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MANAGERIAL
ACCOUNTING for MBAs
Peter D. Easton Robert F. Halsey Mary Lea McAnally Al L. Hartgraves Wayne J. Morse
Fourth Edition
MODULE 21
Operational Budgeting and
Profit
Planning
Budgets
Require people to think about the
future
Move a company from a reactive to a
proactive style of management
Improve communication and
coordination
Provide a guide to action
Provide a basis of performance
evaluation
Aid in risk management
Cambridge Business Publishers, 3
Management by Exception
RISK RESPONSE
Select a response to each risk:
Avoid risk, e.g. do not accept project
Transfer risk, e.g. purchase insurance
Mitigate risk, e.g. contingency plans
Accept risk, e.g. risk low, risk will not have a significant impact, or risk
unavoidable
RISK MONITORING
Develop procedures to continuously monitor important risks with the goal of
facilitating a timely response.
Alan J. Chilcott, Risk Management A Developing Field of Study and
Application, Cost Engineering September 9, 2010, pp. 9-16; Neville Turbit,
Basics of Managing Risk, The Project Perfect White Paper Collection,
Cambridge Business Publishers, www.projectperfect.com.au. 7
Learning Objective 2
Cash
Special Budget
Budgets Pro Forma
Statements
Income Statement
Cambridge Business Publishers, Balance Sheet 18
Sales Budget
BC Carts
Purchases Budget
For Month of June 2015
Units Dollars
Sales needs 9,000. $36,000.
Desired ending inventory 1,980. 7,920.
Total 10,980. 43,920.
Less beginning inventory (1,800) (7,200)
Purchases 9,180. $36,720.
Sales for July: 9,000 + (9,000 0.10) = 9,900 carts Number of units times
Ending inventory = 9,900 0.20 = 1,980 carts
the cost per unit of $4
Cambridge Business Publishers, 22
Selling Expense Budget
Continued
Cambridge Business Publishers, 31
Complete Cash Budget
BC Carts
Cash Budget
For Month of June 2015
Credit sales
Disbursements
Purchases
Total 33,180.
Fixed assets
Equipment, net 90,400
$36,720 x 0.75
Total assets $169,640
Liabilities and Income
Stockholders' Equity
Stmt. ($8,400 - $1,100) x 0.40
Current liabilities
Accounts payable $27,540
Income taxes payable 10,148 $25,000 - $5,000
Accrued expenses 2,920 $ 40,608
Given
Long-term liabilities
$63,355 + $23,678
Notes payable 20,000
Total liabilities 60,608
Cambridge Business Publishers, 36
Finalizing the Budget
BC Carts
Purchases Budget
For Month of June 2015
Resin:
Pounds of resin needs (6 lbs. x 9,180 carts) 55,080. 6 x 10,098 x 0.10
Desired ending resin inventory 6,059.
Total resin requirements in pounds 61,139.
Less beginning resin inventory (5,508)
Given
Resin purchases in pounds 55,631.
Continued
Cambridge Business Publishers, 42
Purchases Budget Example - Wheels
BC Carts plans to produce 10,098 carts in July. It wants
to have 10% of the materials needed for the next
months production in stock at the end of each month.
Each cart requires 6 pounds of plastic resin and two
wheels. At June 1, BC had 5,508 pounds of resin and
1,836 wheels on hand. Wheels cost $0.30 each and
resin costs $0.21 per pound.
Wheels:
Number of wheels needed (2 x 9,180 carts) 18,360. 2 x 10,098 x 0.10
Desired ending wheel inventory 2,020.
Total wheel requirements 20,380.
Less beginning wheel inventory (1,836) Given
Wheels purchases 18,544.
Continued
Cambridge Business Publishers, 43
Purchases Budget Example
Complete materials purchases budget:
BC Carts
Purchases Budget
For Month of June 2015
Resin:
Pounds of resin needs (6 lbs. x 9,180 carts) 55,080.
Desired ending resin inventory 6,059.
Total resin requirements in pounds 61,139.
Less beginning resin inventory (5,508)
Resin purchases in pounds 55,631.
Wheels:
Number of wheels needed (2 x 9,180 carts) 18,360.
Desired ending wheel inventory 2,020.
Total wheel requirements 20,380.
$0.21 x 55,631
Less beginning wheel inventory (1,836)
= $11,683
Wheels purchases 18,544.
BC Carts
Manufacturing Cost Budget
For Month of June 2015
Direct materials
Resin used in production (9,180 6 lbs. $0.21) $11,567
Wheels used in production (9,180 2 $0.30) 5,508
Total direct materials 17,075
Direct labor (9,180 0.075 $10) 6,885
Manufacturing overhead
Variable ($0.43 per unit) 3,947
Fixed 8,262
Total manufacturing costs $36,169
Cambridge Business Publishers, 45
Learning Objective 5
Fixed-length periods
Most companies use a one-year budget
period; some shorter and longer
Life-cycle budgeting
Developing a budget for a projects entire life
Continuous budgeting
Based on a moving time frame
When one period passes, one more period is
added
Sometimes called a rolling budget
Managers forced to focus on future