Profit Planning

1
Profit Planning
Chapter 9
2
Learning Objectives

• Understand budgeting objectives
• Understand things you need to know do before
  starting a budget (not in book)
• Prepare a master budget (sales, cash receipts,
  production, direct materials, cash disbursements,
  direct labor, manufacturing overhead, selling
  administration, cash budget, income statement and
  balance sheet)

3
Planning and Control

• Planning Where do we want to go and how do we
  get there? or involves developing objectives and
  preparing various budgets to achieve these
  objectives.
• Growth??
• New business ventures?
• Maintain during a recession?

4
Planning and Control

• Control Are we keeping to our plan? Or
  involves the steps taken by management that
  attempt to ensure the objectives are attained.
• Are your managers staying within budget?
• Do you care?

5
Advantages of Budgeting
Advantages
6
What is a Budget?
7
Types of budgets

• Sales budget through Gross Margin
• Cost of Goods Sold all costs
• Expenses
• Ending balances cash, inventory, etc.
• Complete set of Financial Statements
• Long term budgets (Capital budgets chapter 14)

8
Things YOU need to know

• What are the companys goals?
• What are its assumptions?
• Profitability expectations
• New product development
• Annual raises
• New stores, offices
• What is your companys culture?

9
Things you NEED to do before planning your
departmental budget

• Plan your Income Expenses as a TEAM
• No one on your team is going to buy in to a
  budget (especially one with CUTS) that they
  didnt get to give input on.

10
Things you NEED to do before planning your
departmental budget

• Include some CUSHION in your plan
• Be prepared to have your first budget slashed
  (its their way of adding value. . . .)

11
Things you NEED to do before planning your
departmental budget

• Consider pre-saleswho is the decision maker on
  your budget?
• How can you pre-sell it before the BIG MEETING?

12
Things you NEED to do after you have your final
departmental budget

• Regularly REVIEW, COMPARE, ANALYZE
• Actual Income and Expenses
• To Planned (budgeted) Income and Expenses
• Make ADJUSTMENTS as necessary
• Watch for timing issues. . . . (just like those
  outstanding checks)

13
Techniques

• Percent increase/decrease from prior year, (or
  most recent quarter)--e.g., 10 growth assumption
• Competition comparison--what are they doing?
  Robert Morris, Hoovers, Valueline
• Task oriented (or zero based budgeting)--more
  work, but easiest to defend

14
CONCLUSIONS. . . .

• Budgeting can help you manage your business. .
  .better

15
Responsibility Accounting

• Managers should be held responsible for those
  items and only those items thatthe manager
  can actually controlto a significant extent.

16
Human Factors in Budgeting

• The success of budgeting depends upon
• The degree to which top management accepts the
  budget program as a vital part of the companys
  activities.
• The way in which top management uses budgeted
  data.

17
The Master Budget
Sales Budget
Selling and Administrative Budget
Production Budget
Direct Materials Budget
Manufacturing Overhead Budget
Direct Labor Budget
Cash Budget
Budgeted Financial Statements
18
The Master Budget

• Using a 8 page (or so) handout. . . .lets walk
  through the Master Budget
• Might take a few days
• Different example (but similar) to book
• Within all the number crunching dont ever lose
  sight of the things you need to know and do. . .

19
The Sales Budget

• Detailed schedule showing expected sales for
  the coming periods expressed in units and dollars.

20
Budgeting Example

• Royal Company is preparing budgets for the
  quarter ending June 30.
• Budgeted sales for the next five months are
• April 20,000 units
• May 50,000 units
• June 30,000 units
• July 25,000 units
• August 15,000 units.
• The selling price is 10 per unit.

21
The Sales Budget
22
The Sales Budget
23
Expected Cash Collections

• All sales are on account.
• Royals collection pattern is
• 70 collected in the month of sale,
• 25 collected in the month following sale,
• 5 is uncollectible.
• The March 31 accounts receivable balance of
  30,000 will be collected in full.

24
Expected Cash Collections
25
Expected Cash Collections
From the Sales Budget for April.
26
Expected Cash Collections
From the Sales Budget for May.
27
Expected Cash Collections
28
The Production Budget
Sales BudgetandExpectedCashCollections
Production Budget
Completed
Production must be adequate to meet
budgeted sales and provide for sufficient ending
inventory.
29
The Production Budget

• The management at Royal Company wants ending
  inventory to be equal to 20 of the following
  months budgeted sales in units.
• On March 31, 4,000 units were on hand.
• Lets prepare the production budget.

30
The Production Budget
31
The Production Budget
32
The Production Budget
33
The Production Budget
Assumed ending inventory.
34
The Direct Materials Budget

• At Royal Company, five pounds of material are
  required per unit of product.
• Management wants materials on hand at the end of
  each month equal to 10 of the following months
  production.
• On March 31, 13,000 pounds of material are on
  hand. Material cost is 0.40 per pound. Lets
  prepare the direct materials budget.

35
The Direct Materials Budget
From production budget
36
The Direct Materials Budget
37
The Direct Materials Budget
10 of the following months production
38
The Direct Materials Budget
March 31 inventory
39
The Direct Materials Budget
Assumed ending inventory
40
Expected Cash Disbursement for Materials

• Royal pays 0.40 per pound for its materials.
• One-half of a months purchases are paid for in
  the month of purchase the other half is paid in
  the following month.
• The March 31 accounts payable balance is 12,000.
• Lets calculate expected cash disbursements.

41
Expected Cash Disbursement for Materials
42
Expected Cash Disbursement for Materials
140,000 lbs. .40/lb. 56,000
43
Quick Check ?

• What are the total cash disbursements for the
  quarter?
• a. 185,000
• b. 68,000
• c. 56,000
• d. 201,400

44
Quick Check ?

• What are the total cash disbursements for the
  quarter?
• a. 185,000
• b. 68,000
• c. 56,000
• d. 201,400

45
Expected Cash Disbursement for Materials
46
The Direct Labor Budget

• At Royal, each unit of product requires 0.05
  hours of direct labor.
• The Company has a no layoff policy so all
  employees will be paid for 40 hours of work each
  week.
• In exchange for the no layoff policy, workers
  agreed to a wage rate of 10 per hour regardless
  of the hours worked (No overtime pay).
• For the next three months, the direct labor
  workforce will be paid for a minimum of 1,500
  hours per month.
• Lets prepare the direct labor budget.

47
The Direct Labor Budget
From production budget
48
The Direct Labor Budget
49
The Direct Labor Budget
50
The Direct Labor Budget
51
Manufacturing Overhead Budget

• Royal Company uses a variable manufacturing
  overhead rate of 1 per unit produced.
• Fixed manufacturing overhead is 50,000 per month
  and includes 20,000 of noncash costs (primarily
  depreciation of plant assets).
• Lets prepare the manufacturing overhead budget.

52
Manufacturing Overhead Budget
From production budget
53
Manufacturing Overhead Budget
54
Manufacturing Overhead Budget
55
Ending Finished Goods Inventory Budget

• Now, Royal can complete the ending finished goods
  inventory budget.
• At Royal, manufacturing overhead is applied to
  units of product on the basis of direct labor
  hours.
• Lets calculate ending finished goods inventory.

56
Ending Finished Goods Inventory Budget
Direct materials budget and information
57
Ending Finished Goods Inventory Budget
Direct labor budget
58
Ending Finished Goods Inventory Budget
59
Ending Finished Goods Inventory Budget
Production Budget
60
Selling and Administrative Expense Budget

• At Royal, variable selling and administrative
  expenses are 0.50 per unit sold.
• Fixed selling and administrative expenses are
  70,000 per month.
• The fixed selling and administrative expenses
  include 10,000 in costs primarily depreciation
  that are not cash outflows of the current
  month.
• Lets prepare the companys selling and
  administrative expense budget.

61
Selling and Administrative Expense Budget
62
Selling and Administrative Expense Budget
63
The Cash Budget

• Royal
• Maintains a 16 open line of credit for 75,000.
• Maintains a minimum cash balance of 30,000.
• Borrows on the first day of the month and repays
  loans on the last day of the month.
• Pays a cash dividend of 49,000 in April.
• Purchases 143,700 of equipment in May and
  48,300 in June paid in cash.
• Has an April 1 cash balance of 40,000.

64
The Cash Budget
Schedule of Expected Cash Disbursements
Schedule of Expected Cash Collections
65
The Cash Budget
Direct Labor Budget
Manufacturing Overhead Budget
Selling and Administrative Expense Budget
66
The Cash Budget
Because Royal maintains a cash balance of
30,000, the company must borrow on
its line-of-credit
67
Financing and Repayment
Ending cash balance for April is the beginning
May balance.
68
The Cash Budget
69
Financing and Repayment
Because the ending cash balance is exactly
30,000, Royal will not repay the loan this month.
70
The Cash Budget
71
The Cash Budget
At the end of June, Royal has enough cash to
repay the 50,000 loan plus interest at 16.
72
Financing and Repayment
50,000 16 3/12 2,000Borrowings on April
1 andrepayment of June 30.
73
The Budgeted Income Statement
Cash Budget
Budgeted Income Statement
Completed
After we complete the cash budget, we can prepare
the budgeted income statement for Royal.
74
The Budgeted Income Statement
75
The Budgeted Balance Sheet

• Royal reported the following account balances
  prior to preparing its budgeted financial
  statements
• Land - 50,000
• Common stock - 200,000
• Retained earnings - 146,150
• Equipment - 175,000

76
(No Transcript)
77
(No Transcript)
78
End of Chapter 9