Marketing Chapter 6 Homework Document Necessary Operational Personnel And Expense

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Chapter 6

Budgeting

Go to the Chapter 6 folder in the Additional Instructor Resources & Solutions folder to find

the Excel spread sheets that accompany the material in this chapter.

Chapter Overview

I. Introduction

II. What is a budget?

1. Guidelines for forecasting

III. Budget preparation

a. Timing and budgets

i. Budget time horizon

IV. Approaches to budgeting

a. Incremental budgeting

i. Line-item budgeting

b. Program planning budgeting system

i. Output budgeting

c. Zero-based budgeting

i. Base budget

vi. Advantages and disadvantages

d. Modified zero-based budgeting (MZBB)

i. Elements of MZBB

1. Fixed costs

2. Variable costs

V. Budgets within budgets

a. Revenue budget

Key Concepts

When reading this chapter, students should focus on the following key concepts.

1. For most sport organizations, budgeting is a tool for financial planning and

reflects management’s opinions about future financial circumstances.

2. Four main approaches to budgeting exist: incremental, program planning, zero-

based, and modified zero-based. Each method has its own advantages and

disadvantages.

Concept Check Responses

1. Why is the budgeting process important to the success of a sport organization?

A budget is the financial plan for the organization based on projections resulting

from a most-likely scenario of the organization’s financial future. It reflects the

2. How do budgeting and forecasting differ?

A forecast is a prediction of future events and their quantification for the

3. How does incremental budgeting differ from program planning budgeting? How

does it differ from zero-based budgeting?

Using incremental budgeting methods, next year’s budget will be determined by

increasing or decreasing the individual revenue and expense lines by the same

4. What are the advantages and disadvantages of incremental budgeting?

See Exhibit 6.2

Advantages:

• The budget is stable, and change is gradual.

Disadvantages:

• Activities and methods of working are assumed to continue in the

same way as before.

• The budget process provides no incentive for developing new ideas.

5. How does program planning budgeting differ from zero-based budgeting?

Both methods include performance objectives and measurement criteria in the

6. What are the advantages and disadvantages of program planning budgeting?

See Exhibit 6.4

Advantages:

• Enables an organization to allocate its resources purposefully.

• Shows managers how their department’s work relates to the whole

organization.

7. What are the advantages and disadvantages of zero-based budgeting?

See Exhibit 6.6

Advantages:

• Forces budget setters to examine every item.

• Allocates resources based on results and needs.

Disadvantages:

• Is a complex, time-consuming process.

• May result in emphasis on short-term benefits to the detriment of

long-term planning.

8. How does modified zero-based budgeting differ from zero-based budgeting?

MZBB does not roll back the budget to zero, as does ZBB. Instead, MZBB begins

9. What are the advantages and disadvantages of modified zero-based budgeting?

See Exhibit 6.9

Advantages:

• Focuses budget setters on variable costs.

• Allocates resources based on results and variable needs.

Disadvantages:

• May result in emphasis on short-term benefits to the detriment of

long-term planning.

10. In team sport (professional or college), which form of budgeting should be used?

To contain costs and reduce budgetary inflation, MZBB should be used. This is

especially true as team sport operates in the service industry, and spending

Responses to Practice Problems

1. See the Practice Problems Excel file (Chapter 6 Practice Problems Solutions, in

the Additional Instructor Resources & Solutions folder) for the solution to

Problem 1.

2. After you have calculated the 2022 budget (see Problem 1), suppose your boss

asks you to revise it so that overall revenues increase by 4% and operating

expenses decrease by 1.5%.

a. Based on current trends in facility management, what revenues do you

anticipate can be increased? What expenses can be decreased?

6.5% increase. Ticket fee revenue was originally forecast to

decrease at the same rate as box office revenue. I would raise the

ticket fee to offset the decrease in ticket sales and therefore

forecast a slight increase in ticket fee revenue in 2016. Likewise,

parking revenue was originally forecast to decrease at the same

rate as ticket sales. I would raise the price for parking and forecast

a slight increase for 2022. I would also increase concessions prices

an additional 2.5%.

For expenses, be sure to discuss which ones may be fixed through

contract (i.e., management fee, insurance). One possibility is as follows:

I would reduce the amount in the reserve by $50,000 as there was

$2.8 million in operating income in 2021. Though, with the

additional increases in revenue during the second pass, this move

has some risk as the 4% increase in the revenue forecast may be

missed. I would also roll back all other increases, with the

exception of the utilities increase, to 2021 levels. This leaves the

b. Use the 2022 budget that you created in Problem 1 and create a new

2022 budget based on the revenue increases and expense decreases as

outlined in Problem 2 and your work on Problem 2a.

See the Chapter 6 Practice Problem Solutions Excel file (in the Additional

Instructor Resources & Solutions folder) for the solution to Problem 2b.

Responses to Case Analysis Questions

1. If you were advising the athletic director at CAU, what budgeting advice would

you provide?

The athletic director has to figure out a way to reduce spending or increase

2. What budgeting approach should the athletic department use if it intends to

balance its budget in the 2022 fiscal year?

I would question every expenditure, as departmental expenditures were $16

3. For the average athletic department, which budgeting method would most likely

keep the program from running a deficit? Why?

For the average department, MZBB or ZBB would most likely keep programs

Additional Classroom/Exam Problem

Note: The solution to this problem is in the related Chapter 6 Additional Problem with

Solution Excel file (in the Additional Instructor Resources & Solutions folder). You’ll

also need the Chapter 6 Student Excel File for Additional Problem.

Using the Chapter 6 Student Excel File for Additional Problem, create a pro forma

balance sheet, income statement, statement of cash flows, and statement of

retained earnings based on the facts given.

Problem:

You were just hired as the new Chief Financial Officer (CFO) for an Arena Football 2

team (af2), the Columbia Destroyers. The previous CFO, who has recently left the

organization, was not good at his job, unfortunately. The financials are a mess. In

addition, the president of the club is asking you to create pro forma financials for the

• Additional equipment—$50,000

• Cash Expenses

• Player compensation—increase 3.5%

e. The team is expected to generate cash receipts as follows:

• Ticket sales—37,500 fans at $16.25 per ticket

• Merchandise—37,500 fans at $2.10 per fan

f. Depreciation:

• All short-term fixed assets depreciated over a 5-year life using the straight

line method

g. Other information:

• The football team pays the City 10% for each ticket sold. This is an expense.

To Do: Using Excel, Prepare Pro Forma Financials for the Next Fiscal Year.