Profit Planning

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Learning Objectives. Understand budgeting objectives Understand

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Profit Planning

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1. Profit Planning

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

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 that the manager can actually control to 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

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

26. Expected Cash Collections

27. Expected Cash Collections

28. The Production Budget

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

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

36. The Direct Materials Budget

37. The Direct Materials Budget

38. The Direct Materials Budget

39. The Direct Materials Budget

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

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

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

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

57. Ending Finished Goods Inventory Budget

58. Ending Finished Goods Inventory Budget

59. Ending Finished Goods Inventory 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

65. The Cash Budget

66. The Cash Budget

67. Financing and Repayment

68. The Cash Budget

69. Financing and Repayment

70. The Cash Budget

71. The Cash Budget

72. Financing and Repayment

73. The Budgeted Income Statement

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

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