Chapter # 19: Sales Mix Considerations Margin of Safety Operating Leverage Cost-Volume-Profit Analysis Business Applications of CVP Additional Considerations in CVP CVP Analysis When a Company Sells Many Products 1

The overall contribution margin ratio Break-even in sales dollars The High-Low Method Assumptions Underlying CVP Analysis 2

Operational Budgeting Chapter 22 3

Budgeting: The Basis for Planning and Control Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. 4

Benefits Coordination of activities Performance evaluation Enhanced managerial responsibility Assignment of decision making responsibilities Benefits Derived from Budgeting 5

Establishing Budgeted Amounts: The “Behavioral” Approach Budget Problems Perceived unfair or unrealistic goals. Poor management- employee communications. Solution Reasonable and achievable budgets. Employee participation in budgeting process. 6

Flow of Budget Data Participation in Budget Process 7

C a p i t a l B u d g e t s A continuous budget is usually a twelve-month budget that adds one month as the current month is completed. The annual operating budget may be divided into quarterly or monthly budgets. The Budget Period 8

Sales forecast Production schedule Budgeted financial budgets: cash income balance sheet Capital expenditures budget Operating expense budgets Cost of goods sold and ending inventory budgets The Master Budget 9

That’s enough talking about budgets, now show me an example! Preparing the Master Budget: An Illustration 10

Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Preparing the Master Budget: An Illustration 11

Preparing the Master Budget: An Illustration Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are: April20,000 $10 =$200,000 May50,000 $10 =$500,000 June30,000 $10 =$300,000 July25,000 $10 =$250,000 The Sales Budget July is needed for June ending inventory computations. 12

Sales Budget Completed Production Budget The Production Budget 13

The Production Budget Ellis wants ending inventory to be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31.  Let’s prepare the production budget. 14

The Production Budget Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units +Desired product units in ending inventory =Total product units needed – Product units in beginning inventory =Product units to produce 15

The Production Budget 16

The Production Budget 17

The Production Budget 18

Production Budget Material Purchases Production Budget Units Completed The Production Budget 19

The material purchases budget is based on production quantity and desired material inventory levels. Units to produce × Material needed per unit =Material needed for units to produce +Desired units of material in ending inventory =Total units of material needed – Units of material in beginning inventory =Units of material to purchase The Production Budget Material Purchases 20

The Production Budget Material Purchases Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. 21

The Production Budget Material Purchases 22

The Production Budget Material Purchases 23

The Production Budget Material Purchases 24

Cash Payments for Material Purchases Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,000. Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,

Cash Payments for Material Purchases 26

Cash Payments for Material Purchases 27

Cash Payments for Material Purchases 28

Cash Payments for Material Purchases 29

Production Budget Labor Production Budget Units Material Completed The Production Budget 30

The Production Budget Direct Labor Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour. 31

Cash Payments for Direct Labor 32

Cash Payments for Direct Labor 33

Production Budget Units Material Labor Completed Production Budget Manufacturing Overhead The Production Budget 34

The Production Budget Manufacturing Overhead Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month. Fixed manufacturing overhead includes $20,000 in depreciation which does not require a cash outflow. 35

Cash Payments for Manufacturing Overhead 36

Cash Payments for Manufacturing Overhead 37

Cash Payments for Manufacturing Overhead 38

Production Budget Completed Selling and Administrative Expense Budget Selling and Administrative (S&A) Expense Budget 39

Selling and Administrative (S&A) Expense Budget Selling expense budgets contain both variable and fixed items. – Variable items: shipping costs and sales commissions. – Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. – Executive salaries and depreciation on company offices. 40

Cash Payments for (S&A) Expenses Variable selling and administrative expenses are $.50 per unit sold and fixed selling and administrative expenses are $70,000 per month. Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow. 41

Cash Payments for (S&A) Expenses 42

Cash Payments for (S&A) Expenses 43

I have seen a lot of cash payments but no cash receipts. Show me some cash receipts! Cash Receipts Budget 44

Cash Receipts Budget All sales are on account. Ellis’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. All sales are on account. Ellis’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. 45

Cash Receipts Budget 46

Cash Receipts Budget 47

Cash Receipts Budget 48

Cash Receipts Budget 49

50