313738

Chapter Nine Profit Planning
COPYRIGHT 2012 Nelson Education Ltd.
Learning Objectives
1.
2.
3.
4.
Define budgeting and discuss its role in planning, control, and decision making Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components Define and prepare the financial budget, identify its major components, and explain the interrelationship of its various components Describe the behavioural dimension of budgeting
29-2
OBJECTIVE 1
Define budgeting and discuss its role in planning, control, and decision making
Looking backward determining what actually happened and comparing it with the previously planned outcomes Control Looking ahead to see what actions should be taken to realize particular goals
Planning and Control are tied together
Budgeting and Planning and Control
49-4
Planning
Budgets

Key component of planning Financial plans for the future Identify objectives and actions needed to achieve them
Before a budget is prepared, a strategic plan should be developed
59-5
Strategic Plan
Identifies strategies for future activities and operations

Long- and short-term objectives
Objectives form the basis of the budget
69-6
1. 2.
3.
4.
Forces managers to plan Provides information that can be used to improve decision making Provides a standard for performance evaluation Improves communication and coordination
Advantages of Budgeting
79-7
Can be broken down into quarterly and monthly budgets
Comprehensive financial plan for the organization as a whole
Master Budget
89-8
January December . February January 2011 2012 2011 2011
A moving 12-month budget
Continuous Budget
99-9
Budget Committee & Director Roles

Budget Committee: Reviews the budget Provides policy guidelines and budgetary goals Resolves differences that arise as the budget is prepared Approves the final budget Monitors actual performance as the year unfolds Budget Director: Responsible for directing and coordinating overall budgeting process Usually the controller
109-10
Major Components of the Master Budget

Master budget can be divided into
Operational budgets
Describe the income-generating activities of a firm Detain the inflows and outflows of cash and the overall financial position
Financial budgets
119-11
OBJECTIVE 2
Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components
Prepare a sales budget for each quarter and for the year
Budgeted units to be sold for each quarter: 1,000 1,200 1,500 and 2,000 Selling price is $10 per t-shirt
Required:
Information:
Example: Cornerstone 9-1
How to Prepare a Sales Budget
139-13
Sales Budget
Projection approved by budget committee
describes expected sales in units and dollars
Basis for all other operating and most of the financial budgets
149-14
Sales Budget Preparation Steps

1.
-
Develop a sales forecast

responsibility of marketing department bottom-up approach
Salespeople submit sales projections
2.
3.
Forecast is reviewed by budget committee Budget committee recommends changes prior to approval
159-15
Moose Patties Inc. Sales Budget For the Year Ending December 31, 2011 Quarter 1 2 3 4 Units 1,000 1,200 1,500 2,000
Year 5,700
Unit selling price $10 $10 $10 $10 $10 Budgeted sales $10,000 $12,000 $15,000 $20,000 $57,000
Most sales happen in summer and fall
169-16
Production Budget
Describes how many units must be produced in order to meet sales needs and satisfy ending inventory requirements Units to Expected be unit + = produced sales
Formula: Units in Units in ending - beginning inventory inventory

179-17

How to Prepare the Production Budget Information:
Sales budget:
1st quarter = 1,000 units 2nd quarter = 1,200 units 3rd quarter = 1,500 units 4th quarter = 2,000 units
Beginning inventory is 180 t-shirts Ending inventory:

Desired quantity = 20% of the following quarters sales Sales for the first quarter of 2008 = 1,000 units
Required:
Prepare a production budget for each quarter and for the year
189-18
Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 Quarter From the sales 1 2 3 4 budget
Sales Desired ending inv. 1,000 240 1,200 300 1,500 400 2,000 200
Year
5,700 200
20% of second quarters sales 20% 1,200 units
20% of third quarters sales 20% 1,500 units
20% of the next years first quarter sales 20% 1,000 units
199-19
Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 Quarter 1 2 3 4
Sales Desired ending inv. Total needs Less: Beg. inventory 1,000 240 1,240 (180) 1,200 300 1,500 (240) 1,500 400 1,900 (300) 2,000 200 2,200 (400)
Year
5,700 200 5,900 (180)
1st quarters ending inventory is 2nd quarters beginning inventory

Beginning inventory as of January, 1, 2011

209-20
Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 Quarter 1 2 3 4
Sales Desired ending inv. Total needs Less: Beg. inventory Units to be produced 1,000 240 1,240 (180) 1,060 1,200 300 1,500 (240) 1,260 1,500 400 1,900 (300) 1,600 2,000 200 2,200 (400) 1,800
Year
5,700 200 5,900 (180) 5,720
1,240 needed, we already have 180, so we need to produce 1,060 units
All four quarters production added together

219-21
Direct Materials Purchases Budget

Tells the amount and cost of raw materials to be purchased in each time period Direct materials needed for production + Desired direct materials in ending inventory - Direct materials in beginning inventory Direct materials to be purchased
Formula:
229-22

How to Prepare a Direct Materials Purchases Budget Information:
Production budget Units to be produced:

1st quarter = 1,060 units 2nd quarter = 1,260 units 3rd quarter = 1,600 units 4th quarter = 1,800 units Total for the year = 5,720 units
Per-unit basis One plain t-shirt, $3 each 5 grams of ink, $0.20 per gram
239-23
Example
Beginning inventory 58 plain t-shirts and 390 grams of ink Ending inventory 10% of the following quarters production Desired ending inventory is 106 t-shirts and 530 grams of ink
Required: Prepare a direct materials purchases budget for: plain t-shirts and ink
Information continued:
249-24
Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011
Plain T-Shirts Quarter 1 2 3 4 Year
Units to be produced Direct materials per unit Production needs Desired ending inv.
1,060 1 1,060 126
1,260 1 1,260
1,600 1 1,600
1,800 1 1,800
5,720 1 5,720
10% of next quarters production needs From production budget
Each unit required 1 plain t-shirt
259-25
Units to be produced Direct materials per unit Production needs Desired ending inv.
1,060 1 1,060 126
1,260 1 1,260 160
1,600 1 1,600 180
1,800 1 1,800 106
5,720 1 5,720 106
10% of the next years 1st quarter production needs
269-26
Units to be produced Direct materials per unit Production needs Desired ending inv. Total needs Less: Beg. inventory
1,060 1 1,060 126 1,186 (58)
1,260 1 1,260 160 1,420 (126)
1,600 1 1,600 180 1,780
1,800 1 1,800 106 1,906
5,720 1 5,720 106 5,826
1st quarters ending inventory is the 2nd quarters beginning inventory

279-27
Units to be produced Direct materials per unit Production needs Desired ending inv. Total needs Less: Beg. inventory
1,060 1 1,060 126 1,186 (58)
1,260 1 1,260 160 1,420 (126)
1,600 1 1,600 180 1,780 (160)
1,800 1 1,800 106 1,906 (180)
5,720 1 5,720 106 5,826 (58)
Beginning of the year inventory

289-28
Units to be produced Direct materials per unit Production needs Desired ending inv. Total needs Less: Beg. inventory Qty to be purchased Cost per t-shirt
1,060 1 1,060 126 1,186 (58) 1,128 $3
1,260 1 1,260 160 1,420 (126) 1,294
1,600 1 1,600 180 1,780 (160) 1,620
1,800 1 1,800 106 1,906 (180) 1,726
5,720 1 5,720 106 5,826 (58) 5,768
Turning # of t-shirts into $ amount

299-29
Units to be produced Direct materials per unit Production needs Desired ending inv. Total needs Less: Beg. inventory Qty to be purchased Cost per t-shirt Total cost
1,060 1 1,060 126 1,186 (58) 1,128 $3 $3,384
1,260 1 1,260 160 1,420 (126) 1,294 $3 $3,882
1,600 1 1,600 180 1,780 (160) 1,620 $3 $4,860
1,800 1 1,800 106 1,906 (180) 1,726 $3
5,720 1 5,720 106 5,826 (58) 5,768 $3

309-30
$5,178 $17,304
Ink Quarter We can do the same thing for ink 1 2 3 4 Year
Units to be produced Direct materials per unit
1,060 5
1,260
1,600
1,800
5,720
It takes 5 grams of ink for each tshirt
319-31
Ink Quarter 1 2 3 4 Year
Units to be produced Direct materials per unit Production needs Desired ending inv. Total needs Less: Beg. inventory Qty to be purchased Cost per t-shirt Total cost
1,060 5 5,300 630 5,930 (390) 5,540 $0.20 $1,108
1,260 5 6,300 800 7,100 (630) 6,470 $0.20 $1,294
1,600 5 8,000 900 8,900 (800) 8,100 $0.20 $1,620
1,800 5 9,000 530 9,530 (900) 8,630 $0.20 $1,726
5,720 5 28,600 530 29,130 (390) 28,740 $0.20 $5,748

329-32
Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 Quarter 1 2 3 4
Total purchase cost of tshirts Total purchase cost of ink $3,384 $3,882 $4,860 $5,178
Year
$17,304
1,108
1,294
1,620
1,726
5,748
Total direct materials purchase cost $4,492
$5,176
$6,480
$6,904
$23,052
339-33
Shows the total direct labour hours needed and the associated cost for the number of units in the production budget
Direct Labour Budget
349-34

How to Prepare a Direct Labour Budget Information:
Production budget
Units to be produced: 1st quarter = 1,060 units 2nd quarter = 1,260 units 3rd quarter = 1,600 units 4th quarter = 1,800 units Total for the year 5,720 units
It takes 0.12 hour to produce one t-shirt Average wage cost per hour is $10
Required: Prepare a direct labour budget

359-35
Moose Patties Inc. Direct Labour Budget For the Year Ending December 31, 2011
Quarter 1 2 3 4 Year
Units to be produced Direct labour per unit Total hours needed Avg. wage per hour Total direct labour cost
1,060 0.12 127.2 $10 $1,272
1,260 0.12 151.2 $10 $1,512
1,600 0.12 192 $10 $1,920
1,800 0.12 216 $10 $2,160
5,720 0.12 686.4 $10 $6,864
369-36
Overhead Budget
Shows the expected cost of all production costs other than direct materials and direct labour Overhead costs are separated into fixed and variable costs and a variable rate is calculated
379-37

How to Prepare an Overhead Budget
Direct labour budget

Budgeted direct labour hours:

Variable overhead rate is $5 per direct labour hour Fixed overhead is budgeted at $1,645 per quarter
Required: Prepare an overhead budget
Information:
1st quarter = 127.2 hours 2nd quarter = 151.2 hours 3rd quarter = 192 hours 4th quarter = 216 hours Total for the year = 686.4 hours
389-38
Moose Patties Inc. Overhead Budget For the Year Ending December 31, 2011 Moose Patties bases Quarter its variable overhead on direct labour hours 1 2 3 4
Budgeted direct labour hours Variable overhead rate Variable overhead Budgeted fixed overhead 127.2 x $5 $ 636 151.2 x $5 $ 756 192 x $5 $ 960 216 x $5 $1,080
Year
686.4 x $5 $3,432
Add in the fixed overhead of $1,645 per quarter
399-39
Moose Patties Inc. Overhead Budget For the Year Ending December 31, 2011 Quarter 1 2 3 4
Budgeted direct labour hours Variable overhead rate Variable overhead Budgeted fixed overhead 1,645 Total overhead $2,281 1,645 $2,401 1,645 $2,605 1,645 $2,725 127.2 x $5 $ 636 151.2 x $5 $ 756 192 x $5 $ 960 216 x $5 $1,080
Year
686.4 x $5 $3,432
6,580 $10,012
409-40
Ending Finished Goods Inventory Budget
Supplies information needed for the balance sheet Important input for the preparation of the cost of goods sold budget
419-41

How to Prepare an Ending Finished Goods Inventory Budget Information:

Each shirt requires one plain t-shirt and 5 grams of ink Each t-shirt costs $3.00 and ink costs $0.20 per gram Takes 0.12 hours to produce one t-shirt Employees are paid an average of $10 per hour Variable overhead rate is $5 per direct labour hour Fixed overhead is budgeted at $1,645 per quarter
Required: Prepare an ending finished goods inventory budget

429-42
Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 Unit cost computation: Direct materials Direct labour
T-shirt + Ink = $3.00 + (5 grams @ $0.20) = $4.00
$4.00 1.20
0.12 hours of direct labour $10 per hour

439-43
Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 Unit cost computation: Direct materials Direct labour Overhead: Variable Fixed
$5 per direct labour hour 0.12 hours
$4.00 1.20 0.60 1.15

Budgeted fixed overhead of $6,580 / 686.4 budgeted direct labour hours = $9.59 per hour $9.59 0.12 hours
Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 Unit cost computation: Direct materials Direct labour Overhead: Variable Fixed Total unit cost
200 shirts $6.95 = $1,390
459-45
$4.00 1.20 0.60 1.15 $6.95

HOW TO Prepare a Cost of Goods Sold Budget Information:
Direct materials:

T-shirts = $3 each 5,720 shirts produced Ink = $0.20 per gram 5 grams per shirt 5,720 shirts produced
Direct labour = $10 per hour x 0.12 hours per shirt 5,720 shirts produced Variable overhead = $5 per direct labour hour 0.12 hours per shirt x 5,720 shirts Fixed overhead = $1,645 per quarter 4 quarters
469-46
Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 Direct materials used Direct labour used
(5720 $3 per t-shirt) + (5 grams ink $0.20 per gram 5720)
$22,880 6,864
5720 shirts 0.12 hours per shirt $10 per hour
479-47
Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 Direct materials used Direct labour used $22,880 6,864
Variable + Fixed
10,012 Overhead Budgeted manufacturing costs $39,756 Beginning finished goods 1,251
180 units @ $6.95 per unit cost
489-48
Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 Direct materials used Direct labour used $22,880 6,864
10,012 Overhead Budgeted manufacturing costs $39,756 Beginning finished goods 1,251 Goods available for sale $41,007 Less: Ending finished goods (1,390) Budgeted cost of goods sold $39,617
499-49
Selling and Administrative Expenses Budget

Outlines planned expenditures for nonmanufacturing activities Selling and administrative expenses can be broken down into fixed and variable components
509-50

How to Prepare a Selling and Administrative Expenses Budget Information:

Sales budget 1,000; 1,200; 1,500; and 2,000 units sold in quarters 1 through 4, respectively Variable expenses = 0.10 per unit sold Fixed expenses:
Salaries average $1,420 per quarter Utilities = $50 per quarter Depreciation = $150 per quarter Advertising = $100; $200; $300 and $500 for quarters 1 through 4 Insurance is $500 and is paid in the third quarter
519-51
Moose Patties Inc. Selling and Administrative Expense Budget For the Year Ending December 31, 2011
Quarter 1 2 3 4 Year
Planned sales in units Variable expenses* Total Variable exp. Fixed expenses: Salaries Utilities Advertising Depreciation Insurance Total fixed exp. Total Selling & Admin
1,000 $0.10 $ 100 $1,420 50 100 150 ----$1,720 $1,820
1,200 $0.10 $ 120 $1,420 50 200 150 ----$1,820 $1,940
1,500 $0.10 $ 150 $1,420 50 300 150 500 $2,420 $2,570
2,000 $0.10 $ 200 $1,420 50 500 150 ----$2,120 $2,320
5,700 $0.10 $ 570 $5,680 200 1,100 600 500 $8,080 $8,650
529-52

How to Prepare a Budgeted Income Statement Information:

Sales budget, $57,000 Cost of goods sold, $39,617 Selling and administrative expenses, $8,650 (600 is depreciation) Income tax rate, 40% Interest expense, $60
Required: Prepare a budgeted income statement

539-53
Moose Patties Inc. Budgeted Income Statement For the Year Ending December 31, 2011 Sales Less: Cost of goods sold Gross margin Less: Selling and admin. exp. Operating income Less: Interest expense Income before taxes Less: Income taxes Net income
Income before taxes of $8,673 40% tax rate
549-54
$57,000 (39,617) $17,383 (8,650) $8,733 (60) $8,673 (3,469) $5,204
OBJECTIVE 3
Define and prepare the financial budget, identify its major components, and explain the interrelationships of its various components
Preparing the Financial Budget

The usual financial budgets prepared are:

Cash budget Budgeted balance sheet Budget for capital expenditures
569-56

How to Prepare an Accounts Receivable Aging Schedule Information:

25% of total sales are cash 75% of total are on credit

90% paid during the quarter of sale, 10% paid the following quarter
2011 Sales: (Q1 $10,000; Q2 $12,000; Q3 $15,000; Q4 $20,000) Balance in Accounts Receivable at end of 2010: $1,350
Collected in cash during first quarter of 2011
Required: Calculate cash sales expected in each quarter of 2011 Prepare a schedule showing cash receipts from sales expected in each quarter of 2011
579-57
Moose Patties Inc. Cash Receipts from Credit Sales For the Year Ending December 31, 2011 Quarter 1 2 3
Cash sales Received on account from: Quarter 4, 2010 1,350 $2,500
1st quarter sales 25% $10,000 25%
10% of 4th quarter 2010s credit sales will be collected in the 1st quarter of 2011
589-58
Cash sales Received on account from: Quarter 4, 2010 Quarter 1, 2011 1,350 6,750 $2,500
90% of this quarters credit sales
599-59
Cash sales Received on account from: Quarter 4, 2010 Quarter 1, 2011 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 Total cash receipts $10,600 1,350 6,750 750 8,100 $2,500 $3,000
25% of 2nd quarters sales
Remainder of 1st quarters credit sales are collected along with 90% of 2nd quarters sales
Cash sales Received on account from: Quarter 4, 2010 Quarter 1, 2011 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 Total cash receipts $10,600 $11,850 $14,775 1,350 6,750 750 8,100 900 10,125 $2,500 $3,000 $3,750
4
$5,000
1,125 13,500 $19,625

619-61

How to Determine Cash Payments on Accounts Payable Information:
All raw materials purchases on account

80% paid for in quarter of purchase 20% paid for in the quarter of purchase
4th quarter 2010 purchases; $5,000 Expected purchases for 2011:

Quarter 1; $4,492 Quarter 2; $5,176 Quarter 3; $6,480 Quarter 4; $6,904
Required:
Prepare a schedule showing anticipated payments for accounts payable for materials
629-62
Moose Patties Inc. Cash Payments on Accounts Payable For the Year Ending December 31, 2011 Quarter Source 1 2 3
Quarter 4, 2010 Quarter 1, 2011 1,000 3,594 20% $5,000
80% $4,492
639-63
Moose Patties Inc. Cash Payments on Accounts Payable For the Year Ending December 31, 2011 Quarter Source 1 2 3
Quarter 4, 2010 Quarter 1, 2011 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 Total cash payments $4,594 $5,039 $6,219 1,000 3,594 898 4,141 1,035 5,184
1,296 5,523 $6,819
649-64

How to Prepare a Cash Budget Information: All previous budgets and the following specific details:
1.
$1,000 minimum cash balance is required for end of each quarter. Money can be borrowed and repaid in multiples of $1,000. Interest is 12% per year. Interest payments are made only for amount of principal being repaid. All borrowing takes place at beginning of a quarter, and repayment takes place at quarter end Budgeted per quarter depreciation is $540 for overhead and $150 for selling and administrative expenses (Cornerstones 9-5 and 9-8)
2.
659-65
Example
Information continued: 3. Capital budget for 2011 revealed plans to purchase additional screen printing equipment. Cash outlay for equipment, $6,500, will take place in Q1. Acquisition of equipment is to be financed with operating cash, supplementing it with shortterm loans as necessary 4. Corporate income taxes are $3,469 and will be paid at end of fourth quarter (Cornerstone 9-9) 5. Beginning cash balance equals $5,200 6. All amounts in budget are rounded to the nearest dollar
Required: Prepare a cash budget for Moose Patties

669-66
Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011
1 Beginning cash bal. Cash sales and collections on account: Total cash available Less disbursements: Payments for: Raw materials Direct labour Quarter 2 3 4 Year
$ 5,200 10,600 $15,800

Calculated in Cornerstone 910
$ (4,594) (1,272)
Calculated in Cornerstone 9-11
Calculated in Cornerstone 9-4

679-67
1 Beginning cash bal. Cash sales and collections on account: Total cash available Less disbursements: Payments for: Raw materials Direct labour Overhead Selling and administrative Quarter 2 3 4 Year
$ 5,200 10,600 $15,800

Budgeted overhead (Cornerstone 9-5) minus $540 depreciation per quarter Depreciation is removed because it does not involve a cash disbursement
$ (4,594) (1,272) (1,741) (1,670)
Budgeted selling and administrative expenses (Cornerstone 9-8) minus $150 depreciation per quarter
Cash Budget continued

Quarter 1 Selling and administrative 2 3 4 Year
(1,670)
Income taxes Equipment Total disbursements Excess of cash available over needs
---(6,500) $(15,777) $ 23
Income taxes will be paid only in the 4th quarter. Equipment will be purchased only in the 1st quarter
Cash available Cash needs

699-69

(1,670)
Income taxes Equipment Total disbursements Excess of cash available over needs Financing: Borrowings Repayments
---(6,500) $(15,777) $ 23 1,000 ---709-70

Moose Patties Inc. must borrow $1,000 to meet their minimum ending cash balance
Cash Budget concluded

Quarter 1 Financing: Borrowings Repayments Interest Total financing Ending cash balance 2 3 4 Year
1,000 ------$1,000 $1,023
719-71
$ 5,200 $ 1,023 10,600 $15,800

1st quarters ending cash balance is the 2nd quarters beginning balance
$ (4,594) (1,272) (1,741) (1,670)

729-72
$ 5,200 $ 1,023 10,600 11,850
$15,800 $12,873
$ (4,594) $ (5,039) (1,272) (1,512) (1,741) (1,861) (1,670) (1,790)

739-73

(1,670)
(1,790) ------Excess cash is used to repay $1,000 borrowed at end of Q1
---(6,500)
$(15,777) $(10,202) $ 23 $ 2,671 1,000 ------(1,000)
749-74

1,000 ------$1,000 $1,023
---(1,000) (60) (1,060) $1,611
759-75
$ 5,200 $ 1,023 $ 1,611 10,600 11,850 14,775
$15,800 $12,873 $16,386
$ (4,594) $ (5,039) $(6,219) (1,272) (1,512) (1,920) (1,741) (1,861) (2,065) (1,670) (1,790) (2,420)
769-76

(1,670)
(1,790) -------
(2,420) ------There is enough cash, so none is borrowed
---(6,500)
$(15,777) $(10,202) $(12,624) $ 23 $ 2,671 $ 3,762 1,000 ------(1,000) -------
779-77

1,000 ------$1,000 $1,023
---(1,000) (60) (1,060) $1,611
------------$3,762
789-78
$ 5,200 $ 1,023 $ 1,611 $ 3,762 10,600 11,850 14,775 19,625
$15,800 $12,873 $16,386 $23,387
$ (4,594) $ (5,039) $(6,219) $(6,819) (1,272) (1,512) (1,920) (2,160) (1,741) (1,861) (2,065) (2,185) (1,670) (1,790) (2,420) (2,170)
799-79

(1,670)
(1,790) -------
(2,420) -------
(2,170) (3,469) ----
---(6,500)
$(15,777) $(10,202) $(12,624) $(16,803) $ 23 $ 2,671 $ 3,762 $ 6,584 1,000 ------(1,000) ------------809-80

1,000 ------$1,000 $1,023
---(1,000) (60) (1,060) $1,611
------------$3,762
------------$6,584
819-81
$ 5,200 $ 1,023 $ 1,611 $ 3,762 10,600 11,850 14,775 19,625
$ 5,200
The year began with $5,200 in cash
$15,800 $12,873 $16,386 $23,387
$ (4,594) $ (5,039) $(6,219) $(6,819) (1,272) (1,512) (1,920) (2,160) (1,741) (1,861) (2,065) (2,185) (1,670) (1,790) (2,420) (2,170)
829-82
$ 5,200 $ 1,023 $ 1,611 $ 3,762 10,600 11,850 14,775 19,625
$ 5,200 56,850
$15,800 $12,873 $16,386 $23,387 $62,050
$ (4,594) $ (5,039) $(6,219) $(6,819) $(22,671) (1,272) (1,512) (1,920) (2,160) (6,864) (7,852) (1,741) (1,861) (2,065) (2,185) (1,670) (1,790) (2,420) (2,170) (8,050)
839-83

(1,670)
(1,790) -------
(2,420) -------
(2,170) (3,469) ----
(8,050) (3,469)
(6,500) (15,777) (10,202) (12,624) (16,803) (55,406) $ 23 $ 2,671 $ 3,762 $ 6,584 $ 6,644 1,000 ------(1,000) ------------1,000 (1,000)
---(6,500)
During the year $1,000 is borrowed and repaid COPYRIGHT 2012 Nelson Education Ltd.

1,000 ------$1,000 $1,023
---(1,000) (60) (1,060) $1,611
------------$3,762
------------$6,584
1,000 (1,000) (60) (60) $6,584
859-85
Budgeted Balance Sheet

Information: Last years balance sheet:
Moose Patties Inc. Balance Sheet December 31, 2010
Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets
Assets $ 5,200 1,350 252 1,251 $ 8,053

869-86
Example
Property, plant and equipment (PP&E): Land Building and equipment Accumulated depreciation Total PP&E Total assets Liabilities and Owners Equity: Current liabilities: Accounts payable Owners equity: Retained earnings Total owners equity Total liabilities and owners equity
$ 1,100 30,000 (5,000)
Using this balance sheet and the budgets, we can prepare the December 31, 2011 balance sheet 26,100 $34,153
$1,000 33,153 33,153 $34,153

879-87
Moose Patties Inc. Balance Sheet December 31, 2011

Assets Current assets: Cash Accounts receivable Raw materials inventory Finished goods inventory Total current assets Property, plant and equipment (PP&E): Land Building and equipment Accumulated depreciation Total PP&E
$ 6,584 1,500 424 1,390
Ending cash balance from cash budget
$ 9,898 2010 balance $5,000 + $2,760 2011 depreciation
$ 1,100 36,500 (7,760)
29,840
889-88
Balance Sheet continued

Total PP&E Total assets Liabilities and Owners Equity: Current liabilities: Accounts payable Owners equity: Retained earnings 29,840 $39,738
$1,381 38,357
2010 balance $33,153 + $5,204 2011s projected net income
899-89
Balance Sheet continued

Total PP&E Total assets Liabilities and Owners Equity: Current liabilities: Accounts payable Owners equity: Retained earnings Total liabilities and owners equity 29,840 $39,738
$1,381 38,557 $39,738
909-90

313738

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Chapter Nine Profit Planning

COPYRIGHT 2012 Nelson Education Ltd.

COPYRIGHT 2012 Nelson Education Ltd.

Planning and Control are tied together

Budgeting and Planning and Control

COPYRIGHT 2012 Nelson Education Ltd.

Before a budget is prepared, a strategic plan should be developed

Identifies strategies for future activities and operations

COPYRIGHT 2012 Nelson Education Ltd.

Can be broken down into quarterly and monthly budgets

Comprehensive financial plan for the organization as a whole

COPYRIGHT 2012 Nelson Education Ltd.

January December . February January 2011 2012 2011 2011

A moving 12-month budget

COPYRIGHT 2012 Nelson Education Ltd.

Budget Committee & Director Roles

Major Components of the Master Budget

COPYRIGHT 2012 Nelson Education Ltd.

Example: Cornerstone 9-1

How to Prepare a Sales Budget

COPYRIGHT 2012 Nelson Education Ltd.

Projection approved by budget committee

describes expected sales in units and dollars

Sales Budget Preparation Steps

Develop a sales forecast

Salespeople submit sales projections

Formula: Units in Units in ending - beginning inventory inventory

Example: Cornerstone 9-2

Beginning inventory is 180 t-shirts Ending inventory:

20% of second quarters sales 20% 1,200 units

20% of third quarters sales 20% 1,500 units

1st quarters ending inventory is 2nd quarters beginning inventory

Beginning inventory as of January, 1, 2011

1,240 needed, we already have 180, so we need to produce 1,060 units

All four quarters production added together

COPYRIGHT 2012 Nelson Education Ltd.

Direct Materials Purchases Budget

Example: Cornerstone 9-3

Production budget Units to be produced:

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1,060 1 1,060 126

10% of next quarters production needs From production budget

Each unit required 1 plain t-shirt

1,060 1 1,060 126

1,260 1 1,260 160

1,600 1 1,600 180

1,800 1 1,800 106

5,720 1 5,720 106

10% of the next years 1st quarter production needs

1,060 1 1,060 126 1,186 (58)

1,260 1 1,260 160 1,420 (126)

1,600 1 1,600 180 1,780

1,800 1 1,800 106 1,906

5,720 1 5,720 106 5,826

1st quarters ending inventory is the 2nd quarters beginning inventory

1,060 1 1,060 126 1,186 (58)

1,260 1 1,260 160 1,420 (126)

1,600 1 1,600 180 1,780 (160)

1,800 1 1,800 106 1,906 (180)

5,720 1 5,720 106 5,826 (58)

Beginning of the year inventory

1,060 1 1,060 126 1,186 (58) 1,128 $3