1. Operational Budgeting Operational Budgeting Exercises ACTG 321 Agenda for Lecture 15

2. 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

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. 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.

5. 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

6. Pro Forma Income Statements JAN FEB MAR Sales $400 $500 $800 Cost of Goods Sold 240 300 480 Gross Profit & Contribution Margin 160 200 320 Fixed Costs 150 150 150 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%).

7. 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

8. 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.

9. 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

10. Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 The COGS line comes from the pro forma income statement. Budgeted ending inventory is a target. Beginning inventory is given.

11. 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

12. Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The beginning balance for January comes from the beginning balance sheet.

13. Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

14. Cash Receipts Budget JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 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.

15. Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

16. Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

17. Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

18. Cash Disbursements Budget for Purchases JAN FEB MAR From prior mo., 40% $195 $192 $168 From current mo., 60% 288 252 216 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.

19. Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 60% of $480 is $288 40% of $480 is $192

20. 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

21. Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The Cash Budget also indicates short-term financing needs.

22. 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

23. 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.

24. Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

25. Cash Receipts Budget JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 Total Receipts $590 $470 $710 Note: $800 - $560 = $240.

26. Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 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.

27. Operational Budgeting Operational Budgeting Exercises ACTG 321 Agenda for Lecture 15

28. 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?

29. 70% of $145,000 = $101,500

30. 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?

31. 70% of $240,000 = $168,000

32. 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?

33. 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

34. 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?

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? 20% + (60% of 80%) = 68% (68% of $180,000) + (40% of 80% of $150,000) = $122,400 + $48,000 = $170,400

36. The Cyber-Dog Corporation makes a single product that requires 39 days to produce. Raw materials enter the production process, becoming part of WIP, on the first day of the production cycle. Cyber-Dog always starts production on the 26th day of the month, never on any other day, so Cyber-Dog finishes each batch on the 4th day of the second month after production began (you may assume that each month has exactly 30 days). Each batch can include as many units as the company wants to manufacture that month.

37. Cyber-Dog expects sales of 1,000 units in January, and expects sales to increase by 100 units each month for the indefinite future (i.e., 1,100 units in February, 1,200 units in March, etc.). Cyber-Dog wants 60% of each month’s sales on hand as finished goods at the beginning of the month. Each unit requires 7 lbs of raw materials. Cyber- Dog wants 130% of each month’s raw materials requirements on hand at the beginning of the month. Required: Calculate the pounds of raw materials to be put into production in March.

38. Units to be completed May: (0.4 x 1,400) + (0.6 x 1,500) = 560 + 900 = 1,460 These units must be started in March. 1,460 finished goods units x 7 lbs per unit = 10,220 lbs.