Chapter 13

Completion and Application of the Profit Plan

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Learning Objectives

After studying this chapter, the student will be able

to elaborate a planned income statement and a

planned balance sheet.

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Completion of the Profit Plan

The development of an annual profit plan ends with

the planned income statement, the planned balance

sheet, and the planned statement of cash flows.

These three statements summarize and integrate the

detailed plans developed by management for the

planning period.

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Completion of the Profit Plan (cont.)

• Responsibility of the budget director.

• Budgets to be discussed:

1. Planned statement of cost of goods manufactured

2. Planned statement of cost of goods sold

3. Planned income statement

4. Planned statement of cash flow

5. Planned balance sheet

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Completion of the Profit Plan (cont.)

• Budgets which have been tentatively approved,

must now be combine to compute the planned

statement.

• Timely completion of the budget suggest the need

for a budget calendar.

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Alternatives in Developing the Profit Plan

• The impact of a selected alternative may not be fully

understood until the profit plan has been completed

and the financial statements have been developed.

• Through this process of building, tearing down, and

rebuilding, a realistic profit plan can be developed.

• Ratios can be useful in testing alternative decisions.

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Alternatives in Developing the Profit Plan (cont.)

1. Sales prices

2. General advertising policies

3. Sales territory and sales force expansion or contraction

4. Sales mix

5. Balance between sales, production, and inventory level

6. Research and development expenditures

7. Capital expenditure

8. Testing alternative decisions

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Implementing the Profit Plan

• After approval of a profit plan, the next step is its distribution to center managers in the enterprise.

• The distribution policy should allowed distribution of parts of the profit plan to middle and lower management.

• After the distribution, a series of profit plan conferences should be held.

• Mangers must clearly understand their responsibilities and how their part of the plan fits into the overall company profit plan.

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Using the Profit Plan to Control Operations

• Performance must be measures and reported at

all managements levels.

• Execution of the profit plan is ensured through

control.

• Short-term performance reporting is essential.

• Key aspect of implementation: flexibility

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Comprehensive Demonstration Case

• To develop the budgeted financial statements, the first logical steps is the preparation of the budgeted cost of goods manufactured.

• Income statement can be developed by assembling appropriate budget amounts from schedules already developed.

• To develop the balance sheet it is preferable to set up a special spreadsheet for these purpose, as shown in Schedule 67.

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