planning and budgeting chapter 13 copyright © 2011 by the mcgraw-hill companies, inc. all rights...
TRANSCRIPT
Planning and Budgeting
Chapter 13
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Budgets
• A budget is a financial plan of the resources neededto carry out activities and meet financial goals.
• Budgets play an important role in managing cash flows.
• Critical success factors are the strengths of acompany that enable it to outperform competitors.
LO1
L.O. 1 Understand the role of budgets in overall organization plans.
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Human Element in Budgeting
L.O. 2 Understand the importance of people in the budgeting process.
Organizationgoals
Individualgoals
Goal congruence
• Participative budgeting:Use of input from lower- and middle-managementemployees; also called grass roots budgeting
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Sales Forecasting
L.O. 3 Estimate sales.
• Forecasting sales is the most difficult aspect of budgeting.
Sales staff
Market researchers
Delphi technique
Trend analysis
Econometric models
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Forecasting ProductionL.O. 4 Develop production and cost budgets.
• A production budget is a plan of resources neededto meet current sales demand and ensure thatinventory levels are sufficient for future sales.
Beginning balanceBB
Transfers inTI
Transfers outTO
+ – = Ending balance
Units in beginninginventory
Requiredproduction
Budgetedsales
+ – =Units in ending
inventory
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Cash BudgetL.O. 5 Estimate cash flows.
• The cash budget is a statement of cash on hand atthe start of the budget period, expected cash receipts,expected cash disbursements, and the resulting cashbalance at the end of the budget period.
• Cash receipts:– Collection of accounts receivable– Cash sales– Sales of assets– Borrowing– Issuing stock– Other
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Cash BudgetLO5
• Cash disbursements:– Materials purchases– Manufacturing costs– Operating activities– Debt repayment– Acquisition of new assets– Income taxes– Dividends– Other activities
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Cash Collections ExampleLO5
Santiago PantsMonthly Collection Experience
Sales on Credit
Cash collected from current month's sales 20%Cash collected from last month's sales 75Cash discounts taken (percentage of gross sales) 2Written off as bad debt 3Total disposition of credit sales in current month 100%
Expected Sales for Three Months
January sales $500,000February sales $450,000
March sales $600,000
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Cash Collections ExampleLO5
Santiago PantsMultiperiod Schedule of Cash Collections
For the Quarter Ended March 31
Beginning accounts receivable,January 1, $540,000
January sales, $500,000a
February sales, $450,000b
March sales, $600,000c
Total cash collections
$540,000 100,000
$640,000
$375,000 90,000
$465,000
$337,500 120,000$457,500
January
$ 540,000 475,000 427,500 120,000$1,562,500
Month
February MarchTotal forQuarter
a 20% collected in January, 75% collected in February, and 5% not collectedb 20% collected in February, 75% collected in March, and 5% not collectedc 20% collected in March, 75% collected in April, and 5% not collected
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Cash Disbursements ExampleLO5
Santiago PantsMonthly Disbursements for Purchases Experience
Cash disbursement for current month's purchases 50%Cash disbursement for prior month's purchases 48Cash discounts taken 2Total cash disbursement for purchases 100%
Expected Purchases for Three Months
January sales $120,000February sales $200,000
March sales $250,000
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Cash Disbursements ExampleLO5
Santiago PantsMultiperiod Schedule of Cash Disbursements
For the Quarter Ended March 31
Beginning accounts payable,January 1, $256,000
January purchases, $120,000a
February purchases, $200,000b
March purchases, $250,000c
Additional cash paymentsTotal cash disbursements
$256,000 60,000
250,000$566,000
$ 57,600 100,000
250,000$407,600
$ 96,000 125,000 250,000$471,000
January
$ 256,000 117,600 196,000 125,000 750,000$1,444,600
Month
February MarchTotal forQuarter
a 50% paid in January, 48% paid in February, and 2% discounts takenb 50% paid in February, 48% paid in March, and 2% discounts takenc 50% paid in March, 48% paid in April, and 2% discounts taken
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Budgeted Balance Sheet ExampleL.O. 6 Develop budgeted financial statements.
AssetsCurrent assets:
CashAccounts receivableInventoriesOther current assets
Total current assetsLong-term assets:
Property, plant, equipmentLess: Accumulated depreciation
Total assets
Budget Year
$ 830 540 155 161$1,686
1,866 (1,246)$2,306
$ 6,940 7,200 4,265 -0- $18,405
1,470 (220)$19,651
$ 7,399 6,840 3,995 100$18,334
-0- -0- $18,334
$ 371 900 425 61$1,757
3,336 (1,470)$3,623
BalanceJan 1 Additions Subtractions
BalanceDec 31
Santiago PantsBudget Balance Sheet
For the Budget Year Ended December 31 ($000)
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Budgeted Balance Sheet ExampleLO6
Liabilities and Shareholders EquityCurrent liabilities:
Accounts payableTaxes payableCurrent portion of long-term debt
Total current liabilitiesLong-term liabilitiesTotal liabilitiesShareholders' equity
Common stockRetained earnings
Total shareholdersTotal liabilities and shareholders equity
Budget Year
$ 256 187 23$ 466 258$ 724
$ 437 1,145$1,582$2,306
$1,715 550 23$2,288 -0- $2,288
$ -0- 1,149$1,149$3,437
$1,694 350 23$2,067 23$2,090
$ -0- 30 30$2,120
$ 277 387 23$ 687 235$ 922
$ 437 2,264$2,701$3,623
BalanceJan 1 Additions Subtractions
BalanceDec 31
Santiago PantsBudget Balance Sheet
For the Budget Year Ended December 31 ($000)
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Budgeting in Service Organizations
Marketing andadministrativecost budget
Sales forecast
Budgeted costof services
Budgetedincome
statement
Cash budgetBudgeted
balance sheets
L.O. 7 Explain budgeting in merchandising and service organizations.
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Ethical Problems in BudgetingL.O. 8 Explain why ethical issues arise in budgeting.
• Budgets can create serious ethical issuesfor many people.
• The company must recognize the trade-offbetween encouraging unbiased reporting bymanagers and the use of budget informationin performance evaluation and rewards.
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Budgeting Under UncertaintyL.O. 9 Explain how to use sensitivity analysis
to budget under uncertainty.
• Budgets allow management to explore manyalternatives.
• Spreadsheets are helpful in preparing budgetsand quantifying “what-if” conditions.
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