Margot Fraser Founder, CEO amp; Chairman of the Board Birkenstock Footprint Sandals, Inc. From: Ron Maurer Subject: Comprehensive Budgeting Date:

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To: Margot Fraser    Founder, CEO & Chairman of the Board    Birkenstock Footprint Sandals, Inc. From: Ron Maurer Subject: Comprehensive Budgeting Date: 01/24/2012

Business Brief

Comprehensive budgeting provides managers the ability to: promote coordination and communication among business units; provide a framework for judging performance and facilitating learning; and motivate managers and other employees (Horngren, Datar, & Rajan, 2012). Birkenstock manufactures two styles of sandals: regular and deluxe- each style requires differing amounts of materials, labor, and set up hours (Horngren et al., 2012). The comprehensive budget shown in Appendix A helps to determine the amount of direct materials and labor needed for each product throughout the budgeting period. This information is important for all activities in the company’s value chain from purchasing to manufacturing to distribution, selling, and marketing. Comprehensive budgeting also provides information regarding cash needs and profitability throughout the budgeting period.

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Coordination and Communication: Materials and Labor needs

Birkenstock’s comprehensive budget for June indicates 10,750 DLH will be needed for the regular sandals and 20,650 DLH for the deluxe sandals. Based on this information, the company can determine if there will be any hiring needs or downsizing needs for the month. The company may have enough workers to produce the regular sandals but may not have enough workers for to produce the deluxe sandals- especially if the two products require workers with differing skill sets. The direct materials budget provides information for purchasing so the company does not run out of direct materials during the month. For example, 7,220 square yards of cloth and 5900 square yards of wood will need to be purchased during the month of June. Purchases will need to be received before beginning inventories are exhausted.

Judging Performance, Learning, and Motivation

The comprehensive budget provides a framework for which actual results can be compared to. For example, the budgeted income statement indicates the expected gross margin from expected sales is $140,437, or 26% of sales, and a net income of $83,687, or 15% of sales. Actual results can be compared to the budgeted amounts to judge performance and the variances in revenues and costs can be examined so that future performance can be improved. For example, if actual costs of goods sold are greater than the budgeted amount, then the company can investigate the reasons for the higher costs and determine how to improve cost control in the future. Communicating the comprehensive budget to all departments in the company’s value chain can motivate managers and employees to achieve the expected performance outlined in the budget as long the goals are perceived as achievable and not impossible. In this way, the goals and objectives of managers and employees are aligned with the company’s goals and objectives.

Ron Maurer, Assignment 4-1, MBA 733 E1FF, Prof. Davis, January 24, 2012

Expected Profitability

Perhaps one the best advantage of a comprehensive budget is it provides an outlook as to the expected profitability or financial health of the organization. For example, the budgeted income statement indicates the company is expected to make a net income of $83.687 in June. But will the company see sufficient cash flow from operations to cover its short and long term financial responsibilities? The cash budget for June indicates the company is in a healthy financial position. Expected cash receipts from customers are $535,200, which is sufficient to cover the expected cash disbursements needed for the month- $455,292. The expected cash balance at the end of the month is $85,698, which is over 13 times higher than the cash balance at the beginning of the month.

As you can see, the comprehensive budgeting process at Birkenstock is a valuable tool for all activities in the company’s value chain from purchasing to manufacturing to distribution and sales. It also provides valuable information for judging performance, future learning and developing strategic planning.

Ron Maurer, Assignment 4-1, MBA 733 E1FF, Prof. Davis, January 24, 2012


Horngren, C., Datar, S., & Rajan, M. (2012). Cost accounting: A managerial emphasis. (14th

ed.). Boston: Pearson Prentice Hall.

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