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Lecture 21

Lecture 21. Operational Budgeting Operational Budgeting Exercises. Lecture 21. Operational Budgeting Operational Budgeting Exercises. Start here. Assumptions about cost behavior. Sales Forecasts. +. +. Assumptions about inventory levels, collections of receiv-ables, & disburse-ments.

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Lecture 21

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  1. Lecture 21 • Operational Budgeting • Operational Budgeting Exercises

  2. Lecture 21 • Operational Budgeting • Operational Budgeting Exercises

  3. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  4. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  5. Willamette Widget Corp. Sales Forecasts JANFEBMAR Sales $400 $500 $800 This information comes from the sales force, merchandisers, marketing personnel, and possibly the finance & planning group.

  6. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  7. Pro Forma Income Statements JANFEBMAR Sales $400 $500 $800 Cost of Goods Sold 240 300 480 Gross Profit & Contribution Margin 160 200 320 Fixed Costs 150 150 150 Income $ 10 $ 50 $170 The Sales line comes from the previous schedule. The Cost of Goods Sold line and Fixed Cost line come from assumptions about cost behavior (contribution margin is 40%).

  8. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  9. Beginning Balance Sheet Dec 31 Assets Cash $ 80 Accounts Receivable 310 Inventory 540 Fixed Assets, net 1580 Total $ 2510 Liabilities Accounts Payable $ 195 Stockholders’ Equity 2315 Total $ 2510 This is all given.

  10. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  11. Purchases Budget JANFEBMAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780900 780 Total requirements 1020 1200 1260 Beginning inventory 540780 900 Purchases $480 $420 $360 The COGS line comes from the pro forma income statement. Budgeted ending inventory is a target. Beginning inventory is given.

  12. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  13. Cash Budget JANFEBMAR Beginning Balance $ 80 $ 52$ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52$50 $134 The beginning balance for January comes from the beginning balance sheet.

  14. Cash Budget JANFEBMAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

  15. Cash Receipts Budget JANFEBMAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 Total Receipts $590 $470 $710 Note: 70% of sales are collected in the month sold, and the remaining 30% are collected in the subsequent month.

  16. Cash Budget JANFEBMAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

  17. Cash Disbursements Budget JANFEBMAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

  18. Cash Disbursements Budget JANFEBMAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

  19. Cash Disbursements Budget for Purchases JANFEBMAR From prior mo., 40% $195 $192 $168 From current mo., 60% 288 252 216 Total $483 $444 $384 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month.

  20. Purchases Budget JANFEBMAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480$420 $360 60% of $480 is $288 40% of $480 is $192

  21. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  22. Cash Budget JANFEBMAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The Cash Budget also indicates short-term financing needs.

  23. Start here Assumptions about cost behavior Sales Forecasts + + Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

  24. Pro Forma Balance Sheet March 31 Assets Cash $ 134 Accounts Receivable 240 Inventory 780 Fixed Assets, net 1535 Total $ 2689 Liabilities Accounts Payable $ 144 Stockholders’ Equity 2545 Total $ 2689 Cash comes from the Cash Budget. A/R is 30% of March sales. Inventory is from Purchases Budget. A/P is 40% of March purchases.

  25. Cash Budget JANFEBMAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

  26. Cash Receipts Budget JANFEBMAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 Total Receipts $590 $470 $710 Note: $800 - $560 = $240.

  27. Purchases Budget JANFEBMAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month. So at the end of March, Payables are 40% of $360.

  28. Lecture 21 • Operational Budgeting • Operational Budgeting Exercises

  29. 1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31?

  30. 1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31? 70% of $145,000 = $101,500

  31. 2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May?

  32. 2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May? 70% of $240,000 = $168,000

  33. 3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March?

  34. 3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March? In March Costco would purchase 60% of March cost-of-sales and 40% of April cost-of-sales. (60% of $180,000 x .7)+(40% of $200,000 x .7) = $75,600 + $56,000 = $131,600

  35. 4. Price Club expects sales as follows: • January $100,000 • February $150,000 • March $180,000 • April $200,000 • Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March?

  36. 4. Price Club expects sales as follows: • January $100,000 • February $150,000 • March $180,000 • April $200,000 • Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March? 20% + (60% of 80%) = 68% (68% of $180,000) + (40% of 80% of $150,000) = $122,400 + $48,000 = $170,400

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