Profit Planning Budgeting Plan to follow Communication Coordination Performance standards Determine problem areas

Profit Planning Components of the Master Budget Sales budget Most important budget…drives all other budgets

Profit Planning Sales forecasting Same period last year Adjustments State of economy Pricing Advertising Other methods Moving average Olympic average

Profit Planning Sales budget determines production budget Units sold + ending inventory – beginning inventory Production budget determines materials purchases budget Units sold + ending inventory – beginning inventory Production budget determines labor budget Not much inventory here… Production budget determines overhead budget Variable and fixed overhead Sales budget determines ending inventory budget Units x Cost Per Unit Sales budget determines COGS budget Units Sold x Cost Per Unit

Profit Planning Cash budget Beginning cash + Cash Sales + Collection of A/R + Borrowed Funds (Operating Line) - Cash Expenses - Payment of A/P = Ending cash

Profit Planning Performance evaluation If you don’t evaluate, why plan? Increasing effectiveness of budgets Participative budgeting Incentives Sales Expenses What if expenses have a favorable variance? Zero based budgeting