666666 6Managerial Accounting

Topic 3. Budgets

Concepts in action
Read and fill in the blanks with the following words: budgeting, value, companies, control, runs,
accounts, managers, experts, expenses, revenue, sensitivity, competitive, users, decision making

Web-Enabled Budgeting and Hendrick Motorsports

In recent years, an increasing number of companies have implemented comprehensive
software packages that manage budgeting and forecasting functions across the organization.
One such option is Microsoft Forecaster, which was originally designed by FRx Software for
businesses looking to gain experts over their budgeting and forecasting process within a fully
integrated Web-based environment.
Among the more unique companies implementing Web-enabled budgeting is Hendrick
Motorsports. Featuring champion drivers Jeff Gordon and Jimmie Johnson, Hendrick is the
premier NASCAR Sprint Cup stock car racing organization. According to Forbes magazine,
Hendrick is NASCAR’s most valuable team, with an estimated value of $350 million.
Headquartered on a 12 building, 600,000-square-foot campus near Charlotte, North Carolina,
Hendrick operates four full-time teams in the Sprint Cup series, which runs annually from
February through November and features 36 races at 22 speedways across the United States.
The Hendrick organization has annual expenses of close to $195 million and more than 500
employees, with tasks ranging from accounting and marketing to engine building and racecar
driving. Such an environment features multiple functional areas and units, varied worksites,
and ever-changing circumstances. Patrick Perkins, director of marketing, noted, “Racing is a
fast business. It’s just as fast off the track as it is on it. With the work that we put into
development of our teams and technologies, and having to respond to change as well as
anticipate change, I like to think of us in this business as change revenue
Microsoft Forecaster, Hendrick’s Web-enabled budgeting package, has allowed
Hendrick’s financial managers to seamlessly manage the planning and budgeting process.
Authorized users from each functional area or team sign on to the application through the
corporate intranet. Security on the system is tight: Access is limited to only the accounts that a
manager is authorized to budget. (For example, Jeff Gordon’s crew chief is not able to see
what Jimmie Johnson’s team members are doing.) Forecaster also allows (8) users at the
racetrack to access the application remotely, which allows sensitivity to receive or update real-
time “actuals” from the system. This way, team managers know their allotted control
for each race. Forecaster also provides users with additional features, including seamless links
with general ledger accounts and the option to perform what-if managers analyses. Scott
Lampe, chief financial officer, said, “Forecaster allows us to change our forecasts to respond to
changes, either rule changes [such as changes in the series’ points system] or technology

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 changes [such as pilot testing NASCAR’s new, safer “Car of Tomorrow”] throughout the
racing season.”
Hendrick’s Web-enabled budgeting system frees the finance department so it can work
on strategy, analysis, and decision making. It also allows Hendrick to complete its annual
budgeting process in only six weeks, a 50% reduction in the time spent budgeting and
planning, which is critical given NASCAR’s extremely short off-season. Patrick Pearson from
Hendrick Motorsports believes the system gives the organization a competitive
advantage: “In racing, the team that wins is not only the team with the fastest car, but the team
that is the most disciplined and prepared week in and week out. Forecaster allows us to
respond to that changing landscape.”
Budgetary Planning at BabyCakes
Listen and fill in the blanks

OK. So, you are the owner of BabyCakes NYC, the most popular health-conscious
vegan bakery in the city and you just opened a second store but it’s all the way across country
in Los Angeles, and you’re facing your first big holiday rush, so how you can budget for it?
First, let’s go over some basics. Budgeting which is defined as a written statement that
management’s plans for a specific period expressed in (1) is a cornerstone of
planning for any business, large or small.
Erin McKenna: “Aside from doing the baking, the frosting and designing uniforms, I’m
also in charge of all (2) myself. Budgeting definitely makes us more
efficient and helps us judge (3) of the company and it help us be a little bit
more responsible in (4) .”
Once budgets are established, they become important basis for evaluating future
performance. They can motivate (5) to meet objectives, they serve as a
deterrent to waste, to promote efficiency and they can serve as (6) .
Erin McKenna: ‘If I didn’t budget I would definitely overspent because there’s so many
things that I want to do for the bakery. It’s like having a baby, and you want to dress it up, and
you want to take it to Disney World, and you want to make it as fun as possible.”
Sometimes people confuse budgeting with planning. Whereas planning focuses on
(7) , budgeting deals with (8) Budgets can be
prepared for any period of time. In the case of Babycakes, Erin prepares (9) budget
which is supplemented by (10) budgets.
Erin McKenna: “From there we know what we can buy, how much we put into certain
items and that way we can look at an extended period of sales trends or weather, holidays...”
Holidays like Valentine’s Day which brings us back to our starting point. With
Valentine’s Day quickly approaching Erin’s need to be sure that she has allocated
(11) to handle the rush, assuming there will be a rush in the new
location. So how did she proceed?
In business, (12) normally contains two classes of budgets.
(13) , which will discuss in this video, and (14) . There
are many different types of (15) but we’ll focus on the two that Erin uses
predominately. Budget goals of course are based on past performance. In larger companies,
data collected from various organizational units beginning several months before the end of
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current year. Because it is derived from (16) , every other budget depends on it,
the sales budget is the first budget prepared. Normally companies forecast sales by considering
a variety of factors but Erin doesn’t always have all these at her disposal on the new LA
bakery.
Erin McKenna: “It can be challenging to plan for Valentine’s Day because we don’t
have past years that we’ve been at this location.”
In the absence of (17) she’ll refer to data from her New York store for
guidance. One thing she learned over the year is that Valentine’s Day is not a holiday to be
taken lightly.
Erin McKenna: “Our first Valentine’s Day in New York we baked a little bit more than
usual, but right when we open our door, there is a line, you know, sneaking around the block
and we couldn’t take fast enough. So I leant my lesson very quickly that time.”
In terms of marketing, Erin keeps her holiday costs low in the new location by using
her creativity and by making use of online social network.
Erin McKenna: “We will tweet that we have special sweetheart boxes, two cupcakes
and window box and it looks like a little present. And things like heart shaped cookies and that
would usually get the word out enough for us. ”
Because Babycakes appeals to a very specific demographic, people with food allergies
Erin can’t really look to changes like Sprinkles for industry trends. As a general rule, Erin
tends to over-bake rather than under-bake so as not to disappoint our customers. In the end she
doesn’t move all of her product, she can always sell items the following day at
(18)___________________
The bottom line is that for small businesses (19) can be
somewhat informal at times. Erin takes a very hands-on approach to her business which allows
her to spot trends, minimize waste and trust her instincts.
Erin McKenna: “When I’m here and I see the waste then the ideas come. And when I
see their reactions to certain items, the doughnuts, brings a really big emotional reaction from
people. And if I didn’t see that then I wouldn’t know to put more money into doughnut pans
and I will, for example, say, the corn bread isn’t selling, stop making it. You know, like as you
see all the little details.”
OK. Now let’s look at an example in her LA store, let’s say that Erin normally sell
about 1,000 up the red velvet cupcakes a day at $3.5 each. On a Valentine’s Day she expects to
sell an additional 500 or 1,500 red velvet cupcakes in total. So we multiply (20) by
(21) to obtain total sales which in this case is 5,250 for the red velvet
cupcakes. So she knows that she needs to ensure she has enough supplies to handle the
production. Next, let’s look at the production budget which shows the units must be produced
to meet the anticipated sales. This is derived from the sales budget plus the desired change in
(22) . In an ideal world, a bakery wants to end the day by selling all
of its product. However, it needs to maintain supplies to produce the next day’s product. The
required production in units formula is: budgeted sales units plus desire ending finished goods
units minus (23) equals required production units. So, if
they sell 1,000 red velvet cupcakes each day on average and I have to account for an extra 500
red velvet cupcakes on Valentine’s Day, there are only enough raw materials for the holiday
but for the days that follow. This is obviously a very simplified example but you can imagine it
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 gets even more complicated when Erin has to take into account different types of cupcakes and
other products and flavors.
Erin worked hard to budget for Valentine’s Day in her new location despite not having
much history to help guide her decisions. She relied on a combination of
(24) and informal budgeting intuition to help her make
decisions and the results or lack of them speak for themselves.
Erin McKenna: “Looks like it’s a big success! Budgeted perfectly.”
She did extremely well in her playing with respect to cupcakes running out just before closing
time. and best of all she knows that she has enough supplies for tomorrow with the entire
process starts all over again at 4 a.m.

Summary
Read and fill in the blanks with the following words: budget, budgeting, budgeted,
production, produced, manufacturing, sold, relate, master, cash
This chapter describes the (1) process and shows how the various operating
budgets (2) to each other. The sales (3) is the foundation for profit
planning. Once the sales budget has been set, the (4) budget and the selling and
administrative expense budget can be prepared because they depend on how many units are to
be (5) . The production budget determines how many units are to be (6) ,
so after it is prepared, the various (7) cost budgets can be prepared. All
of these budgets feed into the (8) budget and the budgeted income statement and
balance sheet. The parts of the (9) budget are connected in many ways. For
example, the schedule of expected cash collections, which is completed in connection with the
sales budget, provides data for both the cash budget and the (10) balance sheet.
Questions
1. What is a budget? What is budgetary control?
2. Discuss some of the major benefits to be gained from budgeting.
3. What is a master budget? Briefly describe its contents.
4. Why is the sales forecast the starting point in budgeting?
5. “As a practical matter, planning and control mean exactly the same thing.” Do you agree?
Explain.
6. Describe the flow of budget data in an organization. Who are the participants in the
budgeting process, and how do they participate?
7. What is a self-imposed budget? What are the major advantages of self-imposed budgets?
What caution must be exercised in their use?
8. How can budgeting assist a company in planning its workforce staffing levels?
9. “The principal purpose of the cash budget is to see how much cash the company will have
in the bank at the end of the year.” Do you agree? Explain.