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Profit Planning
UAA ACCT 202
Principles of Managerial Accounting
Dr. Fred Barbee
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
Planning
Planning -- involves
developing objectives
and preparing various
budgets to achieve these
objectives.
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
Control
Control involves the
steps taken by
management that
attempt to ensure the
objectives are attained.
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Decision
Making
Measure
Performance
Implement
Plans
Initiate LT &
ST Plans
Evaluate
Performance
The Work of Management
Budgets
Initiate LT &
ST Plans
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Evaluate
Performance
Decision
Making
Planning
Decision
Making
Evaluate
Performance
Measure
Performance
The Work of Management
Implement
Plans
Implement
Plans
Through
the budget
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Evaluate
Performance
Decision
Making
Planning
Decision
Making
Evaluate
Performance
Measure
Performance
The Work of Management
Implement
Plans
Measure
Performance
According
to the Budget
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Planning
Decision
Making
Organizing &
Directing
Controlling
Evaluating
The Work of Management
Initiate LT &
ST Plans
Implement
Plans
Measure
Performance
Evaluate
Performance
Decision
Making
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The Basic Framework
of Budgeting
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A Budget is . . .
A quantitative expression of a plan of
action.
A detailed plan for acquiring and
using financial and other resources
over a specified time period (text).
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Now
5 Years
1 Year
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Short-Run Vs. Long-Run
Budgets
Strategic Planning
Selecting overall objectives.
Choosing what markets to be in.
Selecting what products to produce.
Determining the price/quality mix.
Deciding which technologies to use.
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Strategic Planning
Long-run Budgets (more than one year)
Forecasts of large asset acquisitions.
Financing plans.
Research and development plans.
Short-Run Vs. Long-Run
Budgets
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Strategic Planning
Long-run Budgets
Short-run Budgets (1 year or less)
Quantities to produce.
Quantities to sell.
Supplies acquisitions.
Short-Run Vs. Long-Run
Budgets
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Imposed
Participatory
Vs.
Budgets . . .
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Imposed Budgets Versus
Participatory Budgets
Imposed
Budgets
Participatory
Budgets
Continuum
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Right to comment
before implementation
Ultimate right
to set budgets
Continuum
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Imposed Budgets Versus
Participatory Budgets
Imposed
Budgets
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In start-up organizations
In extremely small businesses
In times of economic crises
When operating managers
lack budgetary skills or perspective.
Best Time to Use . . .
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Requires less time.
Utilize top managements knowledge
of overall resource availability.
Increase probability that the firms
strategic plans are incorporated.
Advantages . . .
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Disadvantages . . .
Reduce feeling of teamwork.
Dissatisfaction and low morale.
Limited acceptance of stated goals
and objectives.
May stifle initiative of lower level
managers.
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Imposed Budgets Versus
Participatory Budgets
Participatory
Budgets
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Best Time to Use . . .
In well-established organizations.
In extremely large businesses.
In times of economic affluence.
When operating managers have
strong budgetary skills
and perspectives.
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Advantages . . .
Obtain information from those
persons most familiar with the needs
and constraints of the organizational
units.
Leads to better morale and higher
motivation.
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Advantages . . .
Integrates knowledge that is diffused
among various levels of
management.
Provides a means to develop fiscal
responsibility and budgetary skills of
employees.
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Advantages . . .
Develop a high degree of acceptance
of and commitment to organizational
goals and objectives by operating
management.
Are generally more realistic.
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Disadvantages . . .
Require significantly more time.
May motivate managers to introduce
slack into the budget.
May support empire building by
subordinates.
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Advantages of Budgeting
Advantages
Define goal
and objectives
Uncover potential
bottlenecks
Coordinate
activities
Communicating
plans
Think about and
plan for the future
Means of allocating
resources
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The
Master Budget
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The Master Budget
Sales Budget
Production
Budget
DL Budget
Cash Budget
Pro Forma
Bal. Sht
EI Budget
DM Budget
Pro Forma
Inc. Stmt
Overhead
Budget
Sales
Forecast
Capital
Budget
Pro Forma
SCF
S&A Exp
Budget
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The
Master Budget
The Text Example
Hampton Freeze
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Tom Willis is the majority stockholder
and chief executive officer of Hampton
Freeze, Inc., a company he started in
2001. The company makes premium
popsicles using only natural
ingredients and featuring exotic flavors
such as tangy tangerine and minty
mango. The companys business is
highly seasonal, with most of the sales
occurring in spring and summer.
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In 2002, the companys second year
of operations, a major cash crunch
in the first and second quarters
almost forced the company into
bankruptcy. In spite of this cash
crunch, 2002 turned out to be
overall a very successful year in
terms of both cash flow and net
income.
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With the full backing of Tom Wills,
Larry Giano set out to create a
master budget for the company for
the year 2003.
In his planning for the budgeting
process, Larry drew up the
following list of documents that
would be a part of the master
budget.
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1
2
3 4 5
6
7
8
9
10
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The Sales
Budget
A budget showing the
number of units, sales
price and total sales for
each quarter (or month).
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Research into the history of cash
collections at Hampton Freeze
indicated that
70% of sales are collected in the
quarter in which the sale is made and
the remaining 30% are collected in
the following quarter.
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The Production
Budget
A budget showing the
number of units that must be
produced during each
budget period to meet sales
needs and to provide for the
desired ending inventory.
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Finished
Units
to be
Produced
Expected
Sales in
Units
Desired
EI of
Finished
Units
BI of
Finished
Units
= + -
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Hampton Freeze would like the ending
inventory of finished goods to be equal
to 20% of next quarters sales.
The company has 2,000 units of
beginning inventory.
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1. Finished units to be
produced
2. Equals expected
sales in units
3. Plus Desired EI of
finished units.
4. Less BI of finished
units.
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Desired Ending
Inventory of Finished
Goods equals 20% of
next quarters sales.
Ending Inventory for one quarter equals
Beginning Inventory for next quarter.
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Notice how inventories are accounted for on
the spreadsheet.
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The Direct Materials
Purchases Budget
A budget showing the raw
materials that must be
purchased to fulfill the
production budget and to
provide for adequate
inventories.
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Required
Purchases
of Raw
Materials
Amount
Required
for
Production
Desired
EI of Raw
Materials
BI of Raw
Materials
= + -
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Hampton Freeze has
established a policy of
maintaining RM equal to 10% of the
amount required for production in
the subsequent quarter.
In the first quarter the company
plans on producing 14,000 units
(from the production budget)
Each unit requires parts costing
$0.20.
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To prepare the Schedule of
Expected Cash Disbursements for
Materials, Hamptons policy is to
Pay for 50% of purchases in the
quarter in which the purchase is
made, and
Pay the remaining 50% in the
following quarter.
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1. Required purchases of
Direct Materials
2. Equals amount
required for
production.
3. Plus Desired EI of
raw materials.
4. Less BI of raw
materials.
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The Direct
Labor Budget
A budget showing the direct
labor hours (and total
amount) needed to produce
the number of units specified
in the production budget.
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Each case produced requires 0.4 direct
labor hour.
Each hour costs $15
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The Direct Labor Budget
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The MOH
Budget
A budget showing all
costs of production other
than direct materials and
direct labor.
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The MOH Budget
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The Ending Finished
Goods Inventory
Budget
A budget showing the
carrying cost of the unsold
units remaining in inventory.
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The Ending FG Inventory Budget
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The Selling and
Administrative
Expense Budget
A budget showing
expenses for areas other
than manufacturing.
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The S&A Expense Budget
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The Cash
Budget
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The Budgeted
(Pro-Forma)
Income
Statement
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The Budgeted
Balance Sheet
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