Chapter 3 The Profit Planning and Control Process · 7/3/2014 · Describe the profit planning and...

Chapter 3

The Profit Planning and Control Process

Omar Maguiña Rivero

Learning Objectives

After studying this chapter, the student will be able to:

1. Describe the profit planning and control process

2. Explain the timing of the planning process

3. Explain the line and staff responsibilities related to PPC


The Profit Planning and Control Process

A Comprehensive approach

1) The application of the broad concept of profit planning and control to all phases of operation in an enterprise.

2) The application of a total system approach.


Overview of the PPC Process

• Components of a PPC Program

A. Substantive Plan

B. The Financial Plan

C. Variable expense budgets

D. Supplementary budgets

E. Performance Report

F. Follow-up, Corrective, and Replanning Reports


A. The Substantive Plan

1. Broad objectives of the enterprise

2. Specific enterprise goals

3. Enterprise strategies

4. Executive management planning instructions (planning premises)

The “prose part” of the plan rather than the “numbers part” of the plan.


B. The Financial Plan 1. Strategic long-range profit plan

a) Sales, cost, and profit projections

b) Major projects and capital additions

c) Cash flow and financing

d) Personnel requirements


B. The Financial Plan 2. Tactical short-range profit (annual)plan

a. Operating Plan:

Planned income statement

1) Sales plan

2) Production (or merchandise purchases) Plan

3) Administrative expense budget

4) Distribution expense budget

5) Appropriation-type budgets (e.g., research and development, promotion, advertising)


B. The Financial Plan 2. Tactical short-range profit (annual)plan

b. Financial Position Plan

Planned balance sheet

1) Assets

2) Liabilities

3) Owner’s equity

c. Cash Flow Plan


C. Variable Expenses Budgets Output-expense formulas

D. Variable Expenses Budgets. (e.g., Cost-volume profit analysis, ratio analysis)

E. Performance Report (including any special report)-each month-end and as needed

F. Follow-up, Corrective Action, and Replanning reports


1. Identification and Evaluation of External Variables

Relevant variables

2. Development of the Broad Objectives of the Enterprise

• The statement of broad objectives should express the mission, vision, and ethical character of the enterprise

• Responsibility of executive management.

• Should not specify quantitative goals

• Should be a narrative expression of the purpose, objectives and philosophical character of the business


3. Development of Specific Goals for the Enterprise

• Provides both narrative and quantitative goals that are definite and measurable

• Should be developed by executive management

• These are specific goals that relate to the enterprise as a whole and to the major responsibility centers

• Goals must be developed for both the strategic long-range and the tactical short-range plans


4. Development and Evaluation of Company Strategies

• Company strategies are the basic procedure, ways, and tactics that will be used to attain objectives and goals

• Strategies focus on “how”; there for, they outline a plan of action for the enterprise

• Periodic reassessment of strategies is essential


5. Executive Management Planning Instructions

• This phase involves communication of the substantive plan to middle-and-lower management levels

• It also is called the statement of planning premises or the statement of planning guidelines


6. Preparation and Evaluation of Project Plans

Managers must decide upon the plan status of each project in process and select any new project to be initiated during time dimension by the upcoming strategic and tactical profit plan.


7 – 8 Development and Approval of Strategic and Tactical Profit Plan

“Executive Planning Instructions” and “Project Plans” are needed to initiate activities on each responsibility center to develop:

A Strategic long-range profit plan and a tactical short-range profit plan.

These two plan are usually developed concurrently.


Development of a Typical Short-Term Profit Plan for a Nonmanufacturing Company

9. Implementation of Profit Plans


Involves the management function of leading subordinates in attaining enterprise objectives and goals.

A series of meetings should be scheduled to discuss implementation and action performance.

10. Use of Periodic Performance Report

Designed by top managers and prepared by accounting or each responsibility centers on a daily, weekly or monthly basis.

Short-term performance reporting is essential for effective control.


• Use of Flexible Budgets

• Also referred to as the variable budget or formula budget.

• Each expense must be classified into one of three categories:

– Fixed expenses

– Variable expenses

– Semi variable expenses



Department 1: Flexible Budget Expense formulas

EXPENSE FORMULA

EXPENSE Fixed Amount (per month)

Variable rate (per 100 direct labor

hours)

Supervisory salaries $ 10,000 $ 0.00

Indirect material 0 1.50

Indirect labor $ 450 $ 5.50

Department 1: Actual Performance -January

Output department activity Supervisory salaries Indirect Materials Indirect labor

2,000 direct labor hours $ 10,000 $ 40 $ 540

Department 1: January Expense performance Report


Expense Computation of Budget Expense Goal

Flexible Budget Goal

Actual Expense

Expense Variance

Supervisory salaries

$ 10,000 fixed plus zero variable

$ 10,000 $ 10,000 $ 0.00

Indirect materials

Zero fixed plus variable ($ 1.50 x 20)

$ 30 $ 40 $ (10)

Indirect labor

$ 450 fixed plus variable ($ 5.50 x 20)

$ 560 $ 540 $ 20

Total $ 10,590 $ 10,580 $10

11. Implementation of Follow-up

• Responsibilities are the basis for effective follow-up actions.

• Performance variation are the effects.

• Line management must determine the underlying causes.

• Corrective actions must be implemented.

• Should be a special follow-up to check if corrective actions have worked.


Timing of the Planning Process


• Timing of the Planning Process

• Selection of defined period of time for strategic and tactical profit plans

• Replanning may occurs during the budget year as needed

• Continuous profit planning requires frequent planning and replanning because of the dynamics of the environment or technology


o Continuous Planning Process


Line and Staff Responsibilities Related to PPC


• Line Responsibility

• The chief executive has ultimate responsibility

• Each line executive must be assigned center responsibility for:

1. Operational decision inputs into the plan

2. Implementation

3. Control


• Staff Responsibility

1. Designing and improving the system (as opposed to making operational decision inputs)

2. Supervising and coordinating the operation of the system

3. Providing expert technical assistance, analyses, and advice to the line managers

4. Developing and distributing performance report


PPC Policies Manual


• PPC Policies Manual

Desirable to enhance communication,

specify procedures and provide reasonable

stability in the operation of the system.


o Budget Manual Content

1. A statement of the objectives of the PPC

2. Procedures to be followed in developing profit plan:

a) Instruction and forms to be used

b) Procedures for making planning decisions

c) Top-management budget committee

3. PPC calendar

4. Distribution instructions for profit plan schedules

5. Instructions and procedures with respect to performance reports

6. Procedures for taking corrective action on variances

7. Follow-up and replanning procedures


• Planning Perspectives


• Perspectives

• Tendency to pursue long-range planning on an informal, ad hoc basis

• Failure to distinguish long-range planning and forecasting

• Partial planning (single keys areas)

• Definition of long-range (time)


Behavioral Implications

• Behavioral Management Program

• Basic purpose is to attain goal congruence between employees’ goals and the goals of the enterprise

• The burden of attaining goal congruence is a primary responsibility of the enterprise

• A PPC program can accentuate or ameliorate the behavioral problem in a company


Summary of Herzberg’s Motivation-Hygiene Findings

Chapter 3 The Profit Planning and Control Process · 7/3/2014 · Describe the profit planning and...

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