1. Profit Planning UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

2. Planning Decision Making Decision Making Organizing & Directing Controlling Evaluating The Work of Management

3. Planning Decision Making Decision Making Organizing & Directing Controlling Evaluating The Work of Management Initiate LT & ST Plans Implement Plans Measure Performance Evaluate Performance Decision Making Decision Making

4. Planning Decision Making Decision Making Organizing & Directing Controlling Evaluating The Work of Management Initiate LT & ST Plans Implement Plans Measure Performance Evaluate Performance Decision Making Decision Making Planning Planning -- involves developing objectives and preparing various budgets to achieve these objectives.

5. Planning Decision Making Decision Making Organizing & Directing Controlling Evaluating The Work of Management Initiate LT & ST Plans Implement Plans Measure Performance Evaluate Performance Decision Making Decision Making Control Control involves the steps taken by management that attempt to ensure the objectives are attained.

6. Decision Making Decision Making Measure Performance Implement Plans Initiate LT & ST Plans Evaluate Performance The Work of Management Budgets Initiate LT & ST Plans

7. Evaluate Performance Decision Making Decision Making Planning Decision Making Decision Making Evaluate Performance Measure Performance The Work of Management Implement Plans “Through” the budget

8. Evaluate Performance Decision Making Decision Making Planning Decision Making Decision Making Evaluate Performance Measure Performance The Work of Management Implement Plans Measure Performance “According” to the Budget

9. Planning Decision Making Decision Making Organizing & Directing Controlling Evaluating The Work of Management Initiate LT & ST Plans Implement Plans Measure Performance Evaluate Performance Decision Making Decision Making

10. The Basic Framework of Budgeting

11. A Budget is... A quantitative expression of a plan of action. A detailed plan for acquiring and using financial and other resources over a specified time period (text).

12. Now 5 Years 1 Year

13. Short-Run Vs. Long-Run Budgets Strategic Planning Selecting overall objectives. Choosing what markets to be in. Selecting what products to produce. Determining the price/quality mix. Deciding which technologies to use.

14. Strategic Planning Long-run Budgets (more than one year) Forecasts of large asset acquisitions. Financing plans. Research and development plans. Short-Run Vs. Long-Run Budgets

15. Strategic Planning Long-run Budgets Short-run Budgets (1 year or less) Quantities to produce. Quantities to sell. Supplies acquisitions. Short-Run Vs. Long-Run Budgets

16. Imposed Participatory Vs. Budgets...

17. Imposed Budgets Versus Participatory Budgets Imposed Budgets Participatory Budgets Continuum

18. Participatory Budgets Right to comment before implementation Ultimate right to set budgets Continuum

19. Imposed Budgets Versus Participatory Budgets Imposed Budgets

20. In start-up organizations In extremely small businesses In times of economic crises When operating managers lack budgetary skills or perspective. Best Time to Use...

21. Requires less time. Utilize top management’s knowledge of overall resource availability. Increase probability that the firm’s strategic plans are incorporated. Advantages...

22. Disadvantages... Reduce feeling of teamwork. Dissatisfaction and low morale. Limited acceptance of stated goals and objectives. May stifle initiative of lower level managers.

23. Imposed Budgets Versus Participatory Budgets

24. Best Time to Use... In well-established organizations. In extremely large businesses. In times of economic affluence. When operating managers have strong budgetary skills and perspectives.

25. Advantages... Obtain information from those persons most familiar with the needs and constraints of the organizational units. Leads to better morale and higher motivation.

26. Advantages... Integrates knowledge that is diffused among various levels of management. Provides a means to develop fiscal responsibility and budgetary skills of employees.

27. Advantages... Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management. Are generally more realistic.

28. Disadvantages... Require significantly more time. May motivate managers to introduce “slack” into the budget. May support “empire building” by subordinates.

29. Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinate activities Communicating plans Think about and plan for the future Means of allocating resources

30. The Master Budget

32. Sales Budget Production Budget DL Budget Cash Budget Pro Forma Bal. Sht EI Budget DM Budget Pro Forma Inc. Stmt Overhead Budget Sales Forecast Capital Budget Pro Forma SCF S&A Exp Budget

33. The Master Budget The Text Example Hampton Freeze

34. Tom Willis is the majority stockholder and chief executive officer of Hampton Freeze, Inc., a company he started in 2001. The company makes premium popsicles using only natural ingredients and featuring exotic flavors such as tangy tangerine and minty mango. The company’s business is highly seasonal, with most of the sales occurring in spring and summer.

35. In 2002, the company’s second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2002 turned out to be overall a very successful year in terms of both cash flow and net income.

36. With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2003. In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget.

37. 1 2 345 6 7 8 9 10

38. The Sales Budget A budget showing the number of units, sales price and total sales for each quarter (or month).

39. Research into the history of cash collections at Hampton Freeze indicated that –70% of sales are collected in the quarter in which the sale is made and –the remaining 30% are collected in the following quarter.

41. The Production Budget A budget showing the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.

42. Finished Units to be Produced Expected Sales in Units Desired EI of Finished Units BI of Finished Units =+-

43. Hampton Freeze would like the ending inventory of finished goods to be equal to 20% of next quarter’s sales. The company has 2,000 units of beginning inventory.

44. 1.Finished units to be produced 2.Equals expected sales in units 3.Plus Desired EI of finished units. 4.Less BI of finished units.

45. Desired Ending Inventory of Finished Goods equals 20% of next quarter’s sales. Ending Inventory for one quarter equals Beginning Inventory for next quarter.

46. Notice how inventories are accounted for on the spreadsheet.

47. The Direct Materials Purchases Budget A budget showing the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

48. Required Purchases of Raw Materials Amount Required for Production Desired EI of Raw Materials BI of Raw Materials =+-

49. Hampton Freeze has established a policy of maintaining RM equal to 10% of the amount required for production in the subsequent quarter. In the first quarter the company plans on producing 14,000 units (from the production budget) Each unit requires parts costing $0.20.

50. To prepare the Schedule of Expected Cash Disbursements for Materials, Hampton’s policy is to –Pay for 50% of purchases in the quarter in which the purchase is made, and –Pay the remaining 50% in the following quarter.

51. 1.Required purchases of Direct Materials 2.Equals amount required for production. 3.Plus Desired EI of raw materials. 4.Less BI of raw materials.

53. The Direct Labor Budget A budget showing the direct labor hours (and total amount) needed to produce the number of units specified in the production budget.

54. Each case produced requires 0.4 direct labor hour. Each hour costs $15

55. The Direct Labor Budget

56. The MOH Budget A budget showing all costs of production other than direct materials and direct labor.

57. The MOH Budget

58. The Ending Finished Goods Inventory Budget A budget showing the carrying cost of the unsold units remaining in inventory.

59. The Ending FG Inventory Budget

60. The Selling and Administrative Expense Budget A budget showing expenses for areas other than manufacturing.

61. The S&A Expense Budget

62. The Cash Budget

64. The Budgeted (Pro-Forma) Income Statement

66. The Budgeted Balance Sheet