Chapter 3:

PROFIT PLANNING
Ms. Le Thuy Ngoc Sang
After studying Chapter 3, you should be able to

1. Understand why organizations 5. Prepare a direct labor budget.

budget and the processes they
use to create budgets.
2. Prepare a sales budget, including 7. Prepare a selling and
a schedule of expected cash
collections.
3. Prepare a production budget.
4. Prepare a direct materials
budget, including a schedule of
expected cash disbursements for
purchases of materials.
6. Prepare a manufacturing
overhead budget.
administrative expense budget.
8. Prepare a cash budget.
9. Prepare a budgeted income
statement.
10.Prepare a budgeted balance
In this chapter, we focus on the steps taken by businesses to achieve
their planned levels of profits—a process called profit planning.

Profit planning is accomplished (thực hiện) by preparing a number of

budgets that together form an integrated (tổng hợp) business plan
known as the master budget (dự toán tổng thể).

The master budget is an essential management tool that

communicates (truyề thông tin) management’s plans throughout the
organization, allocates resources, and coordinates (phối hợp) activities.
3.1. THE BASIC FRAMEWORK OF BUDGETING

 A budget is a detailed plan for the future that is usually expressed in formal
quantitative terms (về mặt định lượng).
 Budgets are used for two distinct purposes—planning and control.

Planning involves developing goals and preparing various budgets to achieve

those goals

Control involves gathering feedback (phản hồi) to ensure that the plan is being
properly executed (thực hiện) or modified (sữa đổi)as circumstances change.
3.1.1. Advantages of Budgeting

Organizations realize many benefits from budgeting, including:

1. Budgets communicate management’s plans throughout the organization.

2. Budgets force managers to think about and plan for the future. In the absence of the necessity
to prepare a budget, many managers would spend all of their time dealing with day-to-day
emergencies.
3. The budgeting process provides a means of allocating resources to those parts of the
organization where they can be used most effectively.
4. The budgeting process can uncover (phát hiện ra) potential bottlenecks (bất cập) before they
occur.
5. Budgets coordinate the activities of the entire organization by integrating (phối hợp) the plans
of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the
same direction (có chung một mục đích).
6. Budgets define goals and objectives that can serve as benchmarks (tiêu chuẩn) for evaluating
sub-sequent performance (đánh giá thành quả trong tương lai).
3.1.2. Responsibility Accounting

 The basic idea underlying responsibility accounting is that a manager should be

held responsible for those items—and only those items—that the manager can
actually control to a significant extent.

 Each line item (revenue or cost) in the budget is the responsibility of a manager
who is held responsible for subsequent deviations between budgeted goals and
actual results.

 This concept is central to any effective profit planning and control system. Some-
one must be held responsible for each cost or else no one will be responsible and
the cost will inevitably grow out of control
3.1.3. Choosing a Budget Period

 Operating budgets ordinarily cover a one-year period corresponding

to the company’s fis-cal year.
 Many companies divide their budget year into four quarters.
The first quarter is then subdivided into months, and monthly budgets are developed
The last three quarters may be carried in the budget as quarterly totals only
As the year progresses, the figures for the second quarter are broken down into
monthly amounts, then the third-quarter fig-ures are broken down, and so forth. This
approach has the advantage of requiring periodic review and reappraisal of budget
data throughout the year.
EXHIBIT 3-1
The Initial Flow of Budget Data
Conti...
The initial flow of budget data in a participative budgeting system is
from lower levels of responsibility to higher levels of responsibility.

Each person with responsibility for cost control will prepare his or her
own budget estimates and submit them to the next higher level of
management.

These estimates are reviewed and consolidated as they move upward in

the organization.
3.1.4. The Self-Imposed Budget (dự toán áp đặt)

The success of a budget program is largely determined by the way a

budget is developed.

Oftentimes, the budget is imposed from above, with little participation

by lower-level managers
Conti...
 A self-imposed budget or participative budget, as illustrated in
Exhibit 3-1, is a budget that is prepared with the full cooperation and
participation of managers at all levels.

 Self-imposed budgets have a number of advantages:

Conti...
1. Individuals at all levels of the organization are recognized as members of the team
whose views and judgments are valued by top management.
2. Budget estimates prepared by front-line managers are often more accurate and
reli-able than estimates prepared by top managers who have less intimate
knowledge of markets and day-to-day operations.
3. Motivation is generally higher when individuals participate in setting their own
goals than when the goals are imposed from above. Self-imposed budgets create
commitment.
4. A manager who is not able to meet a budget that has been imposed from above
can always say that the budget was unrealistic and impossible to meet. With a self-
imposed budget, this excuse is not available
3.1.5. Human Factors in Budgeting

The success of a budget program also depends on the degree to which

top management accepts the budget program as a vital part of the
company’s activities and the way in which top management uses
budgeted data.
3.1.6. The Budget Committee (ủy ban)

 A standing budget committee is usually responsible for overall policy

relating to the budget program and for coordinating the preparation
of the budget itself.

 This committee may consist of the president; vice presidents in

charge of various functions such as sales, production, and
purchasing; and the controller.

 Difficulties and disputes relating to the budget are resolved by the

budget committee. In addition, the budget committee approves the
final budget.
EXHIBIT 3-2
The Master Budget
Interrelationship
3.1.7. The Master Budget: An Overview Tổng thể)

The master budget consists of a number of separate but interdependent

(liên kết) budgets that for-mally lay out the company’s sales,
production, and financial goals.
PREPARING THE MASTER BUDGET
3.2.1. The Sales Budget

The sales budget is the starting point in preparing the master budget.
As shown earlier in Exhibit 3-2, all other items in the master budget,
including production, purchases, inventories, and expenses, depend on
it.
Example
Quarter

1 2 3 4
 Budgeted sales in cases: 1,000 30.000 40,000 20,000
 Selling price per cases: $20 $20 $20 $20

Accounts receivable, beginning balance: $90,000

Prepare a sales budget,
including a schedule of
expected cash collections.
At Hampton Freeze, all sales are on credit; furthermore,
experience has shown 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.
 1 2 3 4 Year

Budgeted sales

Selling price

Total sales

Schedule of Expected cash collections

Accounts receivable, beginning

balance

First quarter sales

Second quarter sales

Third quarter sales

Fourth quarter sales

Total cash collections

SCHEDULE 1
3.2.2. The Production Budget
Budgeted unit sales XXXX
Add desired ending inventory of finished goods XXXX
Total needs XXXX
Less beginning inventory of finished goods XXXX
Required production XXXX

At Hampton Freeze, management believes that an ending

inventory equal to 20% of the next quarter’s sales
Assumed ending inventory for fourth-quarter: 3,000 cases
 1 2 3 4 Year

Budgeted sales in cases

Add desired ending inventory of finished

goods

Total needs

Less beginning iventory of finished

goods

Required production in cases

SCHEDULE 2
3.2.3. Inventory Purchases—Merchandising Company

Hampton Freeze prepares a production budget because it is a

manufacturing company. If it were a merchandising company, instead it
would prepare a merchandise purchases budget showing the amount of
goods to be purchased from suppliers during the period.

The format of the merchandise purchases budget is shown below:

Conti...
Budgeted cost of goods sold XXXXX
Add desired ending merchandise inventory XXXXX
Total needs XXXXX
Less beginning merchandise inventory XXXXX
Required purchases XXXXX
3.2.4. The Direct Materials Budget

A direct materials budget is prepared after the production equirements

have been computed.

The direct materials budget details the raw materials that must be
purchased to fulfill the production budget and to provide for adequate
inventories.

The required pur-chases of raw materials are computed as follows:

Conti...
Required production in units of finished goods XXXXX
Raw materials required per unit of finished goods XXXXX
Raw materials needed to meet the production schedule XXXXX
Add desired ending raw materials inventory XXXXX
Total raw material needs XXXXX
Less beginning raw materials inventory XXXXX
Raw materials to be purchased XXXXX
Unit cost of raw materials XXXXX
Cost of raw materials to be purchased XXXXX
Beginning materials inventory equal to 10% of the raw materials used in the quarter

The ending inventory of 22,500 pounds for the fourth quarter is assumed.

Cash payments for last year’s fourth-quarter material purchases: $25,800

$47,400 X 50%; $47,400 X 50%.

3

$97,200 X 50%; $97,200 X 50%.

4

$102,900 X 50%; $102,900 X 50%.

5

6
$55,800 X 50%. Unpaid fourth-quarter purchases ($27,900) appear as accounts
payable on the company’s end-of-year budgeted balance sheet
 1 2 3 4 Year

Required production in cases

Raw materials needed per case

Raw materials needed to meet
production
Total raw materials needs

Less beginningraw materials iventory

Required production in cases

SCHEDULE 3
3.2.5. The Direct Labor Budget
3.2.6. The Manufacturing Overhead Budget
3.2.7. The Ending Finished Goods Inventory Budget
3.2.8. The Selling and Administrative Expense Budget

Quarter
1 2 3 4 Year
Budgeted sales in cases (Schedule 1) 10,000 30,000 40,000 20,000 100,000
Variable selling and administrative expense per case $ 1 80 $ 1.80 $ 1.80 $ 1.80 $ 1.80
Variable selling and administrative expense $ 18.000 $ 54.000 $ 72.000 $ 36,000 $180,000

Fixed selling and administrative expenses:

Advertising 20,000 20,000 20,000 20.000 80,000
Executive salaries 55,000 55,000 55,000 55,000 220,000
Insurance 10,000 10,000 10,000 10,000 40,000
Property taxes 4,000 4,000 4,000 4,000 16,000
Depreciation 10,000 10,000 10,000 10,000 40,000
Total fixed selling and administrative expenses 99,000 99,000 99,000 99,000 396.000

Total selling and administrative expenses 117,000 153,000 171,000 135,000 576,000
Less depreciation 10,000 10,000 10,000 10,000 40,000
Cash disbursements for selling and administrative $107,000 $143,000 $161,000 $125,00 $536,000
expenses 0