Operational Budgeting Operational Budgeting Exercises ACTG 321 Agenda for Lecture 15

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

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

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.

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

Pro Forma Income Statements JAN FEB MAR Sales $400 $500 $800 Cost of Goods Sold Gross Profit & Contribution Margin Fixed Costs 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%).

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

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.

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

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

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

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance 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 Total available Cash disbursements Indicated balance 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% From current mo., 70% 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 Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134

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

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

Cash Disbursements Budget for Purchases JAN FEB MAR From prior mo., 40% $195 $192 $168 From current mo., 60% 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 JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv Total requirements Beginning inventory Purchases $480 $420 $360 60% of $480 is $288 40% of $480 is $192

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

Cash Budget JAN FEB MAR Beginning Balance $ 80 $ 52 $ 50 Cash receipts Total available Cash disbursements Indicated balance Borrow 107 (Repay) 107 Ending balance $52 $50 $134 The Cash Budget also indicates short-term financing needs.

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

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 Total available Cash disbursements Indicated balance 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% From current mo., 70% Total Receipts $590 $470 $710 Note: $800 - $560 = $240.

Purchases Budget JAN FEB MAR Cost of Goods Sold $240 $300 $480 Budgeted ending inv Total requirements Beginning inventory 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.

Operational Budgeting Operational Budgeting Exercises ACTG 321 Agenda for Lecture 15

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?

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?

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

The Cyber-Dog Corporation makes a single product that requires 39 days to produce. Raw materials enter the production process, becoming part of WIP, on the first day of the production cycle. Cyber-Dog always starts production on the 26th day of the month, never on any other day, so Cyber-Dog finishes each batch on the 4th day of the second month after production began (you may assume that each month has exactly 30 days). Each batch can include as many units as the company wants to manufacture that month.

Cyber-Dog expects sales of 1,000 units in January, and expects sales to increase by 100 units each month for the indefinite future (i.e., 1,100 units in February, 1,200 units in March, etc.). Cyber-Dog wants 60% of each month’s sales on hand as finished goods at the beginning of the month. Each unit requires 7 lbs of raw materials. Cyber- Dog wants 130% of each month’s raw materials requirements on hand at the beginning of the month. Required: Calculate the pounds of raw materials to be put into production in March.

Units to be completed May: (0.4 x 1,400) + (0.6 x 1,500) = = 1,460 These units must be started in March. 1,460 finished goods units x 7 lbs per unit = 10,220 lbs.