Question

Case 4 – Budgeting and Variance

Mike has been selling lemonade at his lemonade stand under the name ‘Mike’s Lemonade’ for the past few summers and has had tremendous success. As a matter of fact, kids are so “hooked” on his lemonade that he is now offering credit to those customers who have spent their allowance but need more of his product. His weekly budget is:

Total Customers	100
Cash paying customers	80
Credit customers	20
Net Revenue	$51.00
Cash revenue	40.00
Credit revenue	11.00
Expenses
Salaries & wages	$10.00
Lemons	15.00
Sugar	10.00
Cups	5.00
Equipment rental	2.00
Total Operating Expenses	$42.00
Net Profit (Loss)	$9.00

BUDGET NOTES:

• ‘Salaries & wages’ are comprised of Mike’s salary
• Cash customers pay $0.50/cup and credit customers pay a 10% surcharge
• Lemons, sugar, and cups expenses are for 100 cups of lemonade
• Equipment (pitcher, spoons, measuring cups) are rented from Mike’s mother

1. Mike’s Lemonade – Monthly Budget

Mike plans to keep his lemonade stand open for the 3 summer months (total of 12 weeks) each year. For better planning, expand his weekly budget into a monthly (4 weeks) budget.

2. Mike’s Lemonade – Budget Variance

Things go well for the first two months of operations. However, after the third month Mike finds that he is losing money badly, having to offset his losses from his personal savings account (previous months’ profits). He speaks with his father, a CPA at an accounting firm, who recommends that Mike run a budget variance report. Mike asks you to complete the following table (note – the budget numbers should come from your monthly budget in #1):

	Budget	Actual	Variance	%
Total Customers		240
Cash paying customers		180
Credit customers		60
Net Revenue		$123.00
Cash revenue		90.00
Credit revenue		33.00
Expenses
Salaries & wages		$40.00
Lemons		48.00
Sugar		28.00
Cups		12.00
Equipment rental		8.00
Total Operating Expenses		$136.00
Net Profit (Loss)		(13.00)

Clearly there is a problem, so Mike begins to investigate. He talks to his customers and finds that many were away on vacation some or part of his third month of operations. He also talks to his distributors (the grocery store manager) and finds that the price of lemons and sugar are likely to increase this year due to drought and freezing. Mike estimates that the cost of his supplies will increase by 3% next year.

Mike talks to his father again, who recommends that Mike project monthly budgets for next year including predictions for drops in volume and increases in costs. He also suggests that Mike may want to consider raising the price of his lemonade, but must take into account that price affects volume.

Answer 1

consider the notes given below the table.

VARIANCE REPORT. Total customes cash paying customer Budgut Actu a ria 1004 - 400 1 240 160 40% 80x4 - 320 180 1 140 143-75% 120x4 CO2025 credit customer Net Revenue 204 | 123 81 139.7% Cash Revenue 90 20 143-75% - 160 55x80 uu nuo Revenue. credit 33 25% Expenses Salaries & wages 110x4 1. 40 - Jo.isur 5) x 40 61. u8 113.8 22-3%. 41:2 28 113.2 132 Lemons Sugar (160+30).0103 103 cups (1 005) 00sxum equipment Rental 12 8 uo% 2*4 Total operating expenses 1171 1 136 135 20.46% net propit (Loss) 33 (13) 1139.4% Voo Nok! Lemon O Estimated price / cup S ous lcup - 0.15+3% = 0.15us/ cup Estimated sugar price I cup 1 ou 1 cup oltare - 0.103 /cup