Module 21

Operational Budgeting
and Profit Planning
 Budget
Financial plan for an organization
Operating plans: sales, purchasing, production,
selling, general, and administrative expenses
Cash inflows/outflows

Ends with complete financial reports: income

statement & balance sheet, cash flow statement,
stockholders equity.
Typical Process for a Merchandiser
Sales Budget

Purchases Selling Expense General and

Budget Budget Administrative
Expense Budget

Cash Budget
Special
Budgets

Pro Forma Statements

Income Statement & Balance Sheet
 Sales Budget
Sales plan is the starting point for the budgeting
process
Includes a forecast of sales revenue
Normally includes a forecast of unit sales
The best available information is used to
forecast sales:
Market conditions in sales territories by period
Merchandise lines available
Promotion and advertising plans
Expected pricing policies (markups)
 Sales Budget Example
BC Carts sells childrens carts to retailers. For
June, estimated sales are 9,000 carts at a selling
price of $10 each with an estimated cost of $4 per
cart.
BC Carts
Sales Budget
For Month of June 2012
Sales in units 9,000
Selling price per unit $ 10.00
Sales revenue $90,000

Budgeted revenue for June is $90,000.

 Purchases Budget

Indicates the merchandise to be purchased to

meet sales needs and ending inventory
requirements
Considers
Budgeted sales
Desired ending inventory
Planned beginning inventory
 Purchases Budget Example
BC Carts desires to have 20% of the carts needed for the next months
sales in stock at the end of each month. At the beginning of June,
1,800 carts are on hand. Each cart costs $4. Sales are planned to
increase 10% per month.
BC Carts
Purchases Budget
For Month of June 2012
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
Ending inventory = 9,900 0.20 = 1,980 carts times the cost per
unit of $4
 Selling Expense
Presents the expenses the organization plans to
incur in connection with sales and distribution
Costs are broken into variable and fixed costs
Variable selling costs
Developed as a percent of sales or an amount per
unit sold
Fixed selling costs
Often based on an estimate obtained from the sales
manager
Selling Expense Budget Example
BC Carts
BC Carts estimates Selling Expense Budget
commissions at 4% For Month of June 2012
of sales and Budgeted sales $90,000
miscellaneous Variable selling expenses
variable costs at Commissions (4%) $3,600
Miscellaneous (1.5%) 1,350
1.5%. Estimated
Total variable expenses 4,950
fixed selling costs Fixed selling expenses
are $3,500 for Depreciation 3,500
depreciation, $2,000 Advertising 2,000
for advertising, and Miscellaneous 1,200
$1,200 for Total fixed expenses 6,700
miscellaneous costs. Total selling expenses $11,650

Commissions: $90,000 0.04 = $3,600

Miscellaneous: $90,000 0.015 = $1,350
 General and Administrative
Expense Budget
Presents the expenses planned in connection with
the general administration of the organization
Example expenses:
Compensation
Insurance
Depreciation
Utilities
Miscellaneous
 General and Administrative
Expense Budget Example
BC Carts estimates the following monthly general and
administrative costs: $5,000 for salaries, $800 for insurance,
$1,100 for depreciation, $600 for utilities, and $900 for
miscellaneous.
BC Carts
General and Administrative Expense Budget
For Month of June 2012
Salaries $5,000
Insurance 800
Depreciation 1,100
Utilities 600
Miscellaneous 900
Total general and administrative expenses $8,400
 Cash Budget
Summarizes all cash receipts and disbursements
expected to occur during the budget period
Because of issues related to the timing of sales
and collections on account
Collections on sales do not equal sales revenue
Because of issues related to the timing of
payments for purchases and other expense items
Disbursements do not equal expenses
 Cash Receipts Budget Example
BC Carts budgeted its June sales at $90,000. It estimates that 40% of
sales are cash and 60% are on credit. 30% of credit sales are collected in
the month of sale and 70% are collected in the following month.
Beginning cash balance is $15,000 and sales during May were $86,000.

40% Cash Sales

Sales 30% Collected current month
60% Credit Sales
70% Collected following month
CASH RECEIPTS BUDGET FOR JUNE, 2012
Collections on sales
Cash sales $36,000
Credit sales $90,000 0.40

Current month (30% of credit sales) 16,200

$90,000 0.60 0.30 = $16,200
Prior month (70% of credit sales)
36,120 $86,000 0.60 0.70 = $36,120
Total $88,320
 Cash Disbursements Budget
Example
BC Carts estimates that 25% of its current month inventory
purchases will be paid during the month incurred and 75% are paid in
the following month. During May, purchases were $32,000. Budgeted
purchases for June are $36,720 (from the purchases budget.)

Inventory purchases section of the cash disbursements section

of the cash budget:

CASH DISBURSEMENTS BUDGET FOR JUNE, 2012

Disbursements
Purchases
Current month (25% of purchases) $ 9,180 $36,720 0.25 = $9,180

Prior month (75% of purchases) 24,000 $32,000 0.75 = $24,000

Total $33,180
Continued
 Cash Disbursements Budget
Example continued
BC Carts general and administrative costs were $8,200 during May, and
$8,400 during June, $1,100 of each which is depreciation. Income taxes
were $15,500 during May. The company pays for selling costs in the
month incurred, and 60% of the general and administrative costs in the
month incurred with the remaining 40% the following month. Income
taxes are taxed at 30% of income before taxes and are paid the month
following accrual.
CASH DISBURSEMENTS BUDGET FOR JUNE, 2012
Selling expenses $ 8,150
General and administrative expenses
Current month (60%) $4,380
Prior month (40%) 2,840
Income taxes 15,500
General and administrative expenses 22,720
0.60 ($8,400 $1,100) = $4,380 0.40 ($8,200 $1,100) = $2,840
Financing Section of Cash Budget
BC Carts repays $5,000 of the principal on its
bank loan on June 30 and December 31, and any
accrued interest.

CASH DISBURSEMENTS BUDGET FOR JUNE, 2012

Short-term financing
Loan repayments $5,000
Interest 750
Net cash used for
financing $5,750
$25,000 0.06 1/2
 Budgeted Financial Statements
Pro forma income statement and balance sheet
that reflect the as-if effects of the budgeted
activities on the actual financial position of
organization
Reflect the results if all budgetary projections are
correct
If income not good enough for top
management, then start process again
 Production Budget

Additional steps are required to develop master

budgets for manufacturing organizations
Due to conversion of raw materials into finished
goods
Must determine production volume
To support sales
To meet finished goods inventory
 Production Budget Example
BC Carts produces plastic carts and has estimated sales of
9,000 carts for June and 9,900 for July. BC wants to have
10% of the materials needed for the next months
production and 20% of the carts needed for the next
months sales in stock at the end of each month.

BC Carts
Production Budget
For Month of June 2012
Sales in units 9,000.
Desired ending inventory of carts 1,980. 0.20 9,900 (July sales)
Total cart requirements 10,980.
Less beginning inventory of carts (1,800) 0.20 9,000 (June sales)
Budgeted production 9,180.
 Purchases Budget Example
Assume 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.
BC Carts
Purchases Budget
For Month of June 2012
Resin:
Pounds of resin needs (6 lbs. x 9,180 carts) 55,080.
Desired ending resin inventory 6,059. 6 10,098 0.10
Total resin requirements in pounds 61,139.
Less beginning resin inventory (5,508) given
Resin purchases in pounds 55,631.

Continued
Manufacturing Cost Budget Example
BC Carts have the following costs per unit:
Direct materials
Resin: 6 pounds @ $0.21 a pound
Wheels: 2 @ $0.30 each
Direct labor 0.075 hrs. @ $10 per hour
Variable overhead $0.43 per unit
Fixed overhead $8,262

BC Carts
Manufacturing Cost Budget
For Month of June 2009
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
 Approaches to Budgeting
Input-output: Planned sales volumes and
required inputs
Incremental: Add an increment to past year
Example: Increase budgets by 3%.
Zero-based: Every $ justified starting at 0 for
everything.
Activity-based: Project sales volume to activity
and budget the $ based on activity cost
Rolling (continuous) example: each month, redo
each of the next 12 monthly budgets
 Participation
Extent to which lower level personnel involved with the
budget process: participative or bottom up approach
Alternative is top-down or imposed budgets
Both approaches require top management involvement
Since budgets used in performance measures,
participation often results in budgetary slack:
padding built in to expense or revenue estimates.
Slack can provide needed flexibility when situation has
high uncertainty.