape staffing, staff bonuses, and operational expenses such as utilities around the economic climate. The flexible budget offers this luxury. As stated above from the source material, a flexible budget can help a company anticipate where changes are necessary in order to act out proper procedures to cut potential unfavorable outcomes ("Flexible Budget").
In any case, management by exception is a concept that would be beneficial for adaptation within Competition Bikes' practices. Baby. Management by Exception. Bragg (2013) defines management by exception as "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 mount" ("Management TASK TWO Exception"). There are several advantages to the application of the concept of management by exception.
Mainly, financial staff overseers such as controllers can address extremely large exceptions in operational expenses if they occur ("Management Exception"). This can help Competition Bikes trim unnecessary incursions and overspending while properly utilizing 5 management time and resources to investigate occurrences ("Management Exception"). In some instances, lower level management can handle any smaller variances that may occur ("Management Exception").
Other advantages of management by exception include; reduction of operational and financial results that management must review, minimally invasive automated reporting set on computer- controlled intervals, employees allowed to follow own approaches in operational and financial monitoring freeing management, and auditor-controlled investigations of particularly large exceptions. Example: Transportation out had a total of 105,300 standard but ran in excess of 108,297 actual. This represents an increase in 2,997 more than expected. This particular example might be viewed as a minor incursion hat lower management could monitor and review.