Planning for Profit and Cost

Control

Chapter 14

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

14-2

Learning Objectives1. Describe the budgeting process and the

benefits it provides.2. Explain the relationship between budgeting and

human behavior.3. Prepare a sales budget and related schedule of

cash receipts.4. Prepare an inventory purchases budget and

related schedule of cash payments.5. Prepare a selling and administrative expense

budget and related schedule of cash payments.6. Prepare a cash budget.7. Prepare a pro forma income statement, balance

sheet, and statement of cash flows.

•  

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Three Levels of Planning

1.1. Strategic planningStrategic planning involves making long-term involves making long-term decisions such as defining the scope of the decisions such as defining the scope of the business, determining which products to business, determining which products to develop or discontinue, and identifying the develop or discontinue, and identifying the most profitable markets.most profitable markets.

2.2. Capital budgetingCapital budgeting focuses on intermediate focuses on intermediate range planning and involves decisions as range planning and involves decisions as whether to buy or lease equipment, whether to whether to buy or lease equipment, whether to stimulate sales, or whether to increase stimulate sales, or whether to increase company assets.company assets.

3.3. Operations budgetingOperations budgeting focuses on short-term focuses on short-term objectives . The objectives . The master budget master budget addresses addresses specific sales targets, production goals, and specific sales targets, production goals, and financing plans.financing plans.

1.1. Strategic planningStrategic planning involves making long-term involves making long-term decisions such as defining the scope of the decisions such as defining the scope of the business, determining which products to business, determining which products to develop or discontinue, and identifying the develop or discontinue, and identifying the most profitable markets.most profitable markets.

2.2. Capital budgetingCapital budgeting focuses on intermediate focuses on intermediate range planning and involves decisions as range planning and involves decisions as whether to buy or lease equipment, whether to whether to buy or lease equipment, whether to stimulate sales, or whether to increase stimulate sales, or whether to increase company assets.company assets.

3.3. Operations budgetingOperations budgeting focuses on short-term focuses on short-term objectives . The objectives . The master budget master budget addresses addresses specific sales targets, production goals, and specific sales targets, production goals, and financing plans.financing plans.

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Advantages of Budgeting

BudgetingBudgetingBudgetingBudgeting

PromotesPromotesPlanningPlanningPromotesPromotesPlanningPlanning

EnhancesEnhancesPerformance Performance MeasuremenMeasuremen

tt

EnhancesEnhancesPerformance Performance MeasuremenMeasuremen

tt

EnhancesEnhancesCorrective Corrective

ActionsActions

EnhancesEnhancesCorrective Corrective

ActionsActions

PromotesPromotesCoordinationCoordination

PromotesPromotesCoordinationCoordination

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Budgeting and Human Behavior

Upper management must be sensitive to the impact of the budgeting process on employees.

Budgets are constraining.

They limit individual

freedom in favor of an established

plan.

Budgets are constraining.

They limit individual

freedom in favor of an established

plan.

Many people find Many people find evaluation based evaluation based

on budget on budget expectations expectations

stressful. Think of stressful. Think of students and students and

exams.exams.

Many people find Many people find evaluation based evaluation based

on budget on budget expectations expectations

stressful. Think of stressful. Think of students and students and

exams.exams.Upper management must demonstrate Upper management must demonstrate

that budgets are sincere efforts to that budgets are sincere efforts to express realistic goals employees are express realistic goals employees are

expected to meet.expected to meet.

Upper management must demonstrate Upper management must demonstrate that budgets are sincere efforts to that budgets are sincere efforts to

express realistic goals employees are express realistic goals employees are expected to meet.expected to meet.

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Cashpaymentsfor S & A

Cashpayments

for inventory

Inventorypurchases

budget

IncomeStatement

S & Aexpensebudget

BalanceSheet

Cashreceipts

Salesbudget

Cashbudget

Statement ofCash Flows

Cash Receiptsand Payments

Schedules

OperatingBudgets

Pro formaFinancial

StatementsStartStart

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Sales Budget A detailed schedule prepared by

the marketing department showing expected sales for the coming periods and expected collections on those sales. It is critical to the success of the entire master budgeting process.

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Inventory Purchases Budget

The amount of inventory to purchase is computed by consideration of budgeted sales and budgeted inventory balances.

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Pro Forma Income StatementThe pro forma income statement gives

management an estimate of the expected profitability of HH. If the project appears to be

unprofitable, management can identify changes or make the decision to abandon it. Although managers remain responsible for

data analysis and decision making, computer technology offers powerful tools to assist in

those tasks.

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Pro Forma Income Statement

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Pro Forma Balance SheetThis new store has no contributed capital because its operations will be financed

through debt (line-of-credit) and earnings. The amount of retained earnings will be equal to the net income because there are no prior periods. The fixtures purchased in October will be depreciated for a full three months.

Total accumulated depreciation will be $3,000.

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Pro Forma Statement of Cash Flows

Almost all the information for the Pro Forma Statement of Cash Flows can be

found on the Cash Budget.

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End of Chapter Fourteen