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Profit Planning
4/14/04
Control involves the steps taken by mgmt that attempt to ensure the org. is working together & objectives are attained.
The McGraw-Hill Companies, Inc., 2003
Budget
A plan to acquire and use financial and other resources to achieve the firms goals and objectives Usually a painful process, but absolutely necessary for the efficient running of a firm This chapter provides a very useful model for creating a budget
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Advantages of Budgeting
Define goal and objectives, benchmark Getting mgrs to think about and plan for the future
Advantage s
Uncover potential bottlenecks
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Operating Budget
1999
2000
2001
2002
The annual operating budget may be divided into quarterly and monthly budgets.
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Middle Management
Middle Management
Supervisor
Supervisor
Supervisor
Supervisor
Prepared by lower management levels who are closer to the action and provide more accurate and reliable estimates Recognizes them as part of the team Motivates them to perform, walk their talk Generates buy-in because its not topdown approach
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Zero-based Budgeting
Managers are required to justify all budgeted expenditures Baseline is zero, not last years Requires more work, more time and more documentation Usually done when deep cuts in spending are required
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Cash Budget
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Budgeting Example
Royal Company is preparing budgets for the quarter ending June 30. Budgeted sales for the next five months are:
April May June July August 20,000 units 50,000 units 30,000 units 25,000 units 15,000 units.
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$ 50,000
$ 400,000
$ 170,000
$ 400,000
Note: The 25% of June sales ($75,000) to be collected in July becomes the Accounts Receivable balance at the end of June
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Production Budget
Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
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May 50,000
June 30,000
Quarter 100,000
Quick Check
What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units
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Quick Check
What is the required production for May? a. 56,000 units b. 46,000 units c. 62,000 units d. 52,000 units
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Ending inventory based on 20% of July sales (25,000). The McGraw-Hill Companies, Inc., 2003
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March 31 inventory
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Quick Check
How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds
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Quick Check
How much materials should be purchased in May? a. 221,500 pounds b. 240,000 pounds c. 230,000 pounds d. 211,500 pounds
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$ 40,000
Note: The 50% of June purchases payable in July ($28,400) is the Accounts Payable balance at the end of June.
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The Company has a no layoff policy so all employees will be paid for 40 hours of work each week.
In exchange for the no layoff policy, workers agreed to a wage rate of $10 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
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Note: Cash disbursement equals total direct labor cost since it is paid in period earned
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$ 76,000
$ 59,000
$ 191,000
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4.99 ?
Total mfg. OH for quarter $251,000 = $49.70 per hr.* Total labor hours required 5,050 hrs (from DL budget & MOH budget) *rounded
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The McGraw-Hill Companies, Inc., 2003
Production Budget
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April 20,000
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Because Royal maintains a cash balance of $30,000, the company must borrow on its line-of-credit
$ (20,000)
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$ 30,000
$ (20,000)
$ 30,000
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$ 30,000 $ 30,000
Because the ending cash balance is exactly $30,000, Royal will not repay the loan this month.
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$ (20,000)
$ 30,000
$ 95,000
$ 45,000
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$ 30,000 $ 30,000
$50,000 16% 3/12 = $2,000 Borrowings on April 1 and repayment of June 30.
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The McGraw-Hill Companies, Inc., 2003
After we complete the cash budget, we can prepare the budgeted income statement for Royal.
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Land - $50,000 Common stock - $200,000 Retained earnings - $146,150 Equipment - $175,000
Add 143,700 in May and 48,300 in June for ending balance of $367,000
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Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities
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Royal Company Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property and equipment Land Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities
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43,000 Beginning balance 75,000 Add: net income 4,600 Deduct: dividends 24,950 Ending balance 147,550
End of Chapter 9
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