Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

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Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

Transcript of Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Page 1: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Profit Planning

UAA – ACCT 202 Principles of Managerial Accounting

Dr. Fred Barbee

Page 2: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Page 3: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Initiate LT & ST PlansInitiate LT & ST Plans

Implement Plans

Implement Plans

Measure Performanc

e

Measure Performanc

e

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

Page 4: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Initiate LT & ST PlansInitiate LT & ST Plans

Implement Plans

Implement Plans

Measure Performanc

e

Measure Performanc

e

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

Planning

Planning -- involves developing

objectives and preparing various

budgets to achieve these objectives.

Page 5: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Initiate LT & ST PlansInitiate LT & ST Plans

Implement Plans

Implement Plans

Measure Performanc

e

Measure Performanc

e

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

Control

Control involves the steps taken by management that attempt to ensure the objectives are attained.

Page 6: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

DecisionMaking

DecisionMaking

Measure Performanc

e

Measure Performanc

e

Implement Plans

Implement Plans

Initiate LT & ST PlansInitiate LT & ST Plans

Evaluate Performanc

e

Evaluate Performanc

e

The Work of Management

Budgets

Initiate LT & ST PlansInitiate LT & ST Plans

Page 7: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

PlanningPlanning

DecisionMaking

DecisionMaking

Evaluate Performanc

e

Evaluate Performanc

e

Measure Performanc

e

Measure Performanc

e

The Work of Management

Implement Plans

Implement Plans

Implement Plans

Implement Plans

“Through” the budget

Page 8: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

PlanningPlanning

DecisionMaking

DecisionMaking

Evaluate Performanc

e

Evaluate Performanc

e

Measure Performanc

e

Measure Performanc

e

The Work of Management

Implement Plans

Implement Plans

Measure Performanc

e

Measure Performanc

e

“According” to the Budget

Page 9: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

PlanningPlanning

DecisionMaking

DecisionMaking

Organizing & DirectingOrganizing & Directing

ControllingControlling

EvaluatingEvaluating

The Work of Management

Initiate LT & ST PlansInitiate LT & ST Plans

Implement Plans

Implement Plans

Measure Performanc

e

Measure Performanc

e

Evaluate Performanc

e

Evaluate Performanc

e

DecisionMaking

DecisionMaking

Page 10: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Basic Framework of Budgeting

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A Budget is . . .

• A quantitative expression of a plan of action.

• A detailed plan for acquiring and using financial and other resources over a specified time period (text).

Page 12: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

NowNow

5 Years5 Years

1 Year1 Year

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Short-Run Vs. Long-Run Budgets

Strategic Planning• Selecting overall objectives.• Choosing what markets to be in.• Selecting what products to produce.• Determining the price/quality mix.• Deciding which technologies to use.

Page 14: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Strategic Planning

Long-run Budgets (more than one year)Forecasts of large asset acquisitions.

Financing plans.Research and development plans.

Short-Run Vs. Long-Run Budgets

Page 15: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Strategic Planning

Long-run Budgets

Short-run Budgets (1 year or less)Quantities to produce.

Quantities to sell.Supplies acquisitions.

Short-Run Vs. Long-Run Budgets

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Imposed

Participatory

Vs.

Budgets . . .

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Imposed Budgets VersusParticipatory Budgets

Imposed Budgets

Participatory Budgets

Continuum

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Participatory Budgets

Right to comment before implementation

Ultimate right to set budgets

Continuum

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Imposed Budgets VersusParticipatory Budgets

Imposed Budgets

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• In start-up organizations

• In extremely small businesses

• In times of economic crises

• When operating managers lack budgetary skills or perspective.

Best Time to Use . . .

Page 21: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

• Requires less time.

• Utilize top management’s knowledge of overall resource availability.

• Increase probability that the firm’s strategic plans are incorporated.

Advantages . . .

Page 22: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Disadvantages . . .

• Reduce feeling of teamwork.

• Dissatisfaction and low morale.

• Limited acceptance of stated goals and objectives.

• May stifle initiative of lower level managers.

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Imposed Budgets VersusParticipatory Budgets

Participatory Budgets

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Best Time to Use . . .

• In well-established organizations.

• In extremely large businesses.

• In times of economic affluence.

• When operating managers have strong budgetary skills and perspectives.

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Advantages . . .

• Obtain information from those persons most familiar with the needs and constraints of the organizational units.

• Leads to better morale and higher motivation.

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Advantages . . .

• Integrates knowledge that is diffused among various levels of management.

• Provides a means to develop fiscal responsibility and budgetary skills of employees.

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Advantages . . .

• Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management.

• Are generally more realistic.

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Disadvantages . . .

• Require significantly more time.

• May motivate managers to introduce “slack” into the budget.

• May support “empire building” by subordinates.

Page 29: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Advantages of Budgeting

Advantages

Define goaland objectives

Uncover potentialbottlenecks

Coordinateactivities

Communicatingplans

Think about andplan for the future

Means of allocatingresources

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The Master Budget

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The Master Budget

Sales Budget

Production Budget

DL Budget

Cash Budget

Pro Forma Bal. Sht

EI Budget

DM Budget

Pro Forma Inc. Stmt

Overhead Budget

Sales Forecast

Capital Budget

Pro Forma SCF

S&A Exp Budget

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The Master Budget

The Text Example Hampton Freeze

Page 34: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Tom Willis is the majority stockholder and chief executive officer of Hampton Freeze, Inc., a company he started in 2001. The company makes premium popsicles using only natural ingredients and featuring exotic flavors such as tangy tangerine and minty mango. The company’s business is highly seasonal, with most of the sales occurring in spring and summer.

Page 35: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

In 2002, the company’s second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2002 turned out to be overall a very successful year in terms of both cash flow and net income.

Page 36: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2003.

In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget.

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1

2

3 4 5

6 7

8

9 10

Page 38: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Sales Budget

A budget showing the number of units, sales

price and total sales for each quarter (or

month).

Page 39: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Research into the history of cash collections at Hampton Freeze indicated that

– 70% of sales are collected in the quarter in which the sale is made and

– the remaining 30% are collected in the following quarter.

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Page 41: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Production Budget

A budget showing the number of units that

must be produced during each budget period to

meet sales needs and to provide for the desired

ending inventory.

Page 42: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Finished Units to be

Produced

Expected Sales in Units

Desired EI of

Finished Units

BI of Finished

Units= + -

Page 43: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

• Hampton Freeze would like the ending inventory of finished goods to be equal to 20% of next quarter’s sales.

• The company has 2,000 units of beginning inventory.

Page 44: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

1.Finished units to be produced

2.Equals expected sales in units

3.Plus Desired EI of finished units.

4.Less BI of finished units.

Page 45: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Desired Ending Inventory of

Finished Goods equals 20% of next

quarter’s sales.

Ending Inventory for one quarter equals Beginning Inventory for next

quarter.

Page 46: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Notice how inventories are accounted for on the spreadsheet.

Page 47: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Direct Materials Purchases Budget

A budget showing the raw materials that must

be purchased to fulfill the production budget and to

provide for adequate inventories.

Page 48: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

Required Purchases

of Raw Materials

Amount Required

for Productio

n

Desired EI of Raw

Materials

BI of Raw

Materials

= + -

Page 49: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

• Hampton Freeze has established a policy of maintaining RM equal to 10% of the amount required for production in the subsequent quarter.

• In the first quarter the company plans on producing 14,000 units (from the production budget)

• Each unit requires parts costing $0.20.

Page 50: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

• To prepare the Schedule of Expected Cash Disbursements for Materials, Hampton’s policy is to

– Pay for 50% of purchases in the quarter in which the purchase is made, and

– Pay the remaining 50% in the following quarter.

Page 51: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

1.Required purchases of Direct

Materials

2.Equals amount

required for production.

3.Plus Desired EI of raw materials.

4.Less BI of raw materials.

Page 52: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.
Page 53: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Direct Labor Budget

A budget showing the direct labor hours (and

total amount) needed to produce the number of

units specified in the production budget.

Page 54: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

• Each case produced requires 0.4 direct labor hour.

• Each hour costs $15

Page 55: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Direct Labor Budget

Page 56: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The MOH Budget

A budget showing all costs of production other than direct materials and

direct labor.

Page 57: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The MOH Budget

Page 58: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Ending Finished Goods Inventory

Budget

A budget showing the carrying cost of the

unsold units remaining in inventory.

Page 59: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Ending FG Inventory Budget

Page 60: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.

The Selling and Administrative

Expense Budget

A budget showing expenses for areas other

than manufacturing.

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The S&A Expense Budget

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The Cash Budget

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The Budgeted (Pro-Forma) Income

Statement

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The Budgeted Balance Sheet

Page 67: Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee.