Operational budgets

1
Lecture 21

• Operational Budgeting
• Operational Budgeting Exercises

2
Lecture 21

• Operational Budgeting
• Operational Budgeting Exercises

3
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
4
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
5
Willamette Widget Corp. Sales Forecasts
JAN FEB
MAR Sales 400 500
800
This information comes from the sales force,
merchandisers, marketing personnel, and possibly
the finance planning group.
6
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
7
Pro Forma Income Statements
JAN FEB
MAR Sales 400 500
800 Cost of Goods Sold 240 300
480 Gross Profit Contribution Margin 160
200 320 Fixed Costs 150
150 150 Income
10 50 170
The Sales line comes from the previous
schedule. The Cost of Goods Sold line and Fixed
Cost line come from assumptions about cost
behavior (contribution margin is 40).
8
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
9
Beginning Balance Sheet
Dec
31 Assets Cash
80 Accounts Receivable 310 Inventory
540 Fixed Assets, net
1580 Total
2510 Liabilities Accounts Payable
195 Stockholders Equity 2315 Total
2510
This is all given.
10
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
11
Purchases Budget
JAN FEB
MAR Cost of Goods Sold 240 300
480 Budgeted ending inv. 780 900
780 Total requirements 1020 1200 1260
Beginning inventory 540 780
900 Purchases 480 420
360
The COGS line comes from the pro forma income
statement. Budgeted ending inventory is a
target. Beginning inventory is given.
12
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
13
Cash Budget
JAN FEB
MAR Beginning Balance 80 52
50 Cash receipts 590 470
710 Total available 670 522
760 Cash disbursements 618 579
519 Indicated balance 52 -57
241 Borrow
107 (Repay)
107 Ending balance 52 50
134
The beginning balance for January comes from the
beginning balance sheet.
14
Cash Budget
JAN FEB
MAR Beginning Balance 80 52
50 Cash receipts 590 470
710 Total available 670 522
760 Cash disbursements 618 579
519 Indicated balance 52 -57
241 Borrow
107 (Repay)
107 Ending balance 52 50
134
15
Cash Receipts Budget
JAN FEB
MAR Sales for the month 400 500
800 From prior mo., 30 310 120
150 From current mo., 70 280 350
560 Total Receipts 590 470 710
Note 70 of sales are collected in the month
sold, and the remaining 30 are collected in the
subsequent month.
16
Cash Budget
JAN FEB
MAR Beginning Balance 80 52
50 Cash receipts 590 470
710 Total available 670 522
760 Cash disbursements 618 579
519 Indicated balance 52 -57
241 Borrow
107 (Repay)
107 Ending balance 52 50
134
17
Cash Disbursements Budget
JAN FEB
MAR For merchandise 483 444
384 Other 135 135
135 Total 618 579
519
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Cash Disbursements Budget
JAN FEB
MAR For merchandise 483 444
384 Other 135 135
135 Total 618
579 519
19
Cash Disbursements Budget for Purchases
JAN FEB
MAR From prior mo., 40 195 192 168 From
current mo., 60 288 252 216 Total
483 444 384
Note 60 of purchases are paid for in the month
purchased, and the remaining 40 are paid in the
subsequent month.
20
Purchases Budget
JAN FEB
MAR Cost of Goods Sold 240 300
480 Budgeted ending inv. 780 900
780 Total requirements 1020 1200 1260
Beginning inventory 540 780
900 Purchases 480 420 360
60 of 480 is 288 40 of 480 is 192
21
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
22
Cash Budget
JAN FEB
MAR Beginning Balance 80 52
50 Cash receipts 590 470
710 Total available 670 522
760 Cash disbursements 618 579
519 Indicated balance 52 -57
241 Borrow
107 (Repay)
107 Ending balance 52 50
134
The Cash Budget also indicates short-term
financing needs.
23
Start here
Assumptions about cost behavior
Sales Forecasts


Assumptions about inventory levels, collections
of receiv-ables, disburse-ments
pro forma income statement


Purchases and Production
Long-term financing capital spending
Beg. Balance Sheet
Cash Bud-get S-T Financing
pro forma balance sheet
24
Pro Forma Balance Sheet
March
31 Assets Cash
134 Accounts Receivable 240 Inventory
780 Fixed Assets, net
1535 Total
2689 Liabilities Accounts Payable
144 Stockholders Equity 2545 Total
2689
Cash comes from the Cash Budget. A/R is 30 of
March sales. Inventory is from Purchases
Budget. A/P is 40 of March purchases.
25
Cash Budget
JAN FEB
MAR Beginning Balance 80 52
50 Cash receipts 590 470
710 Total available 670 522
760 Cash disbursements 618 579
519 Indicated balance 52 -57
241 Borrow
107 (Repay)
107 Ending balance 52 50
134
26
Cash Receipts Budget
JAN FEB
MAR Sales for the month 400 500
800 From prior mo., 30 310 120
150 From current mo., 70 280 350
560 Total Receipts 590 470
710
Note 800 - 560 240.
27
Purchases Budget
JAN FEB
MAR Cost of Goods Sold 240 300
480 Budgeted ending inv. 780 900
780 Total requirements 1020 1200 1260
Beginning inventory 540 780
900 Purchases 480 420
360
Note 60 of purchases are paid for in the month
purchased, and the remaining 40 are paid in the
subsequent month. So at the end of March,
Payables are 40 of 360.
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Lecture 21

• Operational Budgeting
• Operational Budgeting Exercises

29
1. K-Mart expects sales of 100,000 in April,
145,000 in May and 250,000 in June. Sales are
collected 30 in the month of sale with the
remainder collected the month after sale. What
will accounts receivable be on May 31?
30
1. K-Mart expects sales of 100,000 in April,
145,000 in May and 250,000 in June. Sales are
collected 30 in the month of sale with the
remainder collected the month after sale. What
will accounts receivable be on May 31?
70 of 145,000 101,500
31
2. Sams Club expects to make purchases of
100,000 in April 240,000 in May 350,000 in
June and 230,000 in July. Purchases are paid
30 in the month of purchase and 70 in the month
after purchase. What would accounts payable be
at the end of May?
32
2. Sams Club expects to make purchases of
100,000 in April 240,000 in May 350,000 in
June and 230,000 in July. Purchases are paid
30 in the month of purchase and 70 in the month
after purchase. What would accounts payable be
at the end of May?
70 of 240,000 168,000
33
3. Costco expects sales of 100,000 in January,
150,000 in February, 180,000 in March, and
200,000 in April. Cost of Sales is 70 of
sales. Ending inventory is expected to equal 40
of the next month's unit sales. How much
inventory would be purchased in March?
34
3. Costco expects sales of 100,000 in January,
150,000 in February, 180,000 in March, and
200,000 in April. Cost of Sales is 70 of
sales. Ending inventory is expected to equal 40
of the next month's unit sales. How much
inventory would be purchased in March?
In March Costco would purchase 60 of March
cost-of-sales and 40 of April cost-of-sales. (60
of 180,000 x .7)(40 of 200,000 x .7)
75,600 56,000 131,600
35
4. Price Club expects sales as follows January
100,000 February 150,000 March 180,000 Apr
il 200,000 Sales are made 20 for cash, and
80 on credit. Credit sales are collected 60 in
the month of sale and 40 in the next month.
What are collections for March?
36
4. Price Club expects sales as follows January
100,000 February 150,000 March 180,000 Apr
il 200,000 Sales are made 20 for cash, and
80 on credit. Credit sales are collected 60 in
the month of sale and 40 in the next month.
What are collections for March?
20 (60 of 80) 68 (68 of 180,000) (40
of 80 of 150,000) 122,400 48,000
170,400