Lecture 21 Operational Budgeting Operational Budgeting Exercises

Lecture 21 Operational Budgeting Operational Budgeting Exercises

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Willamette Widget Corp. Sales Forecasts JAN FEB MAR Sales $400 $500 $800 This information comes from the sales force, merchandisers, marketing personnel, and possibly the finance & planning group.

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Pro Forma Income Statements JAN FEB MAR Sales $400 $500 $800 Cost of Goods Sold 240 300 480 Gross Profit & Contribution Margin 160 200 320 Fixed Costs 150 150 150 Income $ 10 $ 50 $170 The Sales line comes from the previous schedule. The Cost of Goods Sold line and Fixed Cost line come from assumptions about cost behavior (contribution margin is 40%).

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Beginning Balance Sheet Dec 31 Assets Cash $ 80 Accounts Receivable 310 Inventory 540 Fixed Assets, net 1580 Total $ 2510 Liabilities Accounts Payable $ 195 Stockholders’ Equity 2315 Total $ 2510 This is all given.

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 The COGS line comes from the pro forma income statement. Budgeted ending inventory is a target. Beginning inventory is given.

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The beginning balance for January comes from the beginning balance sheet.

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

Cash Receipts Budget JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 Total Receipts $590 $470 $710 Note: 70% of sales are collected in the month sold, and the remaining 30% are collected in the subsequent month.

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

Cash Disbursements Budget JAN FEB MAR For merchandise $483 $444 $384 Other 135 135 135 Total $618 $579 $519

Cash Disbursements Budget for Purchases JAN FEB MAR From prior mo., 40% $195 $192 $168 From current mo., 60% 288 252 216 Total $483 $444 $384 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month.

Purchases Budget 60% of $480 is $288 40% of $480 is $192 JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 60% of $480 is $288 40% of $480 is $192

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Cash Budget The Cash Budget also indicates short-term financing needs. JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The Cash Budget also indicates short-term financing needs.

+ + + + Start here Assumptions about cost behavior Sales Forecasts Assumptions about inventory levels, collections of receiv-ables, & disburse-ments pro forma income statement + + Purchases and Production Long-term financing & capital spending Beg. Balance Sheet Cash Bud-get & S-T Financing pro forma balance sheet

Pro Forma Balance Sheet March 31 Assets Cash $ 134 Accounts Receivable 240 Inventory 780 Fixed Assets, net 1535 Total $ 2689 Liabilities Accounts Payable $ 144 Stockholders’ Equity 2545 Total $ 2689 Cash comes from the Cash Budget. A/R is 30% of March sales. Inventory is from Purchases Budget. A/P is 40% of March purchases.

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts 590 470 710 Total available 670 522 760 Cash disbursements 618 579 519 Indicated balance 52 -57 241 Borrow 107 (Repay) 107 Ending balance $52 $50 $134

Cash Receipts Budget Note: $800 - $560 = $240. JAN FEB MAR Sales for the month $400 $500 $800 From prior mo., 30% 310 120 150 From current mo., 70% 280 350 560 Total Receipts $590 $470 $710 Note: $800 - $560 = $240.

Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv. 780 900 780 Total requirements 1020 1200 1260 Beginning inventory 540 780 900 Purchases $480 $420 $360 Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month. So at the end of March, Payables are 40% of $360.

Lecture 21 Operational Budgeting Operational Budgeting Exercises

1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31?

1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31? 70% of $145,000 = $101,500

2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May?

2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May? 70% of $240,000 = $168,000

3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March?

3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March? In March Costco would purchase 60% of March cost-of-sales and 40% of April cost-of-sales. (60% of $180,000 x .7)+(40% of $200,000 x .7) = $75,600 + $56,000 = $131,600

4. Price Club expects sales as follows: January $100,000 February $150,000 March $180,000 April $200,000 Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March?

4. Price Club expects sales as follows: January $100,000 February $150,000 March $180,000 April $200,000 Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March? 20% + (60% of 80%) = 68% (68% of $180,000) + (40% of 80% of $150,000) = $122,400 + $48,000 = $170,400