1. Copyright © 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Chapter Nine Profit Planning

2. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1.The act of preparing a budget is called budgeting. 2.The use of budgets to control an organization’s activity is known as budgetary control.

3. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Planning and Control Planning – involves developing objectives and preparing various budgets to achieve these objectives. Control – involves the steps taken by management that attempt to ensure the objectives are attained.

4. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinateactivities Communicateplans Think about and plan for the future Means of allocating resources

5. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent. Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent.

6. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Choosing the Budget Period Operating Budget 2003200420052006 The annual operating budget may be divided into quarterly or monthly budgets. The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is a 12- month budget that rolls forward one month (or quarter) as the current month (or quarter) is completed.

7. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Self-Imposed Budget A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a self-imposed budget.

8. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Self-Imposed Budgets Most companies do not rely exclusively upon self-imposed budget in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales.

9. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Zero Based Budgeting A zero-based budget requires managers to justify all budgeted expenditures, not just changes in the budget from the prior year. Most managers argue that zero-based budgeting is too time consuming and costly to justify on an annual basis.

10. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Budget Budget is classified under various aspects: On the basis of period  Short term budget  Long term budget 1010 On the basis of Flexibility  Fixed budget (Static budget)  Flexible budget

11. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Types of Budget On the basis of condition  Basic budget  Current budget On the basis of Function  Master budget  Functional budget

12. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Functional Budget  The budget which is prepared according to the nature of business is functional budget. The functional budgets are: Sales Budget Purchase Budget Production Budget Production cost Budget

13. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Functional Budget Overhead Budget Capital Budget Research and Development Budget Cash Budget

14. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Functional Budget Budget is also classified as: Computer Budget Kaizen Budget Zero Base Budget

15. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Budget Committee A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget A standing committee responsible for  overall policy matters relating to the budget  coordinating the preparation of the budget

16. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Master Budget: An Overview Production Budget Production Budget Selling and Administrative Budget Selling and Administrative Budget Direct Materials Budget Direct Materials Budget Manufacturing Overhead Budget Manufacturing Overhead Budget Direct Labor Budget Direct Labor Budget Cash Budget Cash Budget Sales Budget Sales Budget Budgeted Financial Statements Ending Finished Goods Budget Ending Finished Goods Budget

17. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Format of the Cash Budget The cash budget is divided into four sections: 1.Cash receipts listing all cash inflows excluding borrowing 2.Cash disbursements listing all payments excluding repayments of principal and interest 3.Cash excess or deficiency 4.The financing section listing all borrowings, repayments and interest The cash budget is divided into four sections: 1.Cash receipts listing all cash inflows excluding borrowing 2.Cash disbursements listing all payments excluding repayments of principal and interest 3.Cash excess or deficiency 4.The financing section listing all borrowings, repayments and interest

18. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget Royal: lMaintains a 16% open line of credit for $75,000 lMaintains a minimum cash balance of $30,000 lBorrows on the first day of the month and repays loans on the last day of the month lPays a cash dividend of $49,000 in April lPurchases $143,700 of equipment in May and $48,300 in June paid in cash lHas an April 1 cash balance of $40,000 Royal: lMaintains a 16% open line of credit for $75,000 lMaintains a minimum cash balance of $30,000 lBorrows on the first day of the month and repays loans on the last day of the month lPays a cash dividend of $49,000 in April lPurchases $143,700 of equipment in May and $48,300 in June paid in cash lHas an April 1 cash balance of $40,000

19. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget Schedule of Expected Cash Collections Schedule of Expected Cash Collections

20. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget Direct Labor Budget Budget Manufacturing Overhead Budget Manufacturing Selling and Administrative Expense Budget Selling and Administrative Expense Budget Schedule of Expected Cash Disbursements Schedule of Expected Cash Disbursements

21. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on it line-of-credit. Because Royal maintains a cash balance of $30,000, the company must borrow $50,000 on it line-of-credit.

22. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget Ending cash balance for April is the beginning May balance. Ending cash balance for April is the beginning May balance.

23. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget

24. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Quick Check What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000

25. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 What is the excess (deficiency) of cash available over disbursements for June? What is the excess (deficiency) of cash available over disbursements for June? a. $ 85,000 b. $(10,000) c. $ 75,000 d. $ 95,000 Quick Check

26. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Cash Budget $50,000 × 16% × 3/12 = $2,000 Borrowings on April 1 and repayment on June 30.

27. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Budgeted Income Statement Cash Budget Budgeted Income Statement Completed After we complete the cash budget, we can prepare the budgeted income statement for Royal.

28. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Budgeted Income Statement Sales Budget Ending Finished Goods Inventory Selling and Administrative Expense Budget Cash Budget

29. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Budgeted Balance Sheet Royal reported the following account balances prior to preparing its budgeted financial statements:  Land - $50,000  Common stock - $200,000  Retained earnings - $146,150  Equipment - $175,000 Royal reported the following account balances prior to preparing its budgeted financial statements:  Land - $50,000  Common stock - $200,000  Retained earnings - $146,150  Equipment - $175,000

30. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin 11,500 lbs. at $0.40/lb. 11,500 lbs. at $0.40/lb. 5,000 units at $4.99 each 5,000 units at $4.99 each 50% of June purchases of $56,800 50% of June purchases of $56,800 25% of June sales of $300,000 25% of June sales of $300,000

31. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

32. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin International Aspects of Budgeting When a multinational company enters into the budgeting process there are at least three major problems that must be dealt with... 1.Fluctuations in foreign currency exchange rates. 2.High inflation rates. 3.Local economic conditions and governmental policies.

33. Copyright © 2006 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin End of Chapter 9