Question

Budgeting: Baleful Company makes Halloween decorations and costumes from hay. The company makes enough money to pay the owner, Brad Brigand, a decent salary and still show a small profit in most years. The company used the prior year's performance as the current year's budget. As long as we are doing better than last year, we shouldn't expect much more. What do you think of Baleful's budgeting? Explain.

Answer 1

Solution :

Mr. Baleful's plan to use the same previous years performance as a budget for the current year is not right.

Previous year's performance can only be used as a base for budgeting for the current year. In other words, the business environment is so dynamic and the factors influencing the business will not remain the same as it was in the previous year. Mr. Baleful should estimate the current year's budgeted performance by considering the previous year's performance and modifying the previous year's performance as per the changes expected to take place during the current year.

Factors to considet while devising the budget :

1) Estimated Revenues :

Mr. Baleful should estimate the volume of goods intnended to be sold in the current year and analyse whether any revision in the selling price is necessary.

2) Estimated change in costs :

Mr. Baleful has to analyse whether there is any expected change in the material purchase cost or any revision in the labor rate or the variable overhead costs for the current year as compared to the previous year.

3) Fixed costs :

The fixed costs do no vary with the level of output. However, the cost might be subject to any increase or decrease.

Example : Rent of the Building might be increased.

4) Target profit :

Mr.Baleful can also fix a target return for the year based on previous year's performance and can modify the budget accordingly to achieve the target fixed.

This way, Mr. Baleful can have a better control over the revenues and expenditures and can also achieve more profits.