3020 Chapter 9

Profit Planning

Budgeting

• A quantitative plan of what we expect in the future

• Personal budgets

• Purposes– Planning– Control

• Responsibility Accounting

Advantages

• Planning for future makes you think about what will happen

• If shortfalls are seen, something can be done about it ahead of time (obtain a line of credit, hire more workers, get contracts with other suppliers)

• Avoid bottlenecks

• You have to know what to expect in order to control resources

Budgeting

• Time Horizon– Long term (strategic planning)– Medium term (tactical and capital budget)– Day to day (master budget)

• Detail– Little (strategic planning)– More (tactical and capital budgeting)– Most (master budget)

Budgeting

• Participation by Employees– Top management (strategic planning)

– Middle and top management (tactical and capital budgeting)

– Everyone (master budget)

• Other behavioral considerations– If budgets used for performance evaluation, employees

will try to make them even if not properly prepared

– PEOPLE EMHASIZE WHAT GETS REWARDED!!

Master Budget

• Operating Budget (income statement items)– Sales– Production (including DM, DL, and OH)– Ending inventory– Selling and general administrative

• Financial Budget– Cash– Budgeted financial statements

Sales Budget

• Units of sales

• X selling price per unit

• = Dollars of sales

• Units of sales goes to Production budget

• Dollars of sales goes to Income statement

• Schedule of cash collections of sales goes to cash budget

Production Budget

• Units of sales

• + Desired ending inventory

• = Units needed

• - Beginning inventory

• = Units to be produced

• Units to be produced goes to DM, DL, OH budgets

Purchases/DM Budget

• Finished units to be produced• X DM needed per finished unit• = Material needs• + Desired ending inventory of DM• - Beginning inventory of DM• = DM to be purchased

• Goes to income statement and cash budget

Direct Labor Budget

• Finished units to produce

• X standard time allowed per unit

• = Standard labor time needed

• X per hour labor cost

• = Total direct labor cost

• Goes to income statement and cash budget

Manufacturing Overhead Budget

• Predicted activity base

• X variable OH rate

• = Total Variable OH

• + Fixed OH in total

• = Total Manufacturing overhead cost

• Goes to income statement and cash budget

Selling, General & Administrative Budget

• Predicted sales dollars

• X variable S,G & A rate

• = Total variable S,G & A

• + Fixed S,G & A total cost

• =Total S,G & A cost

• Goes to income statement and cash budget

Cash Budget

• Beginning Balance

• + Cash receipts for period

• = Cash available

• - Cash disbursements for period

• = Excess (Deficiency) over cash available

• Financing (loans, interest payments, stock sales, etc.)

• Ending cash balance

Cash Collections

• Cash sales

• Cash collections of credit sales– Collected for this month’s sales– Collected for prior month’s sales– Minus sales discounts

• Any other cash receipts (sales of property, plant & equipment, dividends received, etc.)

Cash Disbursements

• Purchases– Cash purchases– Credit purchases

• Percentage paid this month less discount taken

• Percentage paid of prior month’s purchases

– Operating expenses– NOT DEPRECIATION– Equipment payments– Dividend payments

Budgeted Income Statement

• Sales (from sales forecast)• Cost of goods sold

– Beginning inventory (from previous balance sheet)– COGM - compute cost per unit from DM, DL, OH budgets

x units manufactured OR Actual purchases made for a retailer

– Ending inventory budgets – (from previous ending inventory budget)

• Selling and administrative expenses (from S&A budget)

• Compute to arrive at budgeted net income

Budgeted Balance Sheet

• Assets– Cash (from cash budget)– Accts. Rec. (credit sales that have not been collected)– Inventory (from ending inventory budget)– Property, plant & Equipment (beg. Balance + changes)

• Liabilities– Accounts Payable (from purchases budget)– Notes Payable (from cash budget)

• Owners’ equity– Common stock (Beg. Balance + Changes)– Retained earnings (Beg. Bal. + Net income – Divs.)