Strategic Planning
Critical success factors - Strengths of the company that enable it to outperform competitors.
Critical Success Factors Incorporated Into

Strategic Plan

Strategic Long-Range Plan
The master budget is part of an overall organizational plan made up of three components . . . Organizational goals ± management¶s broad objectives that employees work to achieve. longThe strategic long-range profit plan ± steps to be taken to achieve organizational goals. The master budget ± tactical short-range shortprofit plan.

. Evaluating Performance and Providing 4 Incentives.Key Purposes of the Budgeting System The five primary purposes are: 1. 2. Allocating Resources. 5. Planning. 3. Facilitating Communication and Coordination. 4. Managing Financial and Operational Performance.

Organizations Use Many Types of Budgets Organization Organization goals Long-range strategic plan Anticipated conditions Master budget Strategic evaluation Actual period results Performance evaluation 5 Individual Individual goals and values Individual beliefs .

work begins on the master budget. 2006 6 .The Master Budget as a Planning Tool After organization goals. ± The master budget is a detailed budget for the coming fiscal year. strategies and long-range plans have been developed.

7 Sales Budget: The Starting Point . ‡ Market Research ± can predict long-term trends in attitudes and the effects of social and economic changes on the company¶s sales. potential markets and products.‡ Sales Staff ± close to customer needs. Let·s look at some forecasting tools. ‡ Sales Forecasting ± the process of predicting sales of services or goods.

Forecasting Tools ‡ Delphi Technique ± individual forecasts of group members are submitted anonymously and evaluated by the group as a whole. ‡ Econometric Models ± statistical method of forecasting economic data using regression analysis. 8 .

Operational Budgets ‡ Manufacturing firms ± A production budget is developed from budgets for direct materials. 9 . direct labor. general. ‡ Service-industry firms ± Based on the sales Servicebudget for its services. The SG&A budget is also prepared. a budget of merchandise purchased is developed. and administrative (SG&A) expenses is also prepared. and overhead. a service industry firm develops a set of budgets that show how it will meet the demand. A budget for selling. ‡ Merchandising firms ± Instead of a production budget.

Operational Budgets Every business prepares a . Capital expenditures budget. Summary of operational budgets 10 . . . 1. Cash budget 2. and a 3.

The economies of all countries fluctuate in terms of consumer demand. Budget preparation is difficult when inflation (or deflation) is high or unpredictable. and laws affecting commerce. availability of skilled labor. 1. Translation of foreign currencies into local currency. . 2. 3. 11 . .International Aspects of Budgeting Firms with international operations face a variety of additional challenges in preparing their budgets .

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. 12 .

General.Illustrating the Master Budget Schedule 1 2 3 4 5 6 7 8 9 10 11 12 Sales Budget Production Budget Direct-Materials Budget Direct-Labor Budget Manufacturing Overhead Budget Selling. and Administrative Expense Budget (SG&A) Cash Receipts Budget Cash Disbursements Budget Cash Budget Budgeted Schedule of Cost of Goods Manufactured and Sold Budgeted Income Statement Budgeted Balance Sheet Title of Schedule 13 .

The Sales Budget Detailed schedule showing expected sales for the coming periods expressed in units and dollars. 14 .

000 units Fourth quarter ± 20. 20x1.000 units Third quarter ± 10. 15 .000 units  The selling price is $12 per unit.  Budgeted sales are: First quarter ± 15.Sales Budget of Collegiate Apparel  Collegiate Apparel Company is preparing budgets for the year ending December 31.000 units Second quarter ± 5.

Sales Budget of Collegiate Apparel 16 .

17 .Production Budget Sales Budget Production Budget Plan of resources needed to meet current sales demand and ensure inventory levels are sufficient for future sales.

. .Forecasting Production Rearrange the basic inventory formula as follows . . . Units in beginning inventory + Required production in units ± Sales in Units = Units in ending inventory Now. Units to be Produced = Sales in Units + Units in ending inventory ± Expected beginning inventory 18 . solve for required production .

500 completed units were on hand. 19 . 15.000 units are expected to be sold.  At the beginning of the year. Let¶s prepare the production budget. 1.The Production Budget  Collegiate Apparel wants units in ending finished goods inventory to be 10% of the next quarter¶s expected sales in units.  During the first quarter of 20x2.

000 × 10% = 500 units 20 .The Production Budget 5.

. Ending Required Materials Beginning materials purchases = used in production + materials inventory ± materials inventory 21 .Direct-Materials Budget Direct materials needed for the budget period can be determined as follows . .

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 quarter¶s raw materials required. On January 1st, 2,100 yards of fabric are on-hand. During the first quarter of 20x2, onCollegiate expects 21,000 yards of fabric to be required.  Each yard of fabric cost the company $2.  Let¶s prepare the direct materials budget.

Direct-Materials Budget

8,250 × 10% = 825 units


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.
Let¶s prepare the direct labor budget.

Direct-Labor Budget 25 .

 At the batch-level. the company expects the following batchproduction runs:  1st quarter ± 28  2nd quarter ± 11  3rd quarter ± 22  4th quarter ± 39  At the product-level.15 of electricity. the company expects two new style productdesigns each quarter with each new T-shirt design costing T$500. 26 .Manufacturing-Overhead Collegiate Apparel uses activity-based budgeting. activityBudget  At the unit-level.  Details of the facilities-level overhead costs are shown on the facilitiesmanufacturingmanufacturing-overhead budget. each unit produced requires $0.25 of indirect unitmaterials and $0.

BatchUnit-. and Product-level Portions of the Budget ProductBudget 27 .Manufacturing-Overhead Unit. Batch-.

Manufacturing-Overhead Product.Facilities.500 28 .600 + $8.400 + $1.Budget Product-.000 + $36.500 = $51. Facilities-level and Total Overhead Budget $5.

sales commissions and freight-out are unitlevel SG&A.  Customer-level SG&A expenses include licensing fees for use of names and logos. and clerical wages. advertising.  Facilities-level SG&A expense include sales salaries.SG&A Expense Budget  At Collegiate Apparel. 29 .

SG&A Expense Budget $ $ $ $ 30 .

Cash Receipts Budget  At Collegiate Apparel all sales are made on account. The remaining two percent of each quarter¶s sales are expected to be uncollectible.  Sales in the last quarter of 20x0 were $240.  The company collects 80% of its billings in the quarter of the sale. 18% in the following quarter. 31 .000.

600 32 .200 $180.000 × 18% = $43.Cash Receipts Budget $240.000 × 18% = $32.000 × 2% = $3.400 $180.

850. 33 . Let¶s prepare the Cash Receipts Budget.Cash Payments for DirectMaterials  At Collegiate Apparel all purchases of raw materials are made on account.  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.

890 34 .780 $18.Cash Payments for DirectMaterials $39.450 × 40% = $15.150 × 60% = $10.

Other Cash Disbursements 35 .

Cash Budget  Collegiate Apparel started the year with a cash balance of $10.000 = $15. and borrows $100.000 at the end of each quarter with interest on the unpaid balance at 10%.000 = $5.000.  Payments for the plant expansion were:     1st quarter 2nd quarter 3rd quarter 4th quarter = $45.000 36 .000 at the beginning of 20x1 to finance plant expansion.  The loan is repaid in the amount of $25.000 = $35.

000 × 10% × ¼ = $2.Cash Budget $100.500 37 .

Calculation of Absorption Unit Cost 38 .

100 yards of fabric at $2.  From Schedule 3. We just computed the absorption cost per unit at $9. we know there are 2.  From Schedule 2 we know there are 1. 39 .Cost of Goods Manufactured and Sold Budget  At Collegiate Apparel the production cycle is short enough that it has no work-in-process inventory at any time.500 units in ending finished goods inventory.00.00 per yard in beginning raw material inventory.

500 × $9 $13.500 40 .Cost of Goods Manufactured and Sold Budget 2.200 1.100 × $2 $4.

Budgeted Income Statement 41 .

20x0.000.  Supplies on hand at December 31. 20x0 was $400. was $330. noninterest-bearing note payable of $200. 20x1.000. 20x1 were $2. Total accumulated depreciation was $240.000.Budgeted Balance Sheet  The balance in the building account on December 31.000 per year. 20x3.000.  The balance in the owners¶ equity account at December 31. 42 . Depreciation expense is recorded at the rate of $60. The note is due on December 31. and the balance in the equipment account was $320.000.  At December 31. the company had a long-term.160.

740 $330.160 56.750 $386.$240.000 × 18% $43.910 43 .200 $56.850 × 40% $22.

How It All Fits Together Production budget Sales forecast SG&A budget 44 .

labor and mfg. overhead budgets Budgeted income statement 45 .How It All Fits Together Production budget Sales forecast SG&A budget Required direct materials.

labor and mfg. overhead budgets Budgeted cost of goods mfg.How It All Fits Together Production budget Sales forecast SG&A budget Required direct materials. and sold Budgeted income statement 46 .

How It All Fits Together Production budget Sales forecast SG&A budget Required direct materials. labor and mfg. and sold Budgeted income statement Cash budget Budgeted balance sheet 47 . overhead budgets Budgeted cost of goods mfg.

Responsibility for Budget Administration Budget Committee ± Consists of key senior executives who may advise the budget director during the preparation of the budget. 48 . The authority to give final approval to the budget usually rests with the board of directors.

Padding the budget means intentionally underestimating revenues or overestimating costs. slack. The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called budgetary slack. Budgetary Slack: Padding the Budget 49 .

50 .Participative Budgeting Participative Budgeting ± the use of input from lower. ± The process is time consuming but enhances employee motivation and acceptance of goals.and middlemanagement employees.

51 . Let¶s prepare the sales forecast with a 4% increase. so we will really look good! I think sales will increase by 10% next year.Ethical Problems in Budgeting Much of the information for the budget is provided by persons whose performance is then compared with the budget they help develop.

Zero-Based Budgeting for Discretionary Costs A system of establishing financial plans beginning with an assumption of no activity and justifying each program or activity level. Massive amounts of time were required to implement and update the budget. 52 . zero-based budgeting was found to be impractical. After some initial success.

Includes several possible activity levels. It is not based on only one level of activity as we have seen with the static budget.Flexible Overhead Budget A flexible budget is a budget that is valid for a relevant range of activity. St t t t ty ( t t ty ) t $ $ $ F t $ Based on only one activity level. 53 .

200 Cost Variance 150 Favorable After preparing a flexible budget.500 machine hours.500 machine hours. the manager obtained the following information about cost control at 4. Actual Electricity Cost 1.050 Budgeted Electricity Cost 1.Advantages of Flexible Budgets A manager is faced with the following information from the static budget for June when the level of activity was 4. Was there good control of electric costs? Actual Electricity Cost 1.050 Budgeted Electricity Cost 900 Cost Variance 150 Unfavorable 54 .

55 . Output should be measured in terms of the standard input allowed given actual output.Activity Measure: Based on Input or Output? The number of units of output usually is not a meaningful measure in a multiproduct firm because it requires the addition of numbers of dissimilar products.

Formula Flexible Budget Total budgeted monthly = overhead cost Budgeted fixed Total Budgeted variable overhead cost per × activity + overhead cost per month units activity unit 56 .

15 × 6.Flexible Overhead Budget Illustrated $2.000 = $12.900 57 .

Flexible Overhead Budget Illustrated 58 .

550 = $40.Flexible Overhead Budget Illustrated $24.910 59 .360 + $16.

Flexible Overhead Budget Normal costing Illustrated Standard costing Manufacturing Overhead Actual Overhead Applied Overhead Actual activity Manufacturing Overhead Actual Overhead Applied Overhead Standard allowed activity × Predetermined overhead rate × Predetermined overhead rate The difference lies in the quantity of hours used 60 .

2. The activity measure should be one that varies in a similar pattern to the way that variable overhead varies.Choice of Activity Measure 1. 61 . 3. As automation increases. Dollar measures are subject to price-level pricechanges and fluctuate more than physical measures. many companies are using measures such as machine hours or process time for their flexible overhead budget.

End of Chapter 7 62 .