Chap Profit Planning

8/9/2019 Chap Profit Planning

1/77

Profit PlanningProfit Planning

Chapter 9


2/77

The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin

Learning ObjectivesLearning Objectives

Understand budgeting objectives

Understand things you need to know & do

beforestarting 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,incomestatement and balancesheet)


3/77


Planning and ControlPlanning and Control

PlanningPlanning Where do we want to goWhere do we want to goand how do we get there? or and how do we get there? or involvesinvolvesdeveloping objectives and preparing various budgets todeveloping objectives and preparing various budgets to

achieve these objectives.achieve these objectives.

Growth??Growth??

New business ventures?New business ventures?

Maintain during a recession?Maintain during a recession?


4/77


Planning and ControlPlanning and Control

ControlControl Are we keeping to ourplan?Are we keeping to ourplan?Or Or involves the steps taken by management that attempt toinvolves the steps taken by management that attempt toensure the objectives are attained.ensure the objectives are attained.

Are your managers staying within budget?Are your managers staying within budget?

Do you care?Do you care?


5/77


Advantages of BudgetingAdvantages of Budgeting

Advantages

Define goalDefine goaland objectivesand objectives

UncoverpotentialUncoverpotentialbottlenecksbottlenecks

CoordinateCoordinateactivitiesactivities

CommunicatingCommunicating

plansplans

Think about andThink about and

plan for the futureplan for the future

Means of allocatingMeans of allocatingresourcesresources


6/77


Types of budgetsTypes of budgets

Sales budget through GrossMargin

Cost of GoodsSold all costs

Expenses Ending balances:cash, inventory,etc.

Completeset of Financial Statements

Long term budgets (Capital budgets chapter 14)


7/77


Things YOU need toThings YOU need to knowknow::

What are thecompanys goals?

What are its assumptions?

Profitability expectations New product development

Annual raises

New stores, offices

What is yourcompanysculture?


8/77


Things you NEED to do beforeThings you NEED to do beforeplanning yourplanning yourdepartmentaldepartmental budgetbudget

Plan your Income &Expenses as a TEAM

No oneon your team isgoing to buy in to abudget (especially onewith CUTS) that theydidnt get to give input on.


9/77



IncludesomeCUSHIONin yourplan

Beprepared to have your firstbudget slashed(its their wayof adding value. . . .)


10/77



Considerpre-saleswhois the decision maker onyour budget?

How can you pre-sell itbefore the BIGMEETING?


11/77


Things you NEED to do after you haveThings you NEED to do after you haveyour finalyour final departmentaldepartmental budgetbudget

Regularly REVIEW, COMPARE,ANALYZE:

Actual Income and Expenses

To Planned (budgeted) Income andExpenses

MakeADJUSTMENTS as necessary

Watch for timing issues....(just like thoseoutstanding checks)


12/77


13/77


CONCLUSIONS....CONCLUSIONS....

Budgeting can help you manage yourbusiness...better


14/77


Responsibility AccountingResponsibility Accounting

Managersshould be held responsible forManagersshould be held responsible forthose itemsthose items andand onlyonly those itemsthose items thatthat

the managercan actually controlthe managercan actually control

to a significant extent.to a significant extent.


15/77


Human Factors in BudgetingHuman Factors in Budgeting

Thesuccess of budgeting depends upon:Thesuccess of budgeting depends upon:

The degree to whichThe degree to which top managementtop management

acceptsaccepts the budget program as a vital partthe budget program as a vital partof thecompanys activities.of thecompanys activities.

The way in which top managementThe way in which top management usesusesbudgeted data.budgeted data.


16/77


TheMaster BudgetTheMaster Budget

ProductionBudget

ProductionBudget

Selling andAdministrative

Budget

Selling andAdministrative

Budget

DirectMaterials

Budget

DirectMaterials

Budget

ManufacturingOverhead

Budget

ManufacturingOverhead

Budget

DirectLabor

Budget

DirectLabor

Budget

CashBudgetCash

Budget

SalesBudgetSales

Budget

Budgeted Financial StatementsBudgeted Financial Statements


17/77


TheMaster BudgetTheMaster Budget

Using a 8 page (orso) handout....letswalk through theMaster Budget

Might take a few days

Different example (but similar) to book

Within all the numbercrunching dont ever

lose sight of the things you need to knowand do...


18/77


TheSales BudgetTheSales Budget

Detailed scheduleshowing expectedDetailed scheduleshowing expectedsales for thecoming periodssales for thecoming periods

expressed in units and dollars.expressed in units and dollars.


19/77


Budgeting ExampleBudgeting Example

Royal Company ispreparing budgets for theRoyal Company ispreparing budgets for thequarterendingquarterending June 30June 30..

Budgeted sales for the next five months are:Budgeted sales for the next five months are:

AprilApril 20,000 units20,000 units

MayMay 50,000 units50,000 units

JuneJune 30,000 units30,000 units

JulyJuly 25,000 units25,000 unitsAugustAugust 15,000 units.15,000 units.

Theselling price is $10 per unit.Theselling price is $10 per unit.


20/77



April May June Quarter

Budgeted

sales (units) 20,000 50,000 30,000 100,000Selling price

per unit

Total sales


21/77




Budgeted

sales (units) 20,000 50,000 30,000 100,000Selling price

per unit 10$ 10$ 10$ 10$

Total sales 200,000$ 500,000$ 300,000$ 1,000,000$


22/77


Expected Cash CollectionsExpected Cash Collections

All sales are on account.All sales are on account.

Royalscollection pattern is:Royalscollection pattern is:

70% collected in the month ofsale,70% collected in the month ofsale,25% collected in the month following sale,25% collected in the month following sale,

5% is uncollectible.5% is uncollectible.

TheMarch 31 accounts receivableTheMarch 31 accounts receivablebalance of $30,000 will becollected in full.balance of $30,000 will becollected in full.


23/77


24/77




Accounts rec. - 3/31 30,000$ 30,000$

April sales

70% x $200,000 140,000 140,000

25% x $200,000 50,000$ 50,000

Total cash collections 170,000$ 50,000$

From the Sales Budget for April.From the Sales Budget for April.


25/77




Accounts rec. - 3/31 30,000$ 30,000$

April sales

70% x $200,000 140,000 140,000

25% x $200,000 50,000$ 50,000May sales

70% x $500,000 350,000 350,000

25% x $500,000 125,000$ 125,000

Total cash collections 170,000$ 400,000$

From the Sales Budget for May.From the Sales Budget for May.


26/77




Accounts rec. - 3/31 30,000$ 30,000$

April sales

70% x $200,000 140,000 140,000

25% x $200,000 50,000$ 50,000May sales

70% x $500,000 350,000 350,000

25% x $500,000 125,000$ 125,000

June sales

70% x $300,000 210,000 210,000Total cash collections 170,000$ 400,000$ 335,000$ 905,000$


27/77


The Production BudgetThe Production Budget

ProductionProductionBudgetBudget

SalesSalesBudgetBudget

andandExpectedExpectedCashCash

CollectionsCollections

Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide forsufficient ending inventory.sales and provide forsufficient ending inventory.


28/77



The management at Royal Company wantsThe management at Royal Company wantsending inventory to beequal to 20% of theending inventory to beequal to 20% of thefollowing months budgeted sales in units.following months budgeted sales in units.

On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.

Letsprepare theproduction budget.Letsprepare theproduction budget.


29/77



Budgeted sales 20,000 50,000 30,000 100,000

Add desired ending

inventory 10,000Total needed 30,000

Less beginning

inventory 4,000

Required production 26,000


Budgeted sales 50,000Desiredpercent 20%Desired inventory 10,000


30/77



Budgeted sales 20,000 50,000 30,000 100,000

Add desired ending

inventory 10,000Total needed 30,000

Less beginning

inventory 4,000

Required production 26,000 ?


March 31March 31ending inventoryending inventory


31/77



Budgeted sales 20,000 50,000 30,000 100,000

Add desired ending

inventory 10,000 6,000Total needed 30,000 56,000

Less beginning

inventory 4,000 10,000

Required production 26,000 46,000



32/77



Budgeted sales 20,000 50,000 30,000 100,000

Add desired ending

inventory 10,000 6,000 5,000 5,000Total needed 30,000 56,000 35,000 105,000

Less beginning

inventory 4,000 10,000 6,000 4,000

Required production 26,000 46,000 29,000 101,000


Assumed ending inventory.Assumed ending inventory.


33/77


TheDirect Materials BudgetTheDirect Materials Budget

At Royal Company, fivepounds of materialAt Royal Company, fivepounds of materialare required per unit ofproduct.are required per unit ofproduct.

Management wants materials on hand atManagement wants materials on hand attheend ofeach month equal to 10% of thetheend ofeach month equal to 10% of thefollowing monthsproduction.following monthsproduction.

On March 31, 13,000 pounds of materialOn March 31, 13,000 pounds of material

are on hand. Material cost is $0.40 perare on hand. Material cost is $0.40 perpound.pound.Letsprepare the direct materials budget.Letsprepare the direct materials budget.


34/77



Production 26,000 46,000 29,000 101,000

Materials per unit

Production needs

Add desiredending inventory

Total needed

Less beginning

inventory

Materials to be

purchased


From productionFrom productionbudgetbudget


35/77




Production 26,000 46,000 29,000 101,000

Materials per unit 5 5 5 5

Production needs 130,000 230,000 145,000 505,000

Add desiredending inventory

Total needed

Less beginning

inventory

Materials to be

purchased


36/77




Production 26,000 46,000 29,000 101,000



Add desiredending inventory 23,000

Total needed 153,000

Less beginning

inventory

Materials to be

purchased

10% of the following10% of the followingmonthsproductionmonthsproduction


37/77



Production 26,000 46,000 29,000 101,000



Add desiredending inventory 23,000

Total needed 153,000

Less beginning

inventory 13,000

Materials to be

purchased 140,000 ?


March 31March 31inventoryinventory


38/77



April Ma J e arter

Production 26 000 46 000 29 000 101 000


Production needs 130 000 230 000 145 000 505 000

Add desiredending inventory 23 000 14 500 11 500 11 500

Total needed 153 000 244 500 156 500 516 500

Less beginning

inventory 13 000 23 000 14 500 13 000

Materials to be

purc ased 140 000 221 500 142 000 503 500

Assumed ending inventoryAssumed ending inventory


39/77


Expected Cash Disbursement forExpected Cash Disbursement forMaterialsMaterials

Royal pays $0.40 perpound for itsRoyal pays $0.40 perpound for itsmaterials.materials.

OneOne--half of a monthspurchases arepaidhalf of a monthspurchases arepaidfor in the month ofpurchase; the otherfor in the month ofpurchase; the otherhalf ispaid in the following month.half ispaid in the following month.

TheMarch 31 accountspayable balanceTheMarch 31 accountspayable balance

is $12,000.is $12,000.

Letscalculateexpected cashLetscalculateexpected cashdisbursements.disbursements.


40/77



April May June Quarter Accounts pay. 3/31 12,000$ 12,000$

April purchases

May purchases

June purchases

Total cashdisbursements


41/77



April purchases

50% x $56,000 28,000 28,000

50% x $56,000 28,000$ 28,000

May purchases

June purchases

Total cashdisbursements 40,000$ ?


140,000 lbs.140,000 lbs. $.40/lb. = $56,000$.40/lb. = $56,000


42/77


Quick CheckQuick Check

What are the total cash disbursements for theWhat are the total cash disbursements for thequarter?quarter?

a. $185,000a. $185,000

b. $ 68,000b. $ 68,000

c. $ 56,000c. $ 56,000

d. $201,400d. $201,400


43/77


Quick CheckQuick Check

What are the total cash disbursements for theWhat are the total cash disbursements for thequarter?quarter?

a. $185,000a. $185,000

b. $ 68,000b. $ 68,000

c. $ 56,000c. $ 56,000

d. $201,400d. $201,400


44/77




April purchases

50% x $56,000 28,000 28,000

50% x $56,000 28,000$ 28,000

May purchases50% x $88,600 44,300 44,300

50% x $88,600 44,300$ 44,300

June purchases

50% x $56,800 28,400 28,400

Total cashdisbursements 40,000$ 72,300$ 72,700$ 185,000$


45/77


TheDirect Labor BudgetTheDirect Labor Budget

At Royal,each unit ofproduct requires 0.05 hours ofdirect labor.

The Company has a no layoff policy so all employeeswill bepaid for 40 hours of work each week.

In exchange for the no layoff policy, workers agreed toa wage rate of $10 per hour regardless of the hoursworked (No overtimepay).

For the next three months, the direct labor workforce willbepaid for a minimum of 1,500 hoursper month.

Lets prepare the direct labor budget.Lets prepare the direct labor budget.


46/77



Production 26,000 46,000 29,000 101,000

Direct labor hours

Labor hours requiredGuaranteed labor hours

Labor hours paid

Wage rate

Total direct labor cost


From production budgetFrom production budget


47/77




Production 26,000 46,000 29,000 101,000

Direct labor hours 0.05 0.05 0.05 0.05

Labor hours required 1,300 2,300 1,450 5,050Guaranteed labor hours

Labor hours paid

Wage rate



48/77



Production 26,000 46,000 29,000 101,000


Labor hours required 1,300 2,300 1,450 5,050Guaranteed labor hours 1,500 1,500 1,500

Labor hours paid 1,500 2,300 1,500 5,300

Wage rate



Higher of labor hours requiredHigher of labor hours requiredor labor hours guaranteed.or labor hours guaranteed.


49/77




Production 26,000 46,000 29,000 101,000


Labor hours required 1,300 2,300 1,450 5,050Guaranteed labor hours 1,500 1,500 1,500

Labor hours paid 1,500 2,300 1,500 5,300

Wage rate 10$ 10$ 10$ 10$

Total direct labor cost 15,000$ 23,000$ 15,000$ 53,000$


50/77


Manufacturing Overhead BudgetManufacturing Overhead Budget

Royal Company uses a variablemanufacturing overhead rate of $1 per unitproducedproduced.

Fixed manufacturing overhead is $50,000 permonth and includes $20,000 of noncash costs(primarily depreciation ofplant assets).

Lets prepare the manufacturingLets prepare the manufacturingoverhead budget.overhead budget.


51/77



Production in units 26,000 46,000 29,000 101,000

Variable mfg. OH rate 1$ 1$ 1$ 1$

Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$

Fixed mfg. OH costsTotal mfg. OH costs

Less noncash costs

Cash disbursements

for manufacturing OH


From production budgetFrom production budget


52/77







Fixed mfg. OH costs 50,000 50,000 50,000 150,000Total mfg. OH costs 76,000 96,000 79,000 251,000

Less noncash costs

Cash disbursements

for manufacturing OH


53/77







Fixed mfg. OH costs 50,000 50,000 50,000 150,000Total mfg. OH costs 76,000 96,000 79,000 251,000

Less noncash costs 20,000 20,000 20,000 60,000

Cash disbursements

for manufacturing OH 56,000$ 76,000$ 59,000$ 191,000$

Depreciation is a noncash charge.


54/77


Ending Finished Goods InventoryEnding Finished Goods InventoryBudgetBudget

Now, Royal can complete theendingfinished goods inventory budget.

At Royal, manufacturing overhead isapplied to units ofproduct on the basis ofdirect labor hours.

Lets calculate ending finished goodsLets calculate ending finished goodsinventory.inventory.


55/77


Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. 0.40$ 2.00$

Direct labor

Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units

Unit product cost

Ending finished goods inventory


Direct materialsDirect materialsbudget and informationbudget and information


56/77




Direct labor 0.05 hrs. 10.00$ 0.50

Manufacturing overhead



Unit product cost

Ending finished goods inventory


Direct labor budgetDirect labor budget


57/77





Manufacturing overhead 0.05 hrs. 49.70$ 2.49

4.99$



Unit product cost 4.99$

Ending finished goods inventory ?


Total mfg. OH for quarter $251,000Total labor hours required 5,050 hrs.

= $49.70 per hr.*

*rounded


58/77





Manufacturing overhead 0.05 hrs. 49.70$ 2.49

4.99$


Ending inventory in units 5,000

Unit product cost 4.99$

Ending finished goods inventory 24,950$


Production BudgetProduction Budget


59/77


Selling and AdministrativeExpenseSelling and AdministrativeExpenseBudgetBudget

At Royal, variableselling and administrativeexpenses are $0.50 per unit sold.

Fixed selling and administrativeexpenses are

$70,000 per month. The fixed selling and administrativeexpenses

include $10,000 in costs primarily depreciation that are not cash outflows of thecurrent month.

Lets prepare the companys selling andadministrative expense budget.


60/77



A M

B g

V g

5

V x

F x gx 7

x 8

L

x

C -f

g & 7 ?


61/77



April May June Quarter Budgeted sales 20,000 50,000 30,000 100,000Variable selling

and admin. rate 0.50$ 0.50$ 0.50$ 0.50$

Variable expense 10,000$ 25,000$ 15,000$ 50,000$

Fixed selling andadmin. expense 70,000 70,000 70,000 210,000

Total expense 80,000 95,000 85,000 260,000Less noncash

expenses 10,000 10,000 10,000 30,000

Cash disburse-ments for

selling & admin. 70,000$ 85,000$ 75,000$ 230,000$


62/77


The Cash BudgetThe Cash Budget

Royal:Royal:

Maintains a 16% open line ofcredit for $75,000.Maintains a 16% open line ofcredit for $75,000.

Maintains a minimum cash balance of $30,000.Maintains a minimum cash balance of $30,000.

Borrows on the first day of the month and repaysBorrows on the first day of the month and repaysloans on the last day of the month.loans on the last day of the month.

Pays a cash dividend of $49,000 in April.Pays a cash dividend of $49,000 in April.

Purchases $143,700 ofequipment in May andPurchases $143,700 ofequipment in May and$48,300 in Junepaid in cash.$48,300 in Junepaid in cash.

Has an April 1 cash balance of $40,000.Has an April 1 cash balance of $40,000.


63/77


April May June QuarterBeginning cash balance 40,000$

Add cash collections 170,000

Total cash available 210,000

Less disbursements

Materials 40,000

Direct laborMfg. overhead

Selling and admin.

Equipment purchase

Dividends

Total disbursements

Excess (deficiency) of

cash available over

disbursements


Schedule ofExpectedSchedule ofExpectedCash CollectionsCash Collections

Schedule ofExpectedSchedule ofExpectedCash DisbursementsCash Disbursements


64/77





Less disbursements

Materials 40,000

Direct labor 15,000Mfg. overhead 56,000

Selling and admin. 70,000

Equipment purchase

Dividends

Total disbursements


cash available over

disbursements


Direct LaborDirect LaborBudgetBudget

ManufacturingManufacturing

Overhead BudgetOverhead Budget

Selling and AdministrativeSelling and AdministrativeExpense BudgetExpense Budget


65/77





Less disbursements

Materials 40,000

Direct labor 15,000Mfg. overhead 56,000

Selling and admin. 70,000

Equipment purchase -

Dividends 49,000

Total disbursements 230,000


cash available over

disbursements (20,000)$


Because Royal maintainsBecause Royal maintains

a cash balance of $30,000,a cash balance of $30,000,thecompany mustthecompany must

borrow on itsborrow on itslineline--ofof--creditcredit


66/77


Apr r rE ( f )

f C v

v r r m t ( )

F g:

B rr w g

R paym t

I t r t

tal f ancing

Ending cash balance 30,000$ 30,000$ -$ -$

Financing and RepaymentFinancing and Repayment

Ending cash balance forAprilEnding cash balance forAprilis the beginning May balance.is the beginning May balance.


67/77



April May June QuarterBeginning cash balance 40,000$ 30,000$

Add cash collections 170,000 400,000

Total cash available 210,000 430,000

Less disbursements

Materials 40,000 72,300

Direct labor 15,000 23,000Mfg. overhead 56,000 76,000

Selling and admin. 70,000 85,000

Equipment purchase - 143,700

Dividends 49,000 -

Total disbursements 230,000 400,000


cash available over

disbursements (20,000)$ 30,000$


68/77



Because theending cash balance isBecause theending cash balance isexactly $30,000, Royal will not repayexactly $30,000, Royal will not repay

the loan this month.the loan this month.

April May June QuarterE cess (deficiency)

ofCash available

overdisbursements ( 0,000)$ 30,000$

Financing:

Borrowing 0,000 -

Repayments - -

Interest - -

Total financing 0,000 -

Ending cash balance 30,000$ 30,000$


69/77



April May June QuarterBeginning cash balance 40,000$ 30,000$ 30,000$ 40,000$

Add cash collections 170,000 400,000 335,000 905,000

Total cash available 210,000 430,000 365,000 945,000

Less disbursements

Materials 40,000 72,300 72,700 185,000

Direct labor 15,000 23,000 15,000 53,000Mfg. overhead 56,000 76,000 59,000 191,000

Selling and admin. 70,000 85,000 75,000 230,000

Equipment purchase - 143,700 48,300 192,000

Dividends 49,000 - - 49,000

Total disbursements 230,000 400,000 270,000 900,000


cash available over

disbursements (20,000)$ 30,000$ 95,000$ 45,000$


70/77


April May June QuarterBeginning cash balance 40,000$ 30,000$ 30,000$ 40,000$

Add cash collections 170,000 400,000 335,000 905,000

Total cash available 210,000 430,000 365,000 945,000

Less disbursements

Materials 40,000 72,300 72,700 185,000

Direct labor 15,000 23,000 15,000 53,000Mfg. overhead 56,000 76,000 59,000 191,000

Selling and admin. 70,000 85,000 75,000 230,000

Equipment purchase - 143,700 48,300 192,000

Dividends 49,000 - - 49,000

Total disbursements 230,000 400,000 270,000 900,000


cash available over

disbursements (20,000)$ 30,000$ 95,000$ 45,000$


At theend ofJune, Royal hasenough cashAt theend ofJune, Royal hasenough cashto repay the $50,000 loan plus interest at 16%.to repay the $50,000 loan plus interest at 16%.


71/77


April May June QuarterE cess (deficiency)

ofCash available

overdisbursements ( 0,000)$ 30,000$ 95,000$ 45,000$

Financing:

Borrowing 50,000 - - 50,000

Repayments - - (50,000) (50,000)

Interest - - ( ,000) ( ,000)

Total financing 50,000 - (52,000) (2,000)

Ending cash balance 30,000$ 30,000$ 43,000$ 43,000$


$50,000$50,000 16%16% 3/12 = $2,0003/12 = $2,000Borrowings on April 1 andBorrowings on April 1 and

repayment ofJune 30.repayment ofJune 30.

Th B d t d ITh B d t d I


72/77


The Budgeted IncomeThe Budgeted IncomeStatementStatement

CashBudget

BudgetedIncome

Statem

ent

After we complete the cash budget,After we complete the cash budget,we can prepare the budgeted incomewe can prepare the budgeted income

statement for Royal.statement for Royal.

The Budgeted IncomeThe Budgeted Income


73/77


The Budgeted IncomeThe Budgeted IncomeStatementStatement

Roy Company

B t Income Statement

Fort e Three Months Ended June 30

Sales (100,000 units @ $10) 1,000,000$Cost of goods sold (100,000 @ $4.99) 499,000

Gross margin 501,000

Selling and administrative expenses 260,000

Operating income 241,000Interest expense 2,000

Net income 239,000$


74/77


The Budgeted BalanceSheetThe Budgeted BalanceSheet

Royal reported the following accountbalancesprior to preparing its budgeted

financial statements:

Land - $50,000 Common stock - $200,000

Retained earnings- $146,150

Equipment - $175,000


75/77


76/77


77/77

End of Chapter 9End of Chapter 9

Chap Profit Planning

Documents

Transcript of Chap Profit Planning