Budgeting and Financial Planning - · PDF fileBudgeting and Financial Planning ... The sales budget displays the projected sales in units and the projected sales return Seasonal Pattern

© McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson

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Budgeting and FinancialPlanning

Student Tutorial

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Strategic Planning

Every enterprise has a set of goalsEvery enterprise has a set of goals

ProfitabilityProfitabilityGrowthGrowth

PublicServicePublic

Service

StrategicPlanning

StrategicPlanning

Achieving and Maintaining

a Competitive Advantage

Achieving and Maintaining

a Competitive Advantage

IDENTIFYCRITICAL SUCCESS

FACTORS

IDENTIFYCRITICAL SUCCESS

FACTORS


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What is a Strategic Long-Range Plan?What is a Strategic Long-Range Plan?

It discusses the major capital investments required to: It discusses the major capital investments required to:

It expresses the specific steps required to achieve the organization’s goal

It expresses the specific steps required to achieve the organization’s goal

MaintainPresent

Facilities

MaintainPresent

FacilitiesIncreaseCapacityIncreaseCapacity

DiversifyProducts orProcesses

DiversifyProducts orProcesses

DevelopParticularMarkets

DevelopParticularMarkets

Strategic Planning


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What Are The Key Purposes OfBudgeting Systems?

What is a budget?What is a budget?

What is a budgetingsystem?



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A detailed plan, expressed in quantitative terms,that specifies how an organization will acquire anduse resources during a particular period of time.

A detailed plan, expressed in quantitative terms,that specifies how an organization will acquire anduse resources during a particular period of time.

What is a budget?What is a budget?



The procedures used todevelop a budget

The procedures used todevelop a budget


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Managing Financialand

Operating Performance

Managing Financialand

Operating Performance

BudgetingSystem

BudgetingSystem

Facilitating Communication

and Coordination

Facilitating Communication

and Coordination

Evaluating Performanceand Providing

Incentives

Evaluating Performanceand Providing

Incentives

PlanningPlanning

AllocatingResources

AllocatingResources



15-7Match the Definition with theType of Budget

1. Master Budget

2. Pro FormaFinancial

Statements

3. Capital Budget

4. Financial Budget

5. RollingBudget

Comprehensive set of budgets covering allphases of the organization’s operations

for a period of time

Show how the organization’s financialstatements will appear at a specified time if operations proceed according to plan

A plan for the acquisition of capital asset

Shows how the organization willacquire its financial resources

Continually updated by periodically addinga new incremental time period, anddropping the period just completed


15-8Match the Definition with theType of Budget

1. Master Budget

2. Pro FormaFinancial

Statements

3. Capital Budget

4. Financial Budget

5. RollingBudget

Comprehensive set of budgets covering allphases of the organization’s operations

for a period of time

Show how the organization’s financialstatements will appear at a specified time if operations proceed according to plan

A plan for the acquisition of capital asset

Shows how the organization willacquire its financial resources

Continually updated by periodically addinga new incremental time period, anddropping the period just completed


15-9Organizations Use Many Types OfBudgets

MASTER BUDGETA comprehensive set of budgets covering all phases of the

organization’s operations for a period of time

MASTER BUDGETA comprehensive set of budgets covering all phases of the

organization’s operations for a period of time

PRO FORMA FINANCIAL STATEMENTSShow how the organization’s financial statements will appear

at a specified time if operations proceed according to plan

PRO FORMA FINANCIAL STATEMENTSShow how the organization’s financial statements will appear

at a specified time if operations proceed according to plan

FINANCIAL BUDGETShows how the organization will acquire its financial resources

FINANCIAL BUDGETShows how the organization will acquire its financial resources

ROLLING BUDGETContinually updated by periodically adding a newincremental time period, such as a quarter, and

dropping the period just completed

ROLLING BUDGETContinually updated by periodically adding a newincremental time period, such as a quarter, and

dropping the period just completed

CAPITAL BUDGETA plan for the acquisition of capital asset

CAPITAL BUDGETA plan for the acquisition of capital asset


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Sales Budget

Production Budget

Direct Material Budget

Budgeted schedulecost of goods

manufactured and sold

Budgeted balanceStatement

Components Of A Master BudgetFor Manufacturing

Direct Labour Budget

Mft. Overhead Budget

Cash budget

Budgeted incomeStatement

Budgeted Statement of Cash Flows

Sales Budget

Selling, Generaland Administrative

Budget

R&D Budget

Marketing Budget

Customer Service Budget

Operational Budget

BudgetedFinancial

Statements

Capital Budget


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Sales Budget: The Starting Point

1. Past sales levels and trends

2. General economic trends

3. Economic trends in thecompany’s industry

4. Other factors expected toaffect sales in the industry

5. Political and legal events

6. The intended pricing policyof the company

7. Planned advertising andproduct promotion

8. Expected action ofcompetitors

9. New products contemplatedby the company or otherfirms

10. Market research studies

Sales forecasting is the process of predicting sales of goods andservices

Among the major factors considered when forecasting sales are:


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The sales level of the prior yearThe sales level of the prior year

Sales staffSales staff

Market researchersMarket researchers

Delphi techniqueDelphi technique

Econometric modelsEconometric models

StartingPoint

Sales Budget: The Starting Point


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Operational Budgets: Meeting TheDemand For Goods And Services

OPERATIONAL BUDGETSSpecify how the company’s operations will be carried out to meet the demand.

OPERATIONAL BUDGETSSpecify how the company’s operations will be carried out to meet the demand.

Prepared fromthe sales budget

ManufacturingFirm

ManufacturingFirm

Merchandising Firm

Merchandising Firm

Service Industry Firm

Service Industry Firm

Production Budgetshows the numberof product units tobe manufactured

MerchandisePurchases Budgetused instead of a

production budget

Set of budgetsthat shows how thefirm will meet the

demand for itsservices


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Operationalbudgets encompass

a plan for usingthe basic factors of

production(material, labour, and overhead) toproduce a product

or provide aservice

Operationalbudgets encompass

a plan for usingthe basic factors of

production(material, labour, and overhead) toproduce a product

or provide aservice

Operational Budgets: Meeting TheDemand For Goods And Services

OPERATIONAL BUDGETSSpecify how the company’s operations will be carried out to

meet the demand for its goods or services

OPERATIONAL BUDGETSSpecify how the company’s operations will be carried out to

meet the demand for its goods or services

CashBudgetCash

Budget

Shows expected cash receipts from selling

goods and services anddisbursements to pay

bills

Shows expected cash receipts from selling

goods and services anddisbursements to pay

bills

CapitalBudget

CapitalBudget

Details plans formajor acquisitionsand disposals of

assets

Details plans formajor acquisitionsand disposals of

assets


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Sales BudgetThe First Step

The sales budget displays the projected sales in units and the projectedsales return

The sales budget displays the projected sales in units and the projectedsales return

Seasonal Pattern in Sales

1st 2nd 3rd 4th YearSales in Units 15,000 5,000 10,000 20,000 50,000Unit sales price X $12 X $12 X $12 X $12 X $12Total sales revenue $180,000 $60,000 $120,000 $240,000 $600,000


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1st 2nd 3rd 4th Year

Sales in units 15,000 5,000 10,000 20,000 50,000Add desired ending inventory of finished goods 500 1,000 2,000 1,500 1,500Total units required 15,500 6,000 12,000 21,500 51,500Less expected beginning inventory of finished goods 1,500 500 1,000 2,000 1,500Units to be produced 14,000 5,500 11,000 19,500 50,000

Production BudgetSales in units + Desired ending inventory of finished goods = Total units requiredSales in units + Desired ending inventory of finished goods = Total units required

Total units required - Expected beginning inventory of finished goods = Units to be produced

Total units required - Expected beginning inventory of finished goods = Units to be produced

10% of next quarter’sexpected sales

10% of first quarter of nextyear’s expected sales of 15,000


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Sales Budget1st 2nd 3rd 4th Year

Sales in Units 25,000 10,000 20,000 15,000 70,000Unit sales price X $10 X $10 X $10 X $10 X $10Total sales revenue $250,000 $100,000 $200,000 $150,000 $700,000

Determine the units to be produced, assuming a 20% of the next quarters sales requirement for the ending inventory and no beginning inventory


Sales in units 25,000 10,000 20,000 15,000 70,000Add desired ending inventory of finished goodsTotal units requiredLess expected beginning inventory of finished goodsUnits to be produced


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Production BudgetDetermine the units to be produced, assuming a 20%

requirement for the ending inventory and no beginning inventory. Assume the sales of the 1st quarter

of next year is 25,000 units

Determine the units to be produced, assuming a 20% requirement for the ending inventory and no beginning

inventory. Assume the sales of the 1st quarter of next year is 25,000 units


Sales in units 25,000 10,000 20,000 15,000 70,000Add desired ending inventory of finished goods 2,000 4,000 3,000 5,000 5,000Total units required 27,000 14,000 23,000 20,000 75,000Less expected beginning inventory of finished goodsUnits to be produced

Add desired ending inventory of 20% of the next quarters sales


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Production BudgetDetermine the units to be produced, assuming a 20%

requirement for the ending inventory and no beginning inventory. Assume the sales of the 1st quarter

of next year is 25,000 units

Determine the units to be produced, assuming a 20% requirement for the ending inventory and no beginning

inventory. Assume the sales of the 1st quarter of next year is 25,000 units


Sales in units 25,000 10,000 20,000 15,000 70,000Add desired ending inventory of finished goods 2,000 4,000 3,000 5,000 5,000Total units required 27,000 14,000 23,000 20,000 75,000Less expected beginning inventory of finished goods 0 2,000 4,000 3,000 0Units to be produced 27,000 12,000 19,000 17,000 75,000

Add desired ending inventory of 20% of the next quarters sales


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Direct Material BudgetAssume that the production of Product AB-59 has beenbudgeted for the month at 350,000 units. One unit ofAB-59 requires 5 pounds of raw materials Z. There arecurrently 10,000 pounds of Z in the beginning inventory.They expect to maintain 5,000 pounds of Z in the endinginventory.How many pounds of Z should be purchased.A. 1,750,000B. 1,740,000C. 1,745,000D. 350,000

Assume that the production of Product AB-59 has beenbudgeted for the month at 350,000 units. One unit ofAB-59 requires 5 pounds of raw materials Z. There arecurrently 10,000 pounds of Z in the beginning inventory.They expect to maintain 5,000 pounds of Z in the endinginventory.How many pounds of Z should be purchased.A. 1,750,000B. 1,740,000C. 1,745,000D. 350,000


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You have told me howmany pounds of materialthey need to USE. Now,

tell me how many poundsthey need to PURCHASE!

Try again.

You have told me howmany pounds of materialthey need to USE. Now,

tell me how many poundsthey need to PURCHASE!

Try again.


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You are close, but youseem to have forgottenabout the 5,000 pounds

you need in endinginventory.

You are close, but youseem to have forgottenabout the 5,000 pounds

you need in endinginventory.


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350,000 units X 5 lbs. = 1,750,000 lbs.1,750,000 lbs. - 10,000 lbs. = 1,740,000 lbs.1,740,000 lbs. + 5,000 lbs. = 1,745,000 lbs.


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You’re not trying veryhard. This is the numberof units we are going to

produce, not the POUNDSwe need.

You’re not trying veryhard. This is the numberof units we are going to

produce, not the POUNDSwe need.


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Direct-labour BudgetThe Cookeville Toy Company manufacturers toy trucks.Direct labour $12 per hourBudgeted production: 10,000 unitsBudget sales: 9,000 unitsDirect labour per truck: .5 hours

What is the budgeted factory labour cost?A. $60,000B. $120,000C. $54,000D. $108,000

The Cookeville Toy Company manufacturers toy trucks.Direct labour $12 per hourBudgeted production: 10,000 unitsBudget sales: 9,000 unitsDirect labour per truck: .5 hours



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10,000 units X .5 hours = 5,000 hours5,000 hours X $12 = $60,000

10,000 units X .5 hours = 5,000 hours5,000 hours X $12 = $60,000


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HINT: Take a look at howmany hours it takes toproduce one unit. Try

again.

HINT: Take a look at howmany hours it takes toproduce one unit. Try

again.


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Did you use budgetedSALES or budgeted

PRODUCTION? Try again.

Did you use budgetedSALES or budgeted

PRODUCTION? Try again.


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Go back and check both thetime it takes to make 1 unit, andthe number of units produced?

Try again.

Go back and check both thetime it takes to make 1 unit, andthe number of units produced?

Try again.


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Manufacturing Overhead Budget

Assume that Elmore Co. has the following overhead costs.Indirect materials $5,000Machine utilities $2,000Setup $12,000Material handling $8,000Product development $20,000Building depreciation $50,000

Prepare a Manufacturing Overhead Budget using ABC levels

Assume that Elmore Co. has the following overhead costs.Indirect materials $5,000Machine utilities $2,000Setup $12,000Material handling $8,000Product development $20,000Building depreciation $50,000

Prepare a Manufacturing Overhead Budget using ABC levels


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Unit-level costs:Indirect materials $5,000Machine utilities 2,000

$7,000Batch-level costs:

Setup $12,000Material handling $8,000

$20,000Product-level costs:

Product development $20,000Facility-level costs:

Building depreciation $50,000Total Overhead: $97,000Less depreciation ($50,000)

Total cash disbursements for overhead: $47,000

Unit-level costs:Indirect materials $5,000Machine utilities 2,000

$7,000Batch-level costs:

Setup $12,000Material handling $8,000

$20,000Product-level costs:

Product development $20,000Facility-level costs:

Building depreciation $50,000Total Overhead: $97,000Less depreciation ($50,000)

Total cash disbursements for overhead: $47,000



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Shows the cost of overhead expected to be incurred in the productionprocess during the budget period


Indirect materialElectricity for

machinery

1st 2nd 3rd 4th YearUnit-level costs $5,600 $2,200 $4,400 $7,800 $20,000Batch-level costs $8,400 $3,300 $6,600 $11,700 $30,000Product-level costs $1,000 $1,000 $1,000 $1,000 $4,000Facility and gen'l operations level costs $36,500 $36,500 $36,500 $36,500 $146,000

Total overhead $51,500 $43,000 $48,500 $57,000 $200,000Less: depreciation $15,000 $15,000 $15,000 $15,000 $60,000Total cash disbursements for overhead $36,500 $28,000 $33,500 $42,000 $140,000



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SetupPurchasing & material

handlingInspection





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Design





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Supervisory salariesInsurance and property taxesMaintenance

UtilitiesDepreciation





15-36Selling, General, AndAdministration (SG&A) Expense

BudgetShows the planned amounts of expenditures for selling, general,

and administrative expenses during a budget period

Shows the planned amounts of expenditures for selling, general, and administrative expenses during a budget period

Sales commissionsFreight-out

Licensing fees for use ofuniversities’ names and logos

Sales salariesAdvertising

Clerical wages


Unit-level expenses $14,000 $5,500 $11,000 $19,500 $50,000Customer-level expenses $1,500 $1,500 $1,500 $1,500 $6,000Facility and general operations-level expenses $4,750 $4,750 $4,750 $4,750 $19,000Total expenses $20,250 $11,750 $17,250 $25,750 $75,000


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Cash Receipts Budget

Details the expected cash collections during a budget periodDetails the expected cash collections during a budget period

80% of revenue

18% x $240,000 (priorquarter’s revenue)

1st 2nd 3rd 4th YearSales revenue $180,000 $60,000 $120,000 $240,000 $600,000

Collections in quarter of sale $144,000 $48,000 $96,000 $192,000 $480,000Collections in quarter following sale 43,200 32,400 10,800 21,600 108,000Total cash receipts $187,200 $80,400 $106,800 $213,600 $588,000


15-38Cash Disbursements Budget

Details the expected cash payments during a budget periodDetails the expected cash payments during a budget period

1st 2nd 3rd 4th YearCost of raw material purchases $39,450 $18,150 $35,550 $56,850 $150,000

Cash payments for purchases made during the quarter $23,670 $10,890 $21,330 $34,110 $90,000Cash payments for prior quarter's purchases 22,740 15,780 7,260 14,220 60,000

Total cash payments for direct material purchases $46,410 $26,670 $28,590 $48,330 $150,000

Other cash disbursements $84,750 $50,750 $72,750 $106,750 $315,000

Total cash disbursements $131,160 $77,420 $101,340 $155,080 $465,000

60% of current

quarter’spurchases


15-39Cash Disbursements Budget

Details the expected cash payments during a budget periodDetails the expected cash payments during a budget period

1st 2nd 3rd 4th YearCost of raw material purchases $39,450 $18,150 $35,550 $56,850 $150,000

Cash payments for purchases made during the quarter $23,670 $10,890 $21,330 $34,110 $90,000Cash payments for prior quarter's purchases 22,740 15,780 7,260 14,220 60,000

Total cash payments for direct material purchases $46,410 $26,670 $28,590 $48,330 $150,000

Other cash disbursements $84,750 $50,750 $72,750 $106,750 $315,000

Total cash disbursements $131,160 $77,420 $101,340 $155,080 $465,000

40% of prior

quarter’spurchases


15-40Budgeted Schedule Of Cost OfGoods Manufactured And Sold

Direct material Raw material inventory, January 1 $4,200 Add: Purchases of raw material 150,000

Raw material available for use 154,200 Deduct: Raw-material, December 31 4,200

Direct material used $150,000Direct labour 100,000Manufacturing overhead 200,000

Subtotal 450,000Add: Work-in-process inventory, Jan. 1 0

Subtotal 450,000Deduct: Work-in-process inventory, Dec. 31 0Cost of goods manufactured 450,000Add: Finished goods inventory, Jan. 1 13,500

Cost of goods available for sale 463,500Deduct: Finished goods inventory, Dec. 31 13,500

Cost of goods sold $450,000

1,500 unitsx $9

absorptionmanufacturing

cost(direct material

= $3, direct labour = $2, andoverhead = $4)

Details the direct material, direct labour, and manufacturing overheadcosts to be incurred and the cost of the goods to be sold

Details the direct material, direct labour, and manufacturing overheadcosts to be incurred and the cost of the goods to be sold


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Sales Budget

Production Budget

Direct Material Budget

Budgeted schedulecost of goods

manufactured and sold

Capital Budget Budgeted balanceStatement

Components Of A Master Budget ForManufacturing

Direct labour Budget

Mft. Overhead Budget

Cash budget

Budgeted incomeStatement

Budgeted Statement of Cash Flows

Sales Budget

Selling, Generaland Administrative

Budget

R&D Budget

Marketing Budget

Customer Service Budget

Operational Budget

BudgetedFinancial

Statements


15-42Financial Planning Models

???

? Managers make assumptions and predictions in preparing budgets because organizations operate in a world of uncertainty

Managers make assumptions and predictions in preparing budgets because organizations operate in a world of uncertainty

FINANCIAL PLANNING MODELa set of mathematical relationships that expresses the

interactions among the various operational, financial, and environmental events that determine the overall results of

an organization’s activities

FINANCIAL PLANNING MODELa set of mathematical relationships that expresses the

interactions among the various operational, financial, and environmental events that determine the overall results of

an organization’s activities

Uncollectible accounts expense = 2% (Sales revenue)Uncollectible accounts expense = 2% (Sales revenue)

Uncollectible accounts expense = p (Sales revenue)Uncollectible accounts expense = p (Sales revenue)

The budget staff canrun the financial

planning model as many times as desired

with p = a differentvalue each time

The budget staff canrun the financial

planning model as many times as desired

with p = a differentvalue each time

?


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Who Is Responsible For BudgetAdministration

Small firmSmall firm Budget process is informalBudget process is informal

Larger firmsLarger firms Budget process is formalBudget process is formal

Designate a BUDGETDIRECTOR (usually the controller) whospecifies the process by which budget

data will begathered, collectsthe information, and prepares the

master budget

Designate a BUDGETDIRECTOR (usually the controller) whospecifies the process by which budget

data will begathered, collectsthe information, and prepares the

master budget

Develops and disseminates a BUDGET

MANUAL which indicates who isresponsible for

providing various types of budget information, when the information is

required, and whatform the information

is to take

Develops and disseminates a BUDGET

MANUAL which indicates who isresponsible for

providing various types of budget information, when the information is

required, and whatform the information

is to take

A BUDGET COMMITTEE,

consisting of key senior executives,often is appointed

to advise the budgetdirector during thepreparation of the

budget

A BUDGET COMMITTEE,

consisting of key senior executives,often is appointed

to advise the budgetdirector during thepreparation of the

budget


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Behavioural Implications OfBudget

A budget affects virtually everyone in an organization: thosewho prepare it, those who use it to facilitate decision-making,

and those who are evaluated using the budget

A budget affects virtually everyone in an organization: thosewho prepare it, those who use it to facilitate decision-making,

and those who are evaluated using the budget

BudgetarySlack

BudgetarySlack

ParticipativeBudgetingParticipative

Budgeting

PADDING THE BUDGETIntentionally underestimating

revenue or overestimatingcosts in order to enhancethe person’s performance

evaluation

PADDING THE BUDGETIntentionally underestimating

revenue or overestimatingcosts in order to enhancethe person’s performance

evaluation

People perform better and make greater

attempts to achieve a goal if they

have beenconsulted in

setting the goals

People perform better and make greater

attempts to achieve a goal if they

have beenconsulted in

setting the goals


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END OF CHAPTER

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Documents

Budgeting and Financial Planning - · PDF fileBudgeting and Financial Planning ... The sales budget displays the projected sales in units and the projected sales return Seasonal Pattern