Profit Planning

Budgeting Plan to follow Communication Coordination Performance standards Determine problem areas

Profit Planning

Components of the Master Budget Sales budget

Most important budget…drives all other budgets

Profit Planning Sales forecasting

Same period last year Adjustments

State of economy Pricing Advertising

Other methods Moving average Olympic average

Profit Planning Sales budget determines production budget

Units sold + ending inventory – beginning inventory Production budget determines materials purchases

budget Units sold + ending inventory – beginning inventory

Production budget determines labor budget Not much inventory here…

Production budget determines overhead budget Variable and fixed overhead

Sales budget determines ending inventory budget Units x Cost Per Unit

Sales budget determines COGS budget Units Sold x Cost Per Unit

Profit Planning Cash budget

Beginning cash + Cash Sales + Collection of A/R + Borrowed Funds (Operating Line) - Cash Expenses - Payment of A/P = Ending cash

Profit Planning Performance evaluation

If you don’t evaluate, why plan? Increasing effectiveness of budgets

Participative budgeting Incentives

Sales Expenses

What if expenses have a favorable variance? Zero based budgeting