Professional Documents
Culture Documents
Profit Planning
(Operating Budgeting
& Cash Budget)
McGraw-Hill/Irwin Copyright © 2006, The McGraw-Hill Companies, Inc.
The Basic Framework of Budgeting
Planning – Control –
involves developing involves the steps
objectives and taken by
preparing various management that
budgets to achieve attempt to ensure
these objectives. the objectives are
attained.
Advantages of Budgeting
Define goal
and objectives
Communicate Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
Responsibility Accounting
Operating Budget
Most
Most managers
managers argue
argue that
that
zero-based
zero-based budgeting
budgeting is
is too
too
time
time consuming
consuming and
and costly
costly to
to
justify
justify on
on an
an annual
annual basis.
basis.
The Budget Committee
Sales
Budget
Ending
Finished
Goods Selling and
Budget Production
Administrative
Budget
Budget
Cash
Budget
Budgeting Example
Foundational step
Customer / region / product
forecasts
Just to look
Expected Cash Collections
•• All
All sales
sales are
are on
on account.
account.
•• Royal’s
Royal’s collection
collection pattern
pattern is:
is:
70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
5%
5% uncollectible.
uncollectible.
•• The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of of
$30,000
$30,000 will
will be
be collected
collected in
in full
full within
within April
April..
Expected Cash Collections
Expected Cash Collections
Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections
March 31
ending inventory
Quick Check
•• At
At Royal
Royal Company,
Company, fivefive pounds
pounds of of material
material
are
are required
required per
per unit
unit ofof product.
product.
•• Management
Management wants
wants materials
materials on on hand
hand at
at
the
the end
end of
of each
each month
month equal
equal toto 10%
10% ofof the
the
following
following month’s
month’s production
production needs.
needs.
•• On
On March
March 31,
31, 13,000
13,000 pounds
pounds of of material
material
are
are on
on hand.
hand. Material
Material cost
cost is
is $0.40
$0.40 per
per
pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
The Direct Materials Budget
March 31 inventory
How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
Quick Check
How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
The Direct Materials Budget
The Direct Materials Budget
•• Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
•• One-half
One-half ofof aa month’s
month’s purchases
purchases is is paid
paid for
for in
in
the
the month
month of
of purchase;
purchase; the
the other
other half
half is
is paid
paid
in
in the
the following
following month.
month.
•• The
The March
March 31 31 accounts
accounts payable
payable balance
balance is is
$12,000.
$12,000.
Let’s
Let’s calculate
calculate expected
expected cash
cash disbursements.
disbursements.
Expected Cash Disbursement for Materials
Expected Cash Disbursement for Materials
•• At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05
hours
hours (3
(3 minutes)
minutes) ofof direct
direct labor.
labor.
•• The
The wage
wage rate
rate is
is $10
$10 per
per hour
hour ..
•• For
For the
the next
next three
three months,
months, the
the guaranteed
guaranteed labor
labor
hours
hours are
are 1,500
1,500 hours
hours per
per month.
month.
Let’s
Let’s prepare
prepare the
the direct
direct labor
labor budget.
budget.
The Direct Labor Budget
Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
The Direct Labor Budget
Quick Check
*rounded
Manufacturing Overhead Budget
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Ending Finished Goods Inventory Budget
•• At
At Royal,
Royal, thethe selling
selling and
and administrative
administrative expenses
expenses budget
budget is
is
divided
divided into
into variable
variable and
and fixed
fixed components.
components.
•• The
The variable
variable selling
selling and
and administrative
administrative expenses
expenses are are $0.50
$0.50
per
per unit
unit sold.
sold.
•• Fixed
Fixed selling
selling andand administrative
administrative expenses
expenses are
are $70,000
$70,000 per
per
month.
month.
•• The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses include
include
$10,000
$10,000 in in costs
costs –– primarily
primarily depreciation
depreciation –– that
that are
are not
not cash
cash
outflows
outflows of of the
the current
current month
month..
Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and administrative
administrative
expense
expense budget.
budget.
Selling and Administrative Expense Budget
Royal:
Royal:
●Maintains
● Maintains aa 16%
16% open
open line
line ofof credit
credit for
for $75,000
$75,000
●Maintains
● Maintains aa minimum
minimum cashcash balance
balance of of $30,000
$30,000
●Borrows
● Borrows on
on the
the first
first day
day ofof the
the month
month andand repays
repays
loans
loans on
on the
the last
last day
day of
of the
the month
month
●Pays
● Pays aa cash
cash dividend
dividend ofof $49,000
$49,000 in in April
April
●Purchases
● Purchases $143,700
$143,700 of of equipment
equipment in in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash
cash
●Has
● Has an
an April
April 11 cash
cash balance
balance of of $40,000
$40,000
The Cash Budget
Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections
Collections
The Cash Budget
Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements
Disbursements
Direct Labor
Budget
Manufacturing
Overhead Budget
Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C
Sales
Sales Budget
Budget
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory
Inventory
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget
Budget
Net income $ 239,000
Cash
Cash Budget
Budget
THE END