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Profit Planning

Chapter 8. Profit Planning. Budget. Budget: A detailed plan for acquiring and using financial and other resources over specified time period. The act of preparing budget is called ‘budgeting’.

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Profit Planning

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  1. Chapter 8 Profit Planning

  2. Budget • Budget: A detailed plan for acquiring and using financial and other resources over specified time period. • The act of preparing budget is called ‘budgeting’. • Master budget is a summary of a company’s plans that sets specific targets for sales, production, distribution, and financing activities.

  3. Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Control– involves the steps taken by management that attempt to ensure the objectives are attained. Planning and Control

  4. Define goal and objectives Communicating plans Think about and plan for the future Coordinate activities Means of allocating resources Uncover potential bottlenecks Advantages of Budgeting Advantages

  5. Operating Budget 1999 2000 2001 2002 Choosing the Budget Period • Operating budget ordinarily cover a one-year period corresponding to the company’s fiscal year. • The annual operating budget may be divided into quarterly or monthly budgets.

  6. Choosing the Budget Period Continuous Budget • Continuous or perpetual budget is a 12-month budget that rolls forward one month as the current month is completed. • Advocates of this budget argue that there is less danger that managers will become narrowly focused on short-term basis. 1999 2000 2001 2002

  7. Participative Budget System Flow of Budget Data

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

  9. The Sales Budget Detailed schedule showing expected sales for the coming periods expressed in units and dollars.

  10. 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.

  11. The Sales Budget

  12. The Sales Budget

  13. Expected Cash Collections • All sales are on account. • Royal’s 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.

  14. Expected Cash Collections

  15. Expected Cash Collections From the Sales Budget for April.

  16. Expected Cash Collections From the Sales Budget for May.

  17. Quick Check  What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000

  18. Quick Check  What will be the total cash collections for the quarter? a. $700,000 b. $220,000 c. $190,000 d. $905,000

  19. Expected Cash Collections

  20. The Production Budget Sales BudgetandExpectedCashCollections Production Budget Completed Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.

  21. The Production Budget • The management at Royal Company wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. • On March 31, 4,000 units were on hand. • Let’s prepare the production budget.

  22. Budgeted sales 50,000 Desired percent 20% Desired inventory 10,000 The Production Budget

  23. March 31 ending inventory The Production Budget

  24. Quick Check  What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units

  25. Quick Check  What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units

  26. The Production Budget

  27. The Production Budget Assumed ending inventory.

  28. 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 month’s production. • On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound.Let’s prepare the direct materials budget.

  29. The Direct Materials Budget From production budget

  30. The Direct Materials Budget

  31. The Direct Materials Budget 10% of the following month’s production

  32. The Direct Materials Budget March 31 inventory

  33. Quick Check  How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds

  34. Quick Check  How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds

  35. The Direct Materials Budget Assumed ending inventory

  36. Expected Cash Disbursement for Materials • Royal pays $0.40 per pound for its materials. • One-half of a month’s 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. • Let’s calculate expected cash disbursements.

  37. Expected Cash Disbursement for Materials

  38. Expected Cash Disbursement for Materials 140,000 lbs. × $.40/lb. = $56,000

  39. Quick Check  What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400

  40. Quick Check  What are the total cash disbursements for the quarter? a. $185,000 b. $ 68,000 c. $ 56,000 d. $201,400

  41. Expected Cash Disbursement for Materials

  42. 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. • Let’s prepare the direct labor budget.

  43. The Direct Labor Budget From production budget

  44. The Direct Labor Budget

  45. Higher of labor hours required or labor hours guaranteed. The Direct Labor Budget

  46. The Direct Labor Budget

  47. Quick Check  What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000

  48. Quick Check  What would be the total direct labor cost for the quarter if the company follows its no lay-off policy, but pays $15 for every hour worked in excess of 1,500 hours in a month? a. $79,500 b. $64,500 c. $61,000 d. $57,000

  49. 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). • Let’s prepare the manufacturing overhead budget.

  50. Manufacturing Overhead Budget From production budget

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