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Chapter 6: Problem 7

Define rolling budget. Give an example.

Short Answer

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A rolling budget is a financial plan that is continuously updated to reflect the most recent information on revenues, expenses, and performance, allowing for regular revisions of projections (typically monthly or quarterly). This type of budget is designed to adapt to changes in the business environment and helps organizations to be more flexible and proactive in their financial planning. An example is a retail store that initially projects January sales to be $10,000 but revises future projections after actual sales come in at $12,000 due to a new product line. The store then continuously updates its budget each month, analyzing variances and adjusting projections accordingly.

Step by step solution

01

Define Rolling Budget

A rolling budget, also known as a continuous budget or rolling forecast, is a type of financial plan that is continuously updated to reflect the most recent information on revenues, expenses, and performance. It allows for projections to be revised regularly (typically monthly or quarterly) to make the budget more accurate and relevant for decision-making purposes. This type of budget is designed to adapt to changes in the business environment and helps organizations to be more flexible and proactive in their financial planning.
02

Preparing and Updating a Rolling Budget

The process of preparing and updating a rolling budget involves the following steps: 1. Start with a base budget that covers a specific period (e.g., a year or a quarter). 2. Review actual revenues and expenses for the period and compare them to the budgeted figures. 3. Identify any variances and analyze the reasons behind them. 4. Use this information to revise the projections for the upcoming periods, adding new periods to the end of the budget each time an update is made. 5. Repeat this process on a regular basis (for example, monthly or quarterly) to ensure that the budget remains up-to-date and accurate.
03

Example of a Rolling Budget

Imagine a retail store that prepares its annual budget based on monthly sales projections. The store initially projects its sales for January to be $10,000, based on historical figures and expected trends. At the end of January, the store's actual sales come in at \(12,000, which is \)2,000 more than initially budgeted. Management analyzes the reasons for the difference and determines that a new product line introduced that month contributed to the higher sales figure. In light of this new information, February's sales forecast is revised from the initial \(10,000 projection to \)11,000, and a new sales projection for a new month (e.g., January next year) is added to the end of the budget. This process is repeated each month, with each month's variances analyzed and future projections updated accordingly. This will allow the store to adapt its financial plan to the most up-to-date information and make more informed decisions throughout the year.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

financial planning
Financial planning is a critical part of managing a business. It involves setting strategic goals, analyzing the current financial situation, and planning for the future. One key element of financial planning is budget creation. Budgets serve as financial maps that guide a company in reaching its financial objectives. They involve estimating income and expenses over a set period.
Effective financial planning enables an organization to allocate resources efficiently. It can also help identify areas where costs can be reduced or revenue can be increased.
  • Setting financial goals: Define clear objectives such as increasing revenue or reducing debt.
  • Assessing financial health: Examine current financial statements, including balance sheets and income statements.
  • Developing strategies: Create plans to achieve financial goals, such as launching new products or reducing operational costs.
By using a rolling budget, companies can continuously update their financial plans, thus staying responsive to any changes in the business environment.
budget variance analysis
Budget variance analysis is a process of comparing actual results with the budgeted figures. This analysis helps businesses understand the reasons for any discrepancies (\(\text{Variance} = \text{Actual} - \text{Budgeted}\)). A variance can be favorable (better than expected) or unfavorable (worse than expected).
This analysis is vital for decision making, enabling management to adjust operational activities accordingly. If a variance analysis shows a higher-than-expected revenue, it might encourage increased investment in that area.
  • Revenue variance: Analyze differences between actual and budgeted sales.
  • Expense variance: Track deviations in actual spending vs. budgeted amounts.
  • Root cause analysis: Determine the underlying reasons for variances to make informed adjustments.
Regular budget variance analysis ensures businesses remain aligned with their financial goals.
continuous budgeting
Continuous budgeting, often synonymous with rolling budgets, allows companies to keep their financial plans flexible and dynamic. Unlike static budgets, which are set for a fixed period and often become outdated, continuous budgeting involves regularly updating budgets to reflect the latest information. This process usually occurs quarterly or even monthly.
This adaptability is crucial in today's fast-paced business environment as it allows for a more accurate reflection of a company's current financial state and prospects.
  • Regular updates: Adapt budgets based on recent data and trends.
  • Long-term vision: Align short-term financial planning with long-term strategic goals.
  • Proactive management: Respond promptly to market changes, optimizing performance.
By providing a more current snapshot of the financial landscape, continuous budgeting empowers managers to make better-informed decisions.
forecasting
Forecasting is the practice of predicting future financial outcomes based on historical data, trends, and assumptions. It plays a vital role in rolling budgets as it helps businesses prepare for future financial conditions.
Forecasts are essential for strategic planning, as they help anticipate challenges and opportunities. This enables companies to allocate resources effectively and plan for potential changes in market conditions.
  • Data-driven predictions: Use past performance and market analysis to make informed forecasts.
  • Strategic alignment: Ensure that forecasts support long-term objectives.
  • Scenario planning: Consider different assumptions and explore various outcomes.
With accurate forecasting, businesses can create flexible rolling budgets that remain aligned with their objectives even as circumstances change.

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Most popular questions from this chapter

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.

Responsibility and controllability. Consider each of the following independent situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for commercial properties. The company also contracts to service both its own and other brands of fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the manufacturing plant and the service technicians (who often need parts to repair fountains), and 12 service vans. The service technicians drive to customer sites to service the fountains. Prestige owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own tools. 1\. In the manufacturing plant, the production manager is not happy with the motors that the purchasing manager has been purchasing. In May, the production manager stops requesting motors from the supply warehouse and starts purchasing them directly from a different motor manufacturer. Actual materials costs in May are higher than budgeted. 2\. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigation reveals a utility rate hike in effect that was not figured into the budget. 3\. Gasoline costs for each van are budgeted based on the service area of the van and the amount of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget for van 3. After investigating, the service manager finds that the diriver has been driving the van for personal use. 4\. Regency Mall, one of Prestige's fountain service customers, calls the service people only for emergencies and not for routine maintenance. Thus, the materials and labor costs for these service calls exceeds the monthly budgeted costs for a contract customer 5\. Prestige's service technicians are paid an hourly wage of S22, regardless of experience or time with the company. As a result of an analysis performed last month, the service manager determined that service technicians in their first year of employment worked on average 20\% more slowly than other employees. Prestige bills customers per service call, not per hour. 6\. The cost of health insurance for service technicians has increased by 40\% this year, which caused the actual health insurance costs to greatly exceed the budgeted health insurance costs for the service technicians For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest ways to solve the problem or to improve the situation.

Budgeted income statement. \((\mathrm{CMA}, \text { adapted) } \mathrm{Smart}\) Video Company is a manufacturer of videoconferencing products. Maintaining the videoconferencing equipment is an important area of customer satisfaction. A recent downturn in the computer industry has caused the videoconferencing equipment segment to suffer, leading to a decline in Smart Video's financial performance. The following income statement shows results for 2017 : Smart Video's management team is preparing the 2018 budget and is studying the following information: 1\. Selling prices of equipment are expected to increase by \(10 \%\) as the economic recovery begins. The selling price of each maintenance contract is expected to remain unchanged from 2017 2\. Equipment sales in units are expected to increase by 6\%, with a corresponding 6 \% growth in units of maintenance contracts 3\. cost of each unit sold is expected to increase by \(5 \%\) to pay for the necessary technology and quality improvements. 4\. Marketing costs are expected to increase by S290,000, but admininstration costs are expected to remain at 2017 levels 5\. Distribution costs vary in proportion to the number of units of equipment sold 6\. Two maintenance technicians are to be hired at a total cost of \(\$ 160,000\), which covers wages and related travel costs. The objective is to improve customer service and shorten response time 7\. There is no beginning or ending inventory of equipment. 1\. Prepare a budgeted income statement for the year ending December 31,2018 2\. How well does the budget align with Smart Video's strategy? 3\. How does preparing the budget help Smart Video's management team better manage the company?

Budgeting; direct material usage, manufacturing cost, and gross margin. Xander Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of \( 2\) per skein and 0.8 gallons of dye at a cost of \(6\) per gallon. All other materials are indirect. At the beginning of the year Xander has an inventory of 458,000 skeins of wool at a cost of \(961,800\) and 4,000 gallons of dye at a cost of \(23,680 .\) Target ending inventory of wool and dye is zero. Xander uses the FIF0 inventory cost-flow method. Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is \(2,000\) each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero. Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools- one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH). There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing laborhours to weave a rug at a budgeted rate of \(13\) per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process. 1\. Prepare a direct materials usage budget in both units and dollars. 2\. Calculate the budgeted overhead allocation rates for weaving and dyeing. 3\. Calculate the budgeted unit cost of a blue rug for the year. 4\. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels). 5\. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. 6\. Find the budgeted gross margin for blue rugs under each sales assumption. 7\. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs? 8\. How might top management at Xander use the budget developed in requirements \(1-6\) to better manage the company?

Comprehensive problem with \(A B C\) costing. Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for the month of April is given in the following tables: Animal Gear uses a FIF0 cost-flow assumption for finished-goods inventory. Animal Gear uses an activity-based costing system and classifies overhead into three activity pools: Setup, Processing, and Inspection. Activity rates for these activities are \( 105\) per setup-hour, \( 10\) per machine-hour, and \( 15\) per inspection-hour, respectively. Other information follows: If necessary, round up to calculate number of batches. Nonmanufacturing fixed costs for March equal \( 32,000\), half of which are salaries. Salaries are expected to increase \(5 \%\) in April. 0 ther nonmanufacturing fixed costs will remain the same. The only variable nonmanufacturing cost is sales commission, equal to \(1 \%\) of sales revenue. Prepare the following for April: 1\. Revenues budget 2\. Production budget in units 3\. Direct material usage budget and direct material purchases budget 4\. Direct manufacturing labor cost budget 5\. Manufacturing overhead cost budgets for each of the three activities 6\. Budgeted unit cost of ending finished-goods inventory and ending inventaries budget 7\. cost of goods sold budget 8\. Nonmanufacturing costs budget 9\. Budgeted income statement (ignore income taxes) 10\. How does preparing the budget help Animal Gear's management team better manage the company?
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