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Planning for Profit and Cost Control

Planning for Profit and Cost Control. Chapter 7. Introduction. Detail Budget. Detail Budget. Detail Budget. Inventory. Master Budget Combination of numerous specific budgets. Production. Sales. The Budget Committee. A standing committee responsible for

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Planning for Profit and Cost Control

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  1. Planning for Profit and Cost Control Chapter 7

  2. Introduction Detail Budget Detail Budget Detail Budget Inventory Master Budget Combinationof numerousspecificbudgets Production Sales

  3. The Budget Committee A standing committee responsible for • overall policy matters relating to the budget. • coordinating the preparation of the budget.

  4. Planning -- involves developing objectives and preparing various budgets to achieve these objectives. Control -- involves the steps taken by management that attempt to ensure the objectives are attained. The Planning Process

  5. Three Levels of Planning for Business Activity Strategic PlanningTop management long-rangedecisions. Capital BudgetingIntermediate-range planning Operations BudgetingDirect firm’s activity inthe short-range

  6. Three Levels of Planning for Business Activity Operating Budget 1999 2000 2001 2002 The annual operating budget may be divided into quarterly or monthly budgets.

  7. Three Levels of Planning for Business Activity Continuous or Perpetual Budget 1999 2000 2001 2002 This budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

  8. Advantages of Budgeting CorrectiveAction PerformanceMeasurement Coordination Planning

  9. Consideration for the Human Factor Participative Budget System Flow of Budget Data

  10. The Master Budget • The master budget consists of a series of detailed schedules and budgets that describe the company’s overall financial plans for the coming accounting period. • The three major budget categories are • Operating budget • Capital budgets • Financial statement budgets

  11. Cash Paymentsfor Inventory IncomeStatement CashPaymentsfor S & A S & AExpenseBudget BalanceSheet CashBudget Cash Flow Statement Information Flow in the Master Budget Cash Receipts and Payments Schedules Operating Budgets Pro formaFinancialStatements Start Sales Budget Cash Receipts InventoryPurchasesBudget

  12. Sales Budget Detailed schedule showing expected sales for the coming periods.

  13. Sales Budget • Web Company is preparing budgets for the quarter ending June 30. • Budgeted sales for the next five months are: • April $200,000 • May $500,000 • June $300,000 • July $250,000 • August $150,000. • Cash sales are 20% of the total and credit sales are 80%.

  14. Sales Budget $200,000 × 20% = $40,000 Accounts receivable at June 30

  15. Schedule of Cash Receipts Sales Budget Scheduleof Cash Receipts Completed Cash receipts flow from expected sales.

  16. Schedule of Cash Receipts • Web expects to collect its accounts receivable in the month following the month of sale. • On March 31, accounts receivable totaled $100,000. • Let’s prepare the cash receipts budget.

  17. Schedule of Cash Receipts From the Sales Budget

  18. Purchases Budget The total amount of inventory needed for each month is equal to the amount of budgeted sales plus the desired ending inventory.

  19. Purchases Budget • At Web, cost of sales is equal to 70% of total budgeted sales. • Management wants to maintain an ending inventory that is equal to 20% of the current month’s cost of budgeted sales. • The ending inventory at March 31 is $15,000. Let’s prepare the purchases budget.

  20. Budgeted Cost of Sales $140,000 Desired Ending Inventory % 20% Desired Ending Inventory $ 28,000 Purchases Budget

  21. Purchases Budget The ending inventory for April is the beginning inventory for May.

  22. Purchases Budget Now we can move on to the Schedule of Cash payments for Inventory Purchases.

  23. Cash Payments for Inventory Purchases • Web pays 80% of inventory purchases in the month of acquisition and the remaining 20% in the month following acquisition. • On March 31, Web owed $14,000 for purchases of inventory. Let’s prepare the Cash Payments for Inventory Purchases schedule.

  24. Cash Payments for Inventory Purchases March 31 accounts payable for inventory purchases

  25. Cash Payments for Inventory Purchases April Inventory Purchases $153,000 Percent Paid in Following Month 20% May Payment for April Purchases $ 30,600

  26. Cash Payments for Inventory Purchases June Inventory Purchases $182,000 Percent Paid in July 20% Accounts Payable at June 30 $ 36,400

  27. Selling and Administrative Expense Budget • Sales commissions are 2% of sales and are paid in the month after they are earned. • Supplies expense is 1% of sales. • Utilities are paid the month after they are used. • On March 31, Web owed $3,000 in sales commissions and $1,200 in utilities. Web has developed the selling and administrative expense budget shown on the next screen.

  28. Selling and Administrative Expense Budget $200,000 Sales × 2% = $4,000

  29. Selling and Administrative Expense Budget $200,000 Sales × 1% = $2,000 Let’s see how these expenses translate into cash payments for selling and administrative expenses.

  30. Selling and Administrative Expense Budget Let’s see how these expenses translate into cash payments for selling and administrative expenses.

  31. Schedule of Cash Payments for S&A Expenses March 31 Sales Commissions and Utilities. Amortization Expense is anon-cash expense.

  32. Schedule of Cash Payments for S&A Expenses April Sales Commissions and Utilities.

  33. Schedule of Cash Payments for S&A Expenses The total quarterly expenses of $141,700, Web will pay$133,700 in cash and record liabilities of $6,000for June sales commissions and $1,700 for June utilities.

  34. Cash Budget • Web want to maintain a $10,000 balance in its cash account before any interest payments. • The company has a $100,000 line-of-credit that requires 12% interest on any outstanding balance payable monthly. • Web plans to purchase $50,000 of equipment on April 1. • On March 31, Web’s cash balance is $18,000. Let’s put together the information developed so far and prepare Web’s cash budget.

  35. Cash Budget Cash Receipts Budget Payment for InventoryPurchases Schedule Cash Payments forS&A Schedule

  36. Cash Budget

  37. Cash Budget ($78,600 + $128,900) × 1% = $2,075

  38. Pro Forma Income Statement Cash Budget Pro Forma Income Statement Completed After we complete the cash budget, we can prepare the pro forma income statement for Web.

  39. Pro Forma Income Statement S&A Expense Budget

  40. Pro Forma Balance Sheet On March 31, Web had the following account balances: • Equipment $100,000, • Capital stock $200,000, and • Retained earnings $19,300. With this data and the informationdeveloped in our budgets, we can prepare Web’s Pro Forma Balance Sheet.

  41. Cash ReceiptsBudget

  42. Sales Budget PurchasesBudget Cash Paymentsfor Inventory Cash Paymentsfor S&A

  43. Beginning retained earnings $ 19,300 Net income for quarter 155,439 Ending retained earnings $174,739

  44. Cash Receipts Budget Cash Payments for S&A Cash Payment for Inventory

  45. Cash Budget

  46. End of Chapter 7

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