1、Chapter Nine,Profit Planning,Learning Objective 1,Understand why organizations budget and the processes they use to create budgets.,The Basic Framework of Budgeting,A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period
2、.,The act of preparing a budget is called budgeting. The use of budgets to control an organizations activity is known as budgetary control.,Planning and Control,Planning involves developing objectives and preparing various budgets to achieve these objectives.,Control involves the steps taken by mana
3、gement that attempt to ensure the objectives are attained.,Advantages of Budgeting,Advantages,Choosing the Budget Period,Operating Budget,2005,2006,2007,2008,The annual operating budget may be divided into quarterly or monthly budgets.,A continuous budget is a 12-month budget that rolls forward one
4、month (or quarter) as the current month (or quarter) is completed.,Self-Imposed Budget,A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget.,Advantages of Self-Imposed Budgets,Individuals at all leve
5、ls of the organization are viewed as members of the team whose judgments are valued by top management. Budget estimates prepared by front-line managers are often more accurate than estimates prepared by top managers. Motivation is generally higher when individuals participate in setting their own go
6、als than when the goals are imposed from above. A manager who is not able to meet a budget imposed from above can claim that it was unrealistic. Self-imposed budgets eliminate this excuse.,Self-Imposed Budgets,Most companies do not rely exclusively upon self-imposed budgets in the sense that top man
7、agers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales.,Human Factors in Budgeting,The success of budgeting depends upon three important factors: Top management must be enthusiastic and committed to the budget process. Top management must not use t
8、he budget to pressure employees or blame them when something goes wrong. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.,The Budget Committee,A standing committee responsible for overall policy matters relating to the budget coordina
9、ting the preparation of the budget,The Master Budget: An Overview,Production Budget,Selling and Administrative Budget,Direct Materials Budget,Manufacturing Overhead Budget,Direct Labor Budget,Cash Budget,Sales Budget,Budgeted Financial Statements,Ending Finished Goods Budget,A case,Learning Objectiv
10、e 2,Prepare a sales budget, including a schedule of expected cash collections.,Budgeting Example,Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units
11、. The selling price is $10 per unit.,The Sales Budget,The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30th,Expected Cash Collections,All sales are on account. Royals collection pattern is: 70% collected in t
12、he month of sale, 25% collected in the month following sale,5% uncollectible. The March 31 accounts receivable balance of $30,000 will be collected in full.,Expected Cash Collections,Expected Cash Collections,Expected Cash Collections,Expected Cash Collections,Learning Objective 3,Prepare a producti
13、on budget.,The Production Budget,Production Budget,Sales Budget and Expected Cash Collections,Completed,Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.,The Production Budget,The management at Royal Company wants ending inventory to be equal to 20% of t
14、he following months budgeted sales in units. On March 31, 4,000 units were on hand. Lets prepare the production budget.,The Production Budget,The Production Budget,The Production Budget,Budgeted sales for the next five months are: July 25,000 units August 15,000 units. (Slide 15),The Production Budg
15、et,Learning Objective 4,Prepare a direct materials budget, including a schedule of expected cash disbursements for purchases of materials.,The Direct Materials Budget,At Royal Company, five pounds of material are required per unit of product. Management wants materials on hand at the end of each mon
16、th equal to 10% of the following months production. On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound. Lets prepare the direct materials budget.,The Direct Materials Budget,The Direct Materials Budget,The Direct Materials Budget,Calculate the materials to be purcha
17、sed in May.,The Direct Materials Budget,The Direct Materials Budget,Expected Cash Disbursement for Materials,Royal pays $0.40 per pound for its materials. One-half of a months purchases is paid for in the month of purchase; the other half is paid in the following month. The March 31 accounts payable
18、 balance is $12,000.Lets calculate expected cash disbursements.,Expected Cash Disbursement for Materials,Expected Cash Disbursement for Materials,Compute the expected cash disbursements for materials for the quarter.,Expected Cash Disbursement for Materials,Learning Objective 5,Prepare a direct labo
19、r budget.,The Direct Labor Budget,At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week at least. In exchange for the “no layoff” policy, workers agree to a wage rate of $10 pe
20、r hour regardless of the hours worked (no overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month. Lets prepare the direct labor budget.,The Direct Labor Budget,The Direct Labor Budget,The Direct Labor Budget,The Direct Labor Budget,Le
21、arning Objective 6,Prepare a manufacturing overhead budget.,Manufacturing Overhead Budget,At Royal, manufacturing overhead is applied to units of product on the basis of direct labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. Fixed manufacturing overhead is $50,000
22、 per month and includes $20,000 of noncash costs (primarily depreciation of plant assets). Lets prepare the manufacturing overhead budget.,Manufacturing Overhead Budget,Manufacturing Overhead Budget,Manufacturing Overhead Budget,Ending Finished Goods Inventory Budget,Direct materials budget and info
23、rmation.,Ending Finished Goods Inventory Budget,Direct labor budget.,Ending Finished Goods Inventory Budget,Ending Finished Goods Inventory Budget,Production Budget.,Learning Objective 7,Prepare a selling and administrative expense budget.,Selling and Administrative Expense Budget,At Royal, the sell
24、ing and administrative expenses budget is divided into variable and fixed components. The variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $70,000 per month. The fixed selling and administrative expenses include $10,000 in costs prim
25、arily depreciation that are not cash outflows of the current month.Lets prepare the companys selling and administrative expense budget.,Selling and Administrative Expense Budget,Selling and Administrative Expense Budget,Learning Objective 8,Prepare a cash budget.,Format of the Cash Budget,The cash b
26、udget is divided into four sections: Cash receipts listing all cash inflows excluding borrowing; Cash disbursements listing all payments excluding repayments of principal and interest; Cash excess or deficiency; and The financing section listing all borrowings, repayments and interest.,The Cash Budg
27、et,Royal: Maintains a 16% open line of credit for $75,000 Maintains a minimum cash balance of $30,000 Borrows on the first day of the month and repays loans on the last day of the month Pays a cash dividend of $49,000 in April Purchases $143,700 of equipment in May and $48,300 in June (both purchase
28、s paid in cash) Has an April 1 cash balance of $40,000,The Cash Budget,The Cash Budget,The Cash Budget,The Cash Budget,Ending cash balance for April is the beginning May balance.,The Cash Budget,The Cash Budget,Learning Objective 9,Prepare a budgeted income statement.,The Budgeted Income Statement,Learning Objective 10,Prepare a budgeted balance sheet.,The Budgeted Balance Sheet,Royal reported the following account balances prior to preparing its budgeted financial statements:Land - $50,000 Common stock - $200,000 Retained earnings - $146,150 Equipment - $175,000,End of Chapter 9,
