Profit Planning

UAA ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

The Work of Management

Planning

Evaluating

Decision Making

Organizing & Directing

Controlling

The Work of Management

Initiate LT & Planning ST Plans

Evaluate Evaluating Performance

Decision Making

Organizing & Implement Directing Plans

Measure Controlling Performance

The Work of Management

Initiate LT & Planning ST Plans

Planning

Planning -- involves Evaluate Decision developing objectives Evaluating Performance Making and preparing various budgets to achieve these objectives. Measure
Controlling Performance

Organizing & Implement Directing Plans

The Work of Management

Control Initiate LT & involves Planning ST Planstaken by steps
Evaluate Evaluating Performance

the

management that attempt to ensure the Organizing & Implement Decision objectives areDirecting attained. Plans Making

Control

Measure Controlling Performance

The Work of Management

Initiate LT & ST Plans

Evaluate Performance Budgets

Decision Making

Implement Plans

Measure Performance

The Work of Management

Through Planning the budget

Evaluate Performance

Decision Making

Implement Plans

Measure Performance

The Work of Management

Planning

Evaluate Performance

Decision Making

According Implement to the Budget Plans

Measure Performance

The Work of Management

Initiate LT & Planning ST Plans

Evaluate Evaluating Performance

Decision Making

Organizing & Implement Directing Plans

Measure Controlling Performance

The Basic Framework of Budgeting

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).

Now

1 Year
5 Years

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.

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.

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.

Budgets . . .

Imposed Vs. Participatory

Imposed Budgets Versus Participatory Budgets

Imposed Budgets Participatory Budgets

Continuum

Participatory Budgets
Right to comment before implementation Ultimate right to set budgets

Continuum

Imposed Budgets Versus Participatory Budgets

Imposed Budgets

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.

Advantages . . .
Requires less time.
Utilize top managements knowledge of overall resource availability. Increase probability that the firms strategic plans are incorporated.

Disadvantages . . .
Reduce feeling of teamwork.
Dissatisfaction and low morale.

Limited acceptance of stated goals and objectives. May stifle initiative of lower level managers.

Imposed Budgets Versus Participatory Budgets

Participatory Budgets

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.

Advantages . . .

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

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

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

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

Advantages of Budgeting
Define goal and objectives Communicating plans Think about and plan for the future

Advantages
Coordinate activities Uncover potential bottlenecks Means of allocating resources

The Master Budget

The Master Budget

Sales Forecast

Sales Budget

EI Budget

Production Budget

S&A Exp Budget

DM Budget

DL Budget

Overhead Budget

Cash Budget

Capital Budget

Pro Forma Inc. Stmt

Pro Forma Bal. Sht

Pro Forma SCF

The Master Budget

The Text Example Hampton Freeze

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 companys business is highly seasonal, with most of the sales occurring in spring and summer.

In 2002, the companys 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.

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.

1 6 2 7

8 9

10

The Sales Budget

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

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.

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.

Finished Units to be Produced

Expected Sales in Units

Desired EI of Finished Units

BI of Finished Units

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

2. Equals expected sales in units

3. Plus Desired EI of finished units.

4. Less BI of finished units.

1. Finished units to be produced

Desired Ending Inventory of Finished Goods equals 20% of next quarters sales.

Ending Inventory for one quarter equals Beginning Inventory for next quarter.

Notice how inventories are accounted for on the spreadsheet.

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.

Required Purchases of Raw Materials

Amount Required for Production

Desired EI of Raw Materials

BI of Raw Materials

 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.

 To prepare the Schedule of Expected Cash Disbursements for Materials, Hamptons 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.

2. Equals amount required for production.

3. Plus Desired EI of raw materials.

4. Less BI of raw materials.

1. Required purchases of Direct Materials

The Direct Labor Budget

A budget showing the direct labor hours (and total amount) needed to produce the number of units specified in the production budget.

 Each case produced requires 0.4 direct labor hour. Each hour costs $15

The Direct Labor Budget

The MOH Budget

A budget showing all costs of production other than direct materials and direct labor.

The MOH Budget

The Ending Finished Goods Inventory Budget

A budget showing the carrying cost of the unsold units remaining in inventory.

The Ending FG Inventory Budget

The Selling and Administrative Expense Budget

A budget showing expenses for areas other than manufacturing.

The S&A Expense Budget

The Cash Budget

The Budgeted (Pro-Forma) Income Statement

The Budgeted Balance Sheet