Budgeting and Financial Planning Chapter 15

Why budgets?  Planning  Controlling  Coordination  Allocation of resources  Evaluation

Master budget  Series of individual budgets and schedules representing the plan for the organization  Begins with sales forecast  Ends with pro forma financial statements

Sales budget  Revenue and “unit” forecast  Based on various pieces of info  Past sales, trends, pricing policy, competitors’ actions, etc.

Operational budgets  For various operational areas  Tailored to the type of organization  Revenue-producing resource needs  Production or acquisition  Selling and administrative  Cash receipts and disbursements  Capital budget

Production budget  Based on sales forecast, desired inventory levels  Sales + end. invty. – beg. Invty.

Materials budget  Based on production needs, desired material inventory levels

Labor budget  Based on production needs

Overhead budget  Based on production needs  Not all costs will be proportional to units produced  Batch-level  Product-level  Facility-level

SG&A budget  May be unit-, batch-, product-, customer- or facility-level  Selling expenses based on units sold  Not units produced

Cash budget  All cash inflows and outflows  Possible timing differences between revenues and expenses and the resulting cash flows  Credit sales  Schedule of cash receipts  Credit purchases  Schedule of cash disbursements

Budgeted cost of goods manufactured  Determines the absorption cost per unit manufactured

Pro forma financial statements  Income statement  Revenue from sales budget  Cost of goods sold from unit cost calculation  SG&A expenses from SG&A budget  Other expenses from cash budget  Interest expense  Income tax expense

Pro forma financial statements  Balance sheet  Some items direct from budgets  Cash  Accounts receivable  Materials inventory  Finished goods inventory  Accounts payable  Some are “rolled forward” from previous year balances

Pro forma financial statements  Statement of retained earnings  Previous year balance  Add pro forma income  Subtract dividends (cash budget)  Cash flow statement  Direct from cash budget

Budget considerations  Different budgets for different uses  Planning  Master budget  Static budget  Controlling  Flexible budget  Includes different levels of activity as benchmarks  Evaluating  Flexible budget  Budget at actual level achieved

Budget considerations  Behavioral and ethical issues  Based on estimates  May be intentionally misstated to make actual results look better than planned  Misallocation of resources  Breakdown of coordination  Participative or imposed?  Who knows best?