9 Profit Planning Chapter Budget Sales$ 1,600 CGS960 Selling expenses170 Net Income$ 30 Gross margin$ 640 Admin. expenses225 Projected revenues and expenses for a plan of action Marketing Department Production Department

Cash Budget 1 st Qtr Beg. cash balance$ 95 Cash receipts312 Cash disbursements $ (108) $ 407 Asset purchases175 … Expenses340 End. cash balance$ 92 Short-term loan200 Quarter-by-quarter projection of cash flows Based on budgeted income statement Financing plan

Preparing the Master Budget 1.Sales budget 2.Production budget 3.Direct materials budget  DM used & DM purchased 4.Direct labor budget 5.Manufacturing overhead budget 6.Standard cost per unit 7.Selling and administrative expense budget 8.Budgeted income statement

 Planning  Communication and coordination  between production and marketing  between finance and operations  Performance evaluation  budget = standard against which performance can be judged  Control  comparison between budget and actual highlights potential problems Advantages of Budgeting

 Responsibility accounting  Should managers be evaluated based on their budget performance?  Should incentives be tied to the budget?  Who should participate in the budgeting process?  better information  commitment to the budget plan  budgetary slack  How achievable should the budget be? Budgeting Issues

YTD Actual Sales$ 822 CGS526 Gross margin$ 296 Selling expenses104 Net income$ 85 Admin. expenses YTD Budget $ $ $ 123 What might this comparison suggest?