Planning for Profit and Cost Control
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Transcript of Planning for Profit and Cost Control
Planning for Profit and Cost Control
Chapter 7
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-2
Introduction
DetailBudget
DetailBudget
DetailBudget
MasterBudget
Combinationof numerous
specificbudgets
Sales
Pro
du
ction
Inven
tory
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-3
The Budget Committee
A standing committee responsible for overall policy matters relating to the
budget. coordinating the preparation of the
budget.
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The Planning Process
Planning -- involves developing objectives and preparing various budgets to achieve these objectives.
Control Control -- involves the steps taken by management that attempt to ensure the objectives are attained.
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Three Levels of Planning for Business Activity
Strategic PlanningTop management long-range
decisions.
Capital BudgetingIntermediate-range planning
Operations BudgetingDirect firm’s activity in
the short-range
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-6
Three Levels of Planning for Business Activity
Operating BudgetOperating Budget
1999 2000 2001 2002
The annual operating budget may be divided into quarterly or monthly budgets.
The annual operating budget may be divided into quarterly or monthly budgets.
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Three Levels of Planning for Business Activity
Continuous or Perpetual Budget
This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.
1999 2000 2001 2002
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Advantages of Budgeting
CorrectiveAction
CorrectiveAction
PerformanceMeasurementPerformanceMeasurement
CoordinationCoordination
PlanningPlanning
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Consideration for the Human Factor
Flow of Budget DataFlow of Budget Data
S u p ervisor S u p ervisor
M id d leM an ag em en t
S u p ervisor S u p ervisor
M id d leM an ag em en t
Top M an ag em en t
Participative Budget System
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The Master Budget
The master budget consists of a series of detailed schedules and budgets that describe the company’s overall financial plans for the coming accounting period.
The three major budget categories are Operating budget Capital budgets Financial statement budgets
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Information Flow in the Master Budget
CashPaymentsfor S & A
CashPayments
for Inventory
InventoryPurchases
Budget
IncomeStatement
S & AExpenseBudget
BalanceSheet
CashReceipts
SalesBudget
CashBudget
Cash Flow Statement
Cash Receiptsand Payments
Schedules
OperatingBudgets
Pro formaFinancial
StatementsStartStart
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Sales Budget
Detailed schedule showing expected sales for the coming periods.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-13
Sales Budget Web Company is preparing budgets for the
quarter ending June 30. Budgeted sales for the next five months are:
April $200,000 May $500,000 June $300,000 July $250,000 August $150,000.
Cash sales are 20% of the total and credit sales are 80%.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-14
Sales Budget
$200,000 × 20% = $40,000$200,000 × 20% = $40,000
Accounts receivableat June 30
Accounts receivableat June 30
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-15
Schedule of Cash Receipts
Sales Budget
Scheduleof
CashReceipts
Complete
d
Cash receipts flow from expected sales.
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Schedule of Cash Receipts
Web expects to collect its accounts receivable in the month following the month of sale.
On March 31, accounts receivable totaled $100,000.
Let’s prepare the cash receipts budget.
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Schedule of Cash Receipts
From the Sales BudgetFrom the Sales Budget
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Purchases Budget
The total amount of inventory needed for each month is equal to the amount of
budgeted sales plus the desired ending inventory.
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Purchases Budget
At Web, cost of sales is equal to 70% of total budgeted sales.
Management wants to maintain an ending inventory that is equal to 20% of the current month’s cost of budgeted sales.
The ending inventory at March 31 is $15,000.
Let’s prepare the purchases budget.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-20
Purchases Budget
April May June QuarterBudgeted Sales 200,000$ Cost of Sales % 70%Budgeted Cost of Sales 140,000$ Desired Ending Inventory 28,000 Inventory Needed 168,000 Less: Beginning Inventory (15,000) Required Purchases 153,000$
Budgeted Cost of Sales $140,000Desired Ending Inventory % 20%Desired Ending Inventory $ 28,000
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-21
Purchases Budget
April May June QuarterBudgeted Sales 200,000$ 500,000$ Cost of Sales % 70% 70%Budgeted Cost of Sales 140,000$ 350,000$ Desired Ending Inventory 28,000 70,000 Inventory Needed 168,000 420,000 Less: Beginning Inventory (15,000) (28,000) Required Purchases 153,000$ 392,000$
The ending inventory for April is thebeginning inventory for May.
The ending inventory for April is thebeginning inventory for May.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-22
Purchases Budget
April May June QuarterBudgeted Sales 200,000$ 500,000$ 300,000$ 1,000,000$ Cost of Sales % 70% 70% 70% 70%Budgeted Cost of Sales 140,000$ 350,000$ 210,000$ 700,000$ Desired Ending Inventory 28,000 70,000 42,000 42,000 Inventory Needed 168,000 420,000 252,000 742,000 Less: Beginning Inventory (15,000) (28,000) (70,000) (15,000) Required Purchases 153,000$ 392,000$ 182,000$ 727,000$
Now we can move on to the Scheduleof Cash payments for Inventory Purchases.
Now we can move on to the Scheduleof Cash payments for Inventory Purchases.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-23
Cash Payments for Inventory Purchases
Web pays 80% of inventory purchases in the month of acquisition and the remaining 20% in the month following acquisition.
On March 31, Web owed $14,000 for purchases of inventory.
Let’s prepare the Cash Payments for Inventory Purchases schedule.
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Cash Payments for Inventory Purchases
March 31accounts payable
for inventorypurchases
March 31accounts payable
for inventorypurchases
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Cash Payments for Inventory Purchases
April Inventory Purchases $153,000Percent Paid in Following Month 20%May Payment for April Purchases $ 30,600
April Inventory Purchases $153,000Percent Paid in Following Month 20%May Payment for April Purchases $ 30,600
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-26
Cash Payments for Inventory Purchases
June Inventory Purchases $182,000Percent Paid in July 20%Accounts Payable at June 30 $ 36,400
June Inventory Purchases $182,000Percent Paid in July 20%Accounts Payable at June 30 $ 36,400
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-27
Selling and Administrative Expense Budget Sales commissions are 2% of sales and are
paid in the month after they are earned. Supplies expense is 1% of sales. Utilities are paid the month after they are used. On March 31, Web owed $3,000 in sales
commissions and $1,200 in utilities.
Web has developed the selling and administrative expense budget shown on the
next screen..
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-28
Selling and Administrative Expense Budget
April May June Quarter
Salary Expense 30,000$ Sales Commissions 4,000 Supplies ExpenseUtilitiesAmortizationRentMiscellaneousTotal S&A Expense
$200,000 Sales × 2% = $4,000$200,000 Sales × 2% = $4,000
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-29
Selling and Administrative Expense Budget
Let’s see how these expenses translate into cashLet’s see how these expenses translate into cashpayments for selling and administrative expenses.payments for selling and administrative expenses.
April May June Quarter
Salary Expense 30,000$ Sales Commissions 4,000 Supplies Expense 2,000 UtilitiesAmortizationRentMiscellaneousTotal S&A Expense
$200,000 Sales × 1% = $2,000$200,000 Sales × 1% = $2,000
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-30
Selling and Administrative Expense Budget
April May June Quarter
Salary Expense 30,000$ 30,000$ 30,000$ 90,000$ Sales Commissions 4,000 10,000 6,000 20,000 Supplies Expense 2,000 5,000 3,000 10,000 Utilities 1,700 1,800 1,700 5,200 Amortization 1,500 1,500 1,500 4,500 Rent 3,000 3,000 3,000 9,000 Miscellaneous 1,000 1,000 1,000 3,000 Total S&A Expense 43,200$ 52,300$ 46,200$ 141,700$
Let’s see how these expenses translate into cashpayments for selling and administrative expenses.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-31
Schedule of Cash Payments for S&A Expenses
Amortization Expense is anon-cash expense.
April May June Quarter
Salary Expense 30,000$ Sales Commissions 3,000 Supplies Expense 2,000 Utilities 1,200 Amortization - Rent 3,000 Miscellaneous 1,000 Total S&A Expense 40,200$
March 31 Sales Commissionsand Utilities.
March 31 Sales Commissionsand Utilities.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-32
Schedule of Cash Payments for S&A Expenses
April May June Quarter
Salary Expense 30,000$ 30,000$ Sales Commissions 3,000 4,000 Supplies Expense 2,000 5,000 Utilities 1,200 1,700 Amortization - - Rent 3,000 3,000 Miscellaneous 1,000 1,000 Total S&A Expense 40,200$ 44,700$
AprilSales Commissions
and Utilities.
AprilSales Commissions
and Utilities.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-33
Schedule of Cash Payments for S&A Expenses
April May June Quarter
Salary Expense 30,000$ 30,000$ 30,000$ 90,000$ Sales Commissions 3,000 4,000 10,000 17,000 Supplies Expense 2,000 5,000 3,000 10,000 Utilities 1,200 1,700 1,800 4,700 Amortization - - - - Rent 3,000 3,000 3,000 9,000 Miscellaneous 1,000 1,000 1,000 3,000 Total S&A Expense 40,200$ 44,700$ 48,800$ 133,700$
The total quarterly expenses of $141,700, Web will pay$133,700 in cash and record liabilities of $6,000
for June sales commissions and $1,700 for June utilities.
The total quarterly expenses of $141,700, Web will pay$133,700 in cash and record liabilities of $6,000
for June sales commissions and $1,700 for June utilities.
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Cash Budget
Web want to maintain a $10,000 balance in its cash account before any interest payments.
The company has a $100,000 line-of-credit that requires 12% interest on any outstanding balance payable monthly.
Web plans to purchase $50,000 of equipment on April 1.
On March 31, Web’s cash balance is $18,000.
Let’s put together the information developed so far and prepare Web’s cash budget.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-35
Cash Budget
Cash Receipts BudgetCash Receipts Budget
Payment for InventoryPurchases Schedule
Payment for InventoryPurchases Schedule
Cash Payments forS&A Schedule
Cash Payments forS&A Schedule
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-36
Cash Budget
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-37
Cash Budget
($78,600 + $128,900) × 1% = $2,075($78,600 + $128,900) × 1% = $2,075
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-38
Pro Forma Income Statement
Cash Cash BudgetBudgetCash Cash
BudgetBudgetPro FormaPro Forma
IncomeIncomeStatementStatement
Pro FormaPro FormaIncomeIncome
StatementStatement
Complete
d
After we complete the cash budget, we After we complete the cash budget, we can prepare the pro forma income can prepare the pro forma income
statement for Web.statement for Web.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-39
Pro Forma Income StatementWeb Company
Budgeted Income StatementFor the Three Months Ended June 30
Sales 1,000,000$ Cost of goods sold 700,000 Gross margin 300,000 Selling and administrative expenses 141,700 Operating income 158,300 Interest expense 2,861 Net income 155,439$
S&A Expense BudgetS&A Expense Budget
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-40
Pro Forma Balance Sheet
On March 31, Web had the following account balances:
Equipment $100,000, Capital stock $200,000, and Retained earnings $19,300.
With this data and the informationdeveloped in our budgets, we can prepare Web’s
Pro Forma Balance Sheet.
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-41
Web CompanyPro Forma Balance Sheet
June 30
Assets Cash 7,925$ Accounts receivable 240,000 Inventory 42,000 Equipment (net) 150,000 Total assets 439,925
Liabilities Accounts payable 36,400 Sales commissions payable 6,000 Utilities payable 1,700 Line-of-credit borrowing 21,086 Total liabilities 65,186 Equity Capital stock 200,000 Retained earnings 174,739 Total equity 374,739 Total liabilities and equity 439,925$
Cash ReceiptsBudget
Cash ReceiptsBudget
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-42
Web CompanyPro Forma Balance Sheet
June 30
Assets Cash 7,925$ Accounts receivable 240,000 Inventory 42,000 Equipment (net) 150,000 Total assets 439,925
Liabilities Accounts payable 36,400 Sales commissions payable 6,000 Utilities payable 1,700 Line-of-credit borrowing 21,086 Total liabilities 65,186 Equity Capital stock 200,000 Retained earnings 174,739 Total equity 374,739 Total liabilities and equity 439,925$
Sales BudgetSales Budget
PurchasesBudget
PurchasesBudget
Cash Paymentsfor S&A
Cash Paymentsfor S&A
Cash Paymentsfor Inventory
Cash Paymentsfor Inventory
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-43
Web CompanyPro Forma Balance Sheet
June 30
Assets Cash 7,925$ Accounts receivable 240,000 Inventory 42,000 Equipment (net) 150,000 Total assets 439,925
Liabilities Accounts payable 36,400 Sales commissions payable 6,000 Utilities payable 1,700 Line-of-credit borrowing 21,086 Total liabilities 65,186 Equity Capital stock 200,000 Retained earnings 174,739 Total equity 374,739 Total liabilities and equity 439,925$
Beginning retained earnings $ 19,300Net income for quarter 155,439Ending retained earnings $174,739
Beginning retained earnings $ 19,300Net income for quarter 155,439Ending retained earnings $174,739
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-44
Cash ReceiptsBudget
Cash ReceiptsBudget
Cash Paymentsfor S&A
Cash Paymentsfor S&A
Cash Paymentfor Inventory
Cash Paymentfor Inventory
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-45
Cash BudgetCash Budget
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada7-46
End of Chapter 7End of Chapter 7