Profit Planning

1. Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

2. Decision Making The Work of Management Planning Organizing & Directing Evaluating Controlling

3. Decision Making Decision Making The Work of Management Initiate LT & ST Plans Planning Evaluate Performance Organizing & Directing Implement Plans Evaluating Controlling Measure Performance

4. Decision Making Decision Making The Work of Management Planning Initiate LT & ST Plans Planning Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Evaluate Performance Organizing & Directing Implement Plans Evaluating Controlling Measure Performance

5. Decision Making Decision Making The Work of Management Controlinvolves the steps taken by management that attempt to ensure the objectives are attained. Initiate LT & ST Plans Planning Evaluate Performance Organizing & Directing Implement Plans Evaluating Controlling Measure Performance Control

6. Decision Making The Work of Management Initiate LT & ST Plans Initiate LT & ST Plans Budgets Evaluate Performance Implement Plans Measure Performance

7. Decision Making Decision Making The Work of Management “Through” the budget Planning Evaluate Performance Evaluate Performance Implement Plans Implement Plans Measure Performance

8. Decision Making Decision Making The Work of Management Planning “According” to the Budget Evaluate Performance Evaluate Performance Implement Plans Measure Performance Measure Performance

9. Decision Making Decision Making The Work of Management Revise? Revise? Initiate LT & ST Plans Planning Revise? Revise? Revise? Evaluate Performance Implement Plans Organizing & Directing Evaluating Controlling Measure Performance Feedback Feedback Feedback Feedback Feedback Feedback

10. The Basic Framework of Budgeting

11. A Budget is . . . • A quantitative expression of a plan of action. • A detailed plan for acquiring and using financial and other resources over a specified time period (text).

12. Now Tactical Plan 1 Year 5 Years Strategic Plan

13. Short-Run Vs. Long-Run Budgets • Strategic Planning • Selecting overall objectives. • Choosing what markets to be in. • Selecting what products to produce. • Determining the price/quality mix. • Deciding which technologies to use.

14. Short-Run Vs. Long-Run Budgets Strategic Planning Long-run Budgets (more than one year) Forecasts of large asset acquisitions. Financing plans. Research and development plans.

15. Short-Run Vs. Long-Run Budgets Strategic Planning Long-run Budgets Short-run Budgets (1 year or less) Quantities to produce. Quantities to sell. Supplies acquisitions.

16. Imposed Participatory Budgets . . . Vs.

17. Imposed Budgets Versus Participatory Budgets Imposed Budgets Participatory Budgets Continuum

18. Participatory Budgets Right to comment before implementation Ultimate right to set budgets Continuum

19. Imposed Budgets Versus Participatory Budgets Imposed Budgets

20. Best Time to Use . . . • In start-up organizations • In extremely small businesses • In times of economic crises • When operating managers lack budgetary skills or perspective.

21. Advantages . . . • Requires less time. • Utilize top management’s knowledge of overall resource availability. • Increase probability that the firm’s strategic plans are incorporated.

22. Disadvantages . . . • Reduce feeling of teamwork. • Dissatisfaction and low morale. • Limited acceptance of stated goals and objectives. • May stifle initiative of lower level managers.

23. Imposed Budgets Versus Participatory Budgets Participatory Budgets

24. Best Time to Use . . . • In well-established organizations. • In extremely large businesses. • In times of economic affluence. • When operating managers have strong budgetary skills and perspectives.

25. Advantages . . . • Obtain information from those persons most familiar with the needs and constraints of the organizational units. • Leads to better morale and higher motivation.

26. Advantages . . . • Integrates knowledge that is diffused among various levels of management. • Provides a means to develop fiscal responsibility and budgetary skills of employees.

27. Advantages . . . • Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management. • Are generally more realistic.

28. Disadvantages . . . • Require significantly more time. • May motivate managers to introduce “slack” into the budget. • May support “empire building” by subordinates.

29. Define goal and objectives Communicating plans Think about and plan for the future Coordinate activities Means of allocating resources Uncover potential bottlenecks Advantages of Budgeting Advantages

30. The Master Budget

32. The Master Budget Sales Budget Sales Forecast EI Budget Production Budget S&A Exp Budget Operating Budget DM Budget DL Budget Overhead Budget Cash Budget Capital Budget Financial Budget Pro Forma Inc. Stmt Pro Forma Bal. Sht Pro Forma SCF

33. The Master Budget The Text Example Hampton Freeze

34. Tom Willis is the majority stockholder and chief executive officer of Hampton Freeze, Inc., a company he started in 2001. The company makes premium popsicles using only natural ingredients and featuring exotic flavors such as tangy tangerine and minty mango. The company’s business is highly seasonal, with most of the sales occurring in spring and summer.

35. In 2002, the company’s second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2002 turned out to be overall a very successful year in terms of both cash flow and net income.

36. With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2003. In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget.

37. 1 7 6 2 3 4 5 8 9 10

38. The Sales Budget A budget showing the number of units, sales price and total sales for each quarter (or month).

39. Research into the history of cash collections at Hampton Freeze indicated that • 70% of sales are collected in the quarter in which the sale is made and • the remaining 30% are collected in the following quarter.

41. The Production Budget A budget showing the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.

42. Finished Units to be Produced Expected Sales in Units Desired EI of Finished Units BI of Finished Units = + -

43. Hampton Freeze would like the ending inventory of finished goods to be equal to 20% of next quarter’s sales. • The company has 2,000 units of beginning inventory.

44. Plus Desired EI of finished units. • Equals expected sales in units • Less BI of finished units. • Finished units to be produced

45. Desired Ending Inventory of Finished Goods equals 20% of next quarter’s sales. Ending Inventory for one quarter equals Beginning Inventory for next quarter.

46. Notice how inventories are accounted for on the spreadsheet.

47. The Direct Materials Purchases Budget A budget showing the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

48. Required Purchases of Raw Materials Amount Required for Production Desired EI of Raw Materials BI of Raw Materials = + -

49. Hampton Freeze has established a policy of maintaining RM equal to 10% of the amount required for production in the subsequent quarter. • In the first quarter the company plans on producing 14,000 units (from the production budget) • Each unit requires parts costing $0.20.

50. To prepare the Schedule of Expected Cash Disbursements for Materials, Hampton’s policy is to • Pay for 50% of purchases in the quarter in which the purchase is made, and • Pay the remaining 50% in the following quarter.