Chapter 7: Profit Planning
Chapter 7: Profit Planning ACC 252
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This 9 page Class Notes was uploaded by Kimberly Portes on Monday November 9, 2015. The Class Notes belongs to ACC 252 at Syracuse University taught by Prof. Zadzilka in Fall 2015. Since its upload, it has received 11 views.
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Date Created: 11/09/15
Accounting 252 Section M002 November 9, 2015 Part 2: Planning Chapter 7: Profit Planning Planning: involves developing objectives and preparing various analysis to achieve these objectives Budgeting: Process of identifying, gathering, summarizing, and communicating financial and non financial information about an organization’s future activities Advantages of Budgeting Could lead to great success Communicate plans Coordinate activates Helps get everyone on the same page Uncover potential bottlenecks Means of allocating resources Think about/plan for the future Getting there together Define goals and objectives Budgeting A process Financial and nonfinancial data Summarizing the pieces Communicating in a way someone can understand Must be tied to a company’s strategy Budget -> short term goals -> long term goals Budget preparation must include the entire management team Self Imposed Budget Also known as the preparation budget Top Prepared with Management full cooperation of all managers at all levels Middle Middle Management Management Supervis Supervis Supervis Supervis or or or or Not exclusively relied on by companies Top managers usually initiate the budget process by issuing broad guidelines in terms of overall profit/sales Human Factors in Budgeting The success of budgeting depends on 3 factors 1. Top management = enthusiastic and committed to its budget process 2. Top management doesn’t use the budget process to pressure employees/blame them when something goes wrong 3. Highly achievable budget targets = usually preferred when managers are rewarded on meeting budget targets Choosing the Budget Period The annual operating budget may be divided into quarterly/monthly budget The [Master] Budget Many budgets interweaved A set of budgets that consolidate an organization’s financial information into pro-forma financial statements for a future period of time Basically -> leads to projected financial statements Operating Financial Budgets Budgets Sale s Income Balance Productio n Stateme Sheet nt Operatin g Cash Capital Expenses Budge Expenditure t s Budget Mechanics Sales demand -> Production -> Production costs Sales Budget What will be sold? How many units will be sold? What price will be charged to the customer? Primary Information Source Marketing/Sales Department Production Budget How much finished goods inventory will be on hand at the beginning of the year? How much finished inventory should be maintained during the year How many units must be produced next year to meet sales demand and desired inventory levels Primary Information Source Materials Department Sales Budget Production Standards Identify quantity, cost of raw materials, and labor required to manufacture one unit of product Used to translate production requirements into the necessary inputs for production Raw material Labor headcount Direct Materials Budget How much raw material inventory will be on hand at the beginning of the year? How much raw material should be maintained during the year? How much raw material should be purchased to meet production requirements and desired inventory levels? How much does raw material cost? Primary Information Source Materials Department Payroll Department Union Contract Production Budget Direct Labor Budget How many operators are required to meet production needs? What level of overtime will be worked? What are the wage rates of operators? Primary Information Source Operations Management Payroll Department Union Contract Production Budget Manufacturing Overhead Budget What other costs will be incurred to meet production needs? How will overhead be assigned to products? Which of the costs are non-cash expenses? Primary Information Source Operations Management Production Budget Sales Demand -> Selling and Admin Costs Selling and Admin Budget What types of sales promotions will be used during the year? What other types of costs will be incurred by support functions during the year? Which of these costs are non-cash expenses? Primary Information Source Sales Budget Marketing/Sales Department Human Resources Finance General Management The operating budgets directly feed data necessary to complete the financial budgets Cash Budget Schedule of cash collections How quickly will customers pay for units sold? Schedule of expected cash disbursements When will raw materials purchases have to be paid? All other budgeted cash disbursements Labor Manufacturing overhead Operating expenses Equipment purchases Dividends Financing Activities Loans Repayments Interest Clearly state all assumptions Preform sensitivity analysis to understand the impact of different assumptions Use realistic assumptions Example of a Direct Labor Budget (pg. 308) Q1 Q2 Q3 Q4 Year Required 14000 3200 36000 19000 101000 Production (sum of all quarters) Direct 0.40 0.40 0.40 0.40 0.40 Labor Hours Total DL 14000*0. 12800 14400 7600 40400 Needed 40 = 5600 DL per $15.00 $15.00 $15.00 $15.00 $15.00 Hour Total DL 5600*$15 $192000 $216000 $114000 $606000 Cost = $84000 Unit of measurement doesn’t have to be DL hours Could be units of production (for example) Example of Manufacturing Overhead Budget (pg. 310) Q1 Q2 Q3 Q4 Year Budgeted 5600 DL Hour Variable OH $4.00 $4.00 $4.00 $4.00 $4.00 Rate Variable OH 5600*$4 $51200 $57600 $30400 $161600 = $22400 Fixed OH $60600 $60600 $60600 $60600 $242400 ($60600* 4) Total OH $22400 $111800 $118200 $91000 $404000 + $60600 = $83000 (Less) $15000 $15000 $15000 $15000 $60000 Depreciation ($15000* 4) Cash $83000 - $96800 $103200 $76000 $344000 Disburseme $15000 nts for OH = $68000 Total OH $404000 Budgeted DL Hour $40400 Predetermined Rate for $404000 / $40400 Year = $10 Page 327, E7-2 1. Prepare the Production Budget Sales in units = provided in textbook End of month inventory = 10% of the following month’s sales March ending inventory = 5000 units* In class -> didn’t include July April May June Total Expected 50,000 75000 90000 215000 Sales Desired 75000 * 9000 8000 8000 Ending 10% = Inventory 7500 Total Needs 7500 + 84000 98000 223000 50000 = 57500 Beginning 5000* 7500 9000 5000 Inventory Production 57500 – 76500 89000 218000 Requiremen 5000 = ts 52500 Beginning inventory: the previous month’s desired ending inventory Total ending inventory = the final month’s ending desired inventory (June’s) Page 327, E7-3 1. Prepare the Direct Materials Budget 3 grams of Musk Oil required for each bottle Costs $1.50 per gram Budgeted production provided in textbook End of month inventory = 20% of the following month’s sales Beginning inventory = 36000 grams* Q1 Q2 Q3 Q4 Year Followin g Q1 Estimated 60000 90000 15000 10000 400000 70000 Production 0 0 RM per Unit $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 Production 60000*$3 = 27000 45000 30000 120000 210000 Needs 180000 0 0 0 0 Desired 270000*20% 90000 60000 42000 42000 Ending = 54000 Inventory Total Needs 180000+540 36000 51000 24200 124200 00 = 234000 0 0 0 0 Beginning 36000* 54000 90000 60000 36000 Inventory Purchase 234000- 30600 42000 28200 120600 Requiremen 36000 = 0 0 0 0 ts 198000 Cost per $1.50 $1.50 $1.50 $1.50 $1.50 Unit Total RM 198000 * $4590 $6300 $4230 $18090 Cost $1.50 = 00 00 00 00 $297000 Following Q1 is needed to calculate Q4 Year estimated production = sum of all 4 quarters Year desired ending inventory = same as Q4’s ending inventory = what will be had at the end of the year Year beginning inventory = same as starting beginning inventory