Professional Documents
Culture Documents
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Learning Objective 1
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Strategic Planning
Critical success factors - Strengths of the company that enable it to outperform competitors.
Critical Success Factors
Incorporated Into
Strategic Plan
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Learning Objective 2
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Organization goals
Strategic evaluation
Performance evaluation
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Learning Objective 3
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The master budget is a detailed budget for the coming fiscal year.
2008
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Sales Staff close to customer needs. Market Research can predict long-term trends in attitudes and the effects of social and economic changes on the companys sales, potential markets and products. Sales Forecasting the process of predicting sales of services or goods.
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Forecasting Tools
Delphi technique the elicitation of forecasts from individual group members, for anonymous evaluation by the group as a whole, in a search for convergence. Econometric modeling the use of various economic indicators and market factors to predict future sales, by means of regression analysis.
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Operational Budgets
Manufacturing firms A production budget is developed from budgets for direct materials, direct labor and overhead. A budget for selling, general and administrative (SG&A) expenses is also prepared. Merchandising firms Instead of a production budget, a budget of merchandise purchased is developed. The SG&A budget is also prepared. Service-industry firms Based on the sales budget for its services, a set of budgets is developed for the resources to be used in providing the services.
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Operational Budgets
Every business prepares a . . . 1. Cash budget 2. Capital expenditures budget, and a 3. Summary of operational budgets
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Activity-Based Budgeting
Activity-based budgeting (ABB) is the process of developing a master budget using information obtained from an activity-based costing (ABC) analysis
Resources Activities Forecast of products and services to be produced, and customers served.
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Collegiate Apparel Company is preparing budgets for the year ending December 31, 20x1. Budgeted sales are: First quarter 15,000 units Second quarter 5,000 units Third quarter 10,000 units Fourth quarter 20,000 units The selling price is $12 per unit.
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Production Budget
Sales Budget Production Budget
Plan of resources needed to meet current sales demand and ensure inventory levels are sufficient for future sales.
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Forecasting Production
Rearrange the basic inventory formula as follows . . .
Units in beginning inventory + Required production in units Sales in Units = Units in ending inventory
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Direct-Materials Budget
Direct materials needed for the budget period can be determined as follows . . .
Required materials purchases = Materials used in production + Ending materials inventory Beginning materials inventory
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Direct-Materials Budget
At Collegiate Apparel 1.5 yards of fabric are required per unit of product. Management wants fabric on hand at the end of each quarter to be 10% of next quarters raw materials required. On January 1st, 2,100 yards of fabric are onhand. During the first quarter of 20x2, Collegiate expects 21,000 yards of fabric to be required. Each yard of fabric cost the company $2.
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Direct-Materials Budget
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Direct-Labor Budget
At Collegiate Apparel, each unit produced requires 0.20 hour (12 minutes) of direct labor. Workers earn a wage rate of $10 per hour regardless of the hours worked. Collegiate Apparel can hire workers as needed to meet production.
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Direct-Labor Budget
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Manufacturing-Overhead Budget
Collegiate Apparel uses activity-based budgeting. At the unit-level, each unit produced requires $0.25 of indirect materials and $0.15 of electricity. At the batch-level, the company expects the following production runs:
1st quarter 28 2nd quarter 11 3rd quarter 22 4th quarter 39
At the product-level, the company expects two new style designs each quarter with each new T-shirt design costing $500. Details of the facilities-level overhead costs are shown on the manufacturing-overhead budget.
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Manufacturing-Overhead Budget
Unit-, Batch-, and Product-level Portions of the Budget
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Manufacturing-Overhead Budget
Product-, Facilities-level and Total Overhead Budget
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Customer-level SG&A expenses include licensing fees for use of names and logos.
Facilities-level SG&A expense include sales salaries, advertising and clerical wages. Lets prepare the SG&A expense budget.
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The company collects 80% of its billings in the quarter of the sale and 18% in the following quarter. The remaining two percent of each quarters sales are expected to be uncollectible.
Sales in the last quarter of 20x0 were $240,000.
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$180,000 2% = $3,600
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The company pays for 60% of its purchases in the quarter of the purchase and the remaining 40% in the following quarter.
Purchases in the last quarter of 20x0 were $56,850.
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Cash Budget
Collegiate Apparel started the year with a cash balance of $10,000, and borrows $100,000 at the beginning of 20x1 to finance plant expansion.
The loan is repaid in the amount of $25,000 at the end of each quarter with interest on the unpaid balance at 10%. Payments for the plant additions were:
1st quarter 2nd quarter 3rd quarter 4th quarter = $45,000 = $15,000 = $5,000 = $35,000
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Cash Budget
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1,500 $9 $13,500
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Learning Objective 4
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Learning Objective 5
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Participative Budgeting
Participative Budgeting the use of input from lower- and middle-management employees.
The process is time consuming but enhances employee motivation and acceptance of goals.
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Learning Objective 6
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The emerging concept of financial planning is gradually replacing a budgeting process in which remote sales projections drive decisions and push costs onto inventory. The process is more customer-driven, not by largescale sales statistics but by specific orders. The budgeting process is adapting to this sales model. In cost management, costs dont just happen but are actively managed with techniques such as activity-based management. Activities are reviewed for the value they add to products and services.
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Beyond Budgeting
A break from the budgeting process already shown, based on the growing need to satisfy customers and relying on a companys intellectual assets. This approach emphasizes:
rolling forecasts and optimization of resources no evaluation on meeting specific targets decentralized decision making and teams a climate based on sustained competitive success transparent and open information systems
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Learning Objective 7
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How much inventory to keep on hand? Inventory decisions involve a delicate balance between these classes of cost:
EOQ is a mathematical tool to determine the order quantity that minimizes the ordering and holding costs:
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Under JIT, there would be no inventories at all! Inventory cost would be wasteful. In fact, as inventory holding costs are reduced, so is EOQ. So, order as needed. There is no ideal order quantity.
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End of Chapter 15