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Lecture 21 Operational Budgeting Operational Budgeting Exercises.

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Presentation on theme: "Lecture 21 Operational Budgeting Operational Budgeting Exercises."— Presentation transcript:

1 Lecture 21 Operational Budgeting Operational Budgeting Exercises

2 Lecture 21 Operational Budgeting Operational Budgeting Exercises

3 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

4 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

5 Willamette Widget Corp. Sales Forecasts JAN FEB MAR Sales $400 $500 $800 This information comes from the sales force, merchandisers, marketing personnel, and possibly the finance & planning group.

6 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

7 Pro Forma Income Statements JAN FEB MAR Sales $400 $500 $800 Cost of Goods Sold Gross Profit & Contribution Margin Fixed Costs Income $ 10 $ 50 $170 The Sales line comes from the previous schedule. The Cost of Goods Sold line and Fixed Cost line come from assumptions about cost behavior (contribution margin is 40%).

8 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

9 Beginning Balance Sheet Dec 31 Assets Cash $ 80 Accounts Receivable 310 Inventory 540 Fixed Assets, net 1580 Total $ 2510 Liabilities Accounts Payable $ 195 Stockholders’ Equity 2315 Total $ 2510 This is all given.

10 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

11 Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv Total requirements Beginning inventory Purchases $480 $420 $360 The COGS line comes from the pro forma income statement. Budgeted ending inventory is a target. Beginning inventory is given.

12 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

13 Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The beginning balance for January comes from the beginning balance sheet.

14 Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134

15 Cash Receipts Budget JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% From current mo., 70% Total Receipts $590 $470 $710 Note: 70% of sales are collected in the month sold, and the remaining 30% are collected in the subsequent month.

16 Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134

17 Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other Total $618 $579 $519

18 Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other Total $618 $579 $519

19 Cash Disbursements Budget for Purchases JAN FEB MAR From prior mo., 40% $195 $192 $168 From current mo., 60% Total $483 $444 $384 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month.

20 Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv Total requirements Beginning inventory Purchases $480 $420 $360 60% of $480 is $288 40% of $480 is $192

21 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

22 Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The Cash Budget also indicates short-term financing needs.

23 Sales Forecasts Assumptions about cost behavior pro forma income statement Assumptions about inventory levels, collections of receiv- ables, & disburse- ments Long-term financing & capital spending Beg. Balance Sheet Cash Bud- get & S-T Financing Purchases and Production pro forma balance sheet Start here

24 Pro Forma Balance Sheet March 31 Assets Cash $ 134 Accounts Receivable 240 Inventory 780 Fixed Assets, net 1535 Total $ 2689 Liabilities Accounts Payable $ 144 Stockholders’ Equity 2545 Total $ 2689 Cash comes from the Cash Budget. A/R is 30% of March sales. Inventory is from Purchases Budget. A/P is 40% of March purchases.

25 Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134

26 Cash Receipts Budget JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% From current mo., 70% Total Receipts $590 $470 $710 Note: $800 - $560 = $240.

27 Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv Total requirements Beginning inventory Purchases $480 $420 $360 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month. So at the end of March, Payables are 40% of $360.

28 Lecture 21 Operational Budgeting Operational Budgeting Exercises

29 1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31?

30 70% of $145,000 = $101,500

31 2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May?

32 70% of $240,000 = $168,000

33 3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March?

34 In March Costco would purchase 60% of March cost-of-sales and 40% of April cost- of-sales. (60% of $180,000 x.7)+(40% of $200,000 x.7) = $75,600 + $56,000 = $131,600

35 4. Price Club expects sales as follows: January $100,000 February$150,000 March$180,000 April$200,000 Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March?

36 4. Price Club expects sales as follows: January $100,000 February$150,000 March$180,000 April$200,000 Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March? 20% + (60% of 80%) = 68% (68% of $180,000) + (40% of 80% of $150,000) = $122,400 + $48,000 = $170,400


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