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3020 Chapter 9

3020 Chapter 9. Profit Planning. Budgeting. A quantitative plan of what we expect in the future Personal budgets Purposes Planning Control Responsibility Accounting. Advantages. Planning for future makes you think about what will happen

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3020 Chapter 9

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  1. 3020 Chapter 9 Profit Planning

  2. Budgeting • A quantitative plan of what we expect in the future • Personal budgets • Purposes • Planning • Control • Responsibility Accounting

  3. Advantages • Planning for future makes you think about what will happen • If shortfalls are seen, something can be done about it ahead of time (obtain a line of credit, hire more workers, get contracts with other suppliers) • Avoid bottlenecks • You have to know what to expect in order to control resources

  4. Budgeting • Time Horizon • Long term (strategic planning) • Medium term (tactical and capital budget) • Day to day (master budget) • Detail • Little (strategic planning) • More (tactical and capital budgeting) • Most (master budget)

  5. Budgeting • Participation by Employees • Top management (strategic planning) • Middle and top management (tactical and capital budgeting) • Everyone (master budget) • Other behavioral considerations • If budgets used for performance evaluation, employees will try to make them even if not properly prepared • PEOPLE EMHASIZE WHAT GETS REWARDED!!

  6. Master Budget • Operating Budget (income statement items) • Sales • Production (including DM, DL, and OH) • Ending inventory • Selling and general administrative • Financial Budget • Cash • Budgeted financial statements

  7. Sales Budget • Units of sales • X selling price per unit • = Dollars of sales • Units of sales goes to Production budget • Dollars of sales goes to Income statement • Schedule of cash collections of sales goes to cash budget

  8. Production Budget • Units of sales • + Desired ending inventory • = Units needed • - Beginning inventory • = Units to be produced • Units to be produced goes to DM, DL, OH budgets

  9. Purchases/DM Budget • Finished units to be produced • X DM needed per finished unit • = Material needs • + Desired ending inventory of DM • - Beginning inventory of DM • = DM to be purchased • Goes to income statement and cash budget

  10. Direct Labor Budget • Finished units to produce • X standard time allowed per unit • = Standard labor time needed • X per hour labor cost • = Total direct labor cost • Goes to income statement and cash budget

  11. Manufacturing Overhead Budget • Predicted activity base • X variable OH rate • = Total Variable OH • + Fixed OH in total • = Total Manufacturing overhead cost • Goes to income statement and cash budget

  12. Selling, General & Administrative Budget • Predicted sales dollars • X variable S,G & A rate • = Total variable S,G & A • + Fixed S,G & A total cost • =Total S,G & A cost • Goes to income statement and cash budget

  13. Cash Budget • Beginning Balance • + Cash receipts for period • = Cash available • - Cash disbursements for period • = Excess (Deficiency) over cash available • Financing (loans, interest payments, stock sales, etc.) • Ending cash balance

  14. Cash Collections • Cash sales • Cash collections of credit sales • Collected for this month’s sales • Collected for prior month’s sales • Minus sales discounts • Any other cash receipts (sales of property, plant & equipment, dividends received, etc.)

  15. Cash Disbursements • Purchases • Cash purchases • Credit purchases • Percentage paid this month less discount taken • Percentage paid of prior month’s purchases • Operating expenses • NOT DEPRECIATION • Equipment payments • Dividend payments

  16. Budgeted Income Statement • Sales (from sales forecast) • Cost of goods sold • Beginning inventory (from previous balance sheet) • COGM - compute cost per unit from DM, DL, OH budgets x units manufactured OR Actual purchases made for a retailer • Ending inventory budgets – (from previous ending inventory budget) • Selling and administrative expenses (from S&A budget) • Compute to arrive at budgeted net income

  17. Budgeted Balance Sheet • Assets • Cash (from cash budget) • Accts. Rec. (credit sales that have not been collected) • Inventory (from ending inventory budget) • Property, plant & Equipment (beg. Balance + changes) • Liabilities • Accounts Payable (from purchases budget) • Notes Payable (from cash budget) • Owners’ equity • Common stock (Beg. Balance + Changes) • Retained earnings (Beg. Bal. + Net income – Divs.)

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