WHAT IS THE FUTURE FOR C&C? Cash flow has been a problem. Is $7,000 in cash enough to operate on?...
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Transcript of WHAT IS THE FUTURE FOR C&C? Cash flow has been a problem. Is $7,000 in cash enough to operate on?...
WHAT IS THE FUTURE FOR C&C?
Cash flow has been a problem. Is $7,000 in cash enough to operate on?
C&C has borrowed money to finance operations
An increase in award jacket sales may be the answer to more cash
C&C’s president, George Douglas, wants to decrease inventory levels, but he is concerned that customer satisfaction will be affected
WHAT IS A BUDGET?
An operating plan expressed in dollars
Shows how resources will be committed during the coming period
Helps plan for the future
Communicates corporate direction and coordinates corporate efforts
TOP-DOWN BUDGETS: ADVANTAGES
Increase probability that the organization’s strategic plans will be incorporated in planned activities
Enhance coordination among divisional plans and objectives
Use top management’s knowledge of overall resource availability
Reduce the time frame for the budgeting process
TOP-DOWN BUDGETS: DISADVANTAGES
May result in dissatisfaction, defensiveness, and low morale among individuals who must work under the budget
Reduces the feeling of teamwork
May limit the acceptance of the stated goals and objectives
May create a view of the budget as a punitive device
BOTTOM-UP BUDGETS: ADVANTAGES
Gathers information from persons most familiar with the needs and constraints of organizational units
Allow organizational units to coordinate with one another
Lead to better morale and higher motivation
Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management
BOTTOM-UP BUDGETS: DISADVANTAGES
Require significantly more time
Effects of managerial participation may be negated by top-management changes
Managers may be ambivalent or unqualified to participate, creating an unachievable budget
May cause managers to introduce slack into the budget
WHAT IS A STANDARD?
Benchmark for measuring performance – an expectation
What are some examples of standards you are familiar with?
In accounting, you can think of it as a budget of a single unit of output
THE STANDARD CONTINUUM
PRACTICAL IDEAL
Tight, but attainable
Perfection, “Factory Heaven”
Where do you want to be?
IDEAL STANDARDS
ADVANTAGESMotivational tool
Constant reminder to workers of need for increased efficiency
DISADVANTAGESDe-motivating because you know you can never achieve the standard
Employees may take shortcuts and reduce effectiveness
Poor planning tool
SETTING STANDARDS
Standards are set for both quantity and price of each input (materials, labor and overhead)
Estimated cost to manufacture a single unit of product or perform a single service
A budget for a single unit of output
HOW DO YOU SET MATERIALS STANDARDS?
What are the inputs?
What is the required quality of each input?
How much of each input is required?
How much does each unit of input cost?
HOW DO YOU SET LABOR STANDARDS?
What are the operations required to produce the product?
How long does it take to perform each operation?
Who performs each operation and how much are they paid?
C&C DIRECT LABOR STANDARDS
Item Rate
Base hourly rate $8.00
Payroll taxes 0.60
Fringe benefits 1.00
Standard direct labor rate $9.60
Activity Direct Labor Hours
Cutting .02
Sewing .18
Machine down-time .01
Rest period .03
Standard direct labor hours .25
$9.60 per direct labor hour x .25 direct labor hours = $2.40
SALES BUDGET
Shows budgeted sales revenue for the period, which flows to the budgeted income statement for the period
Begins with the sales forecast, which typically will be prepared by the sales and marketing departments
Requires a forecasted sales price in addition to the sales volume forecast
Is prepared for each product
C&C’S SALES BUDGET
Notice that the individual sales budget amount flows to the overall sales budget.
SELLING & ADMINISTRATIVE EXPENSE BUDGET
Shows expenses to be incurred to support the budgeted level of sales
Includes variable and fixed expenses
Pay special attention to non-cash expenses such as bad debt expense and depreciation expense. These expenses do not flow to the cash budget.
C&C’S S&A EXPENSE BUDGET
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that
will carry through to the cash budget.
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that
will carry through to the cash budget.
PRODUCTION BUDGET
Shows when and how many units to produce in order to meet budgeted sales volume
Includes budgeted ending inventory of finished goods to provide a cushion for unexpected sales
A retail establishment will have a purchases budget rather than a production budget
Budgeted Sales
Budgeted End. Inv.
Budgeted Beg. Inv.
Budgeted Production
+ _ =
C&C’S PRODUCTION BUDGET
Notice that budgeted ending inventory is based on the next period’s budgeted
sales volume
Notice that budgeted ending inventory is based on the next period’s budgeted
sales volume Notice that budgeted beginning inventory is the previous period’s
budgeted ending inventory
Notice that budgeted beginning inventory is the previous period’s
budgeted ending inventory
DIRECT MATERIALS PURCHASES BUDGET
Shows when and how much of each direct material to purchase in order to meet the production budget
Includes budgeted ending inventory of direct materials to provide a cushion for production errors or supply shortfalls
Is prepared for each direct material input used in the production process
C&C’S DIRECT MATERIALS BUDGET
Notice that you must convert from units of finished goods to units of the direct material
– here from pants to yards of fabric.
Notice that you must convert from units of finished goods to units of the direct material
– here from pants to yards of fabric.
Budgeted inventory levels are calculated using the same principle as
in the production budget.
Budgeted inventory levels are calculated using the same principle as
in the production budget.
DIRECT LABOR BUDGET
Shows when and how much of each direct labor category to employ in order to meet the production budget
May use average standard wage rates for each class of direct laborer rather than actual wage rates for each employee
C&C’S DIRECT LABOR BUDGET
If the standard production time is stated in minutes, you must convert to the hour
decimal equivalent since the standard wage rate is stated on an hourly basis.
If the standard production time is stated in minutes, you must convert to the hour
decimal equivalent since the standard wage rate is stated on an hourly basis.
MANUFACTURING OVERHEAD BUDGET
Is based on budgeted production levels of the overhead application base
Uses the predetermined overhead rate for variable overhead
Assumes budgeted fixed overhead cost is incurred evenly throughout the budget period
Pay special attention to non-cash expenses such as depreciation expense that do not flow to the cash budget.
C&C’S OVERHEAD BUDGET
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that
will carry through to the cash budget.
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that
will carry through to the cash budget.
Application base × variable overhead POR
Application base × variable overhead POR
ENDING INVENTORY AND COGS BUDGET
Shows desired levels of ending inventory
Assists in the preparation of budgeted balance sheet and income statement
C&C’S ENDING RAW MATERIALS BUDGET
DM usage is based on budgeted production and standard DM cost per unit
DM usage is based on budgeted production and standard DM cost per unit
THE CASH BUDGET
Cash available to spend- Cash disbursements= Cash excess or cash needed+ Short-term financing= Ending cash balance
CASH RECEIPTS BUDGET
Based on sales budget
Requires knowledge of historical accounts receivable collection patterns
Distinguishes between cash sales and credit sales
Provides ending accounts receivable balance for the budgeted balance sheet
CASH PAYMENTS FOR MATERIALS BUDGET
Shows when payments for materials purchases will be made
Requires knowledge of past accounts payable payment patterns
Calculates ending accounts payable balance for the budgeted balance sheet
CASH EXCESS (NEEDED)
Cash available minus cash disbursements
Many banks require a minimum cash balance, and that must be figured into the amount of cash excess (needed)
SHORT-TERM FINANCING
This section is only prepared if there is a need to borrow money or repay previously borrowed money
Shows principal and interest amounts
Provides the ending cash balance for the budgeted balance sheet and interest expense for the budgeted income statement
PRO-FORMA FINANCIAL STATEMENTS
Reports “as-if” results rather than actual results
Shows the financial position of the company assuming the budget is achieved