Profit Planning

UAA ACCT 202

Principles of Managerial Accounting
Dr. Fred Barbee

The Work of Management

Planning
Planning

Evaluating
Evaluating

Decision
Decision
Making
Making

Controlling
Controlling

Organizing
Organizing
&
& Directing
Directing

The Work of Management

Initiate
LT
&
Initiate
LT
&
Planning
Planning
ST
ST Plans
Plans
Evaluate
Evaluate
Performanc
Evaluating
Performanc
Evaluating
ee

Decision
Decision
Making
Making
Measure
Measure
Controlling
Performanc
Controlling
Performanc
ee

Implement
Organizing
Organizing
Implement
&
Plans
& Directing
Directing
Plans

The Work of Management

Initiate
LT
&
Initiate
LT
&
Planning
Planning
ST
ST Plans
Plans

Planning -- involves
Evaluate
Evaluate
developing
Decision
Decision
Performanc
Evaluating
Performanc
Evaluating
Making
objectives
and
Making
ee
preparing various
budgets to achieve
Measure
Measure
these objectives.
Controlling
Performanc
Controlling
Performanc
ee

Plannin
g
Implement
Organizing
Organizing
Implement
&
Plans
& Directing
Directing
Plans

The Work of Management

Evaluate
Evaluate
Performanc
Evaluating
Performanc
Evaluating
ee

Control

Control involves the

Initiate
LT
&
Initiate
LT
&
steps
taken
by
Planning
Planning
ST
ST Plans
Plans
management
that
attempt to ensure
the
objectives
are
Organizing
Implement
Decision
Decision
Organizing
Implement
Making
&
Plans
Making
& Directing
Directing
Plans
attained.
Measure
Measure
Controlling
Performanc
Controlling
Performanc
ee

The Work of Management

Initiate
Initiate LT
LT &
&
ST
ST Plans
Plans
Evaluate
Evaluate
Performanc
Performanc
Budgets
ee

Decision
Decision
Making
Making

Measure
Measure
Performanc
Performanc
ee

Implement
Implement
Plans
Plans

The Work of Management

Through
Planning
thePlanning
budget
Evaluate
Evaluate
Performanc
Performanc
ee

Decision
Decision
Making
Making

Measure
Measure
Performanc
Performanc
ee

Implement
Implement
Plans
Plans

The Work of Management

Planning
Planning

Evaluate
Evaluate
Performanc
Performanc
ee

Decision
Decision
Making
Making

Measure
Measure
Performanc
Performanc
ee

According
Implement
Implement
to
the Budget
Plans
Plans

The Work of Management

Initiate
LT
&
Initiate
LT
&
Planning
Planning
ST
ST Plans
Plans
Evaluate
Evaluate
Performanc
Evaluating
Performanc
Evaluating
ee

Decision
Decision
Making
Making
Measure
Measure
Controlling
Performanc
Controlling
Performanc
ee

Implement
Organizing
Organizing
Implement
&
Plans
& Directing
Directing
Plans

The Basic Framework

of Budgeting

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).

Now
Now
11 Year
Year
55 Years
Years

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.

Short-Run Vs. Long-Run

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

Budgets . . .

Imposed
Vs.
Participatory

Imposed Budgets Versus

Participatory Budgets
Imposed
Budgets

Participatory
Budgets
Continuum

Participatory Budgets
Right to comment
before implementation
Continuum

Ultimate right
to set budgets

Imposed Budgets Versus

Participatory Budgets
Imposed
Budgets

Best Time to Use . . .

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

Advantages . . .
Requires less time.
Utilize top managements knowledge
of overall resource availability.
Increase probability that the firms
strategic plans are incorporated.

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

Imposed Budgets Versus

Participatory Budgets
Participatory
Budgets

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.

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

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

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

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

Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Coordinate
activities

Think about and

plan for the future

Advantages

Uncover potential
bottlenecks

Means of allocating
resources

The

Master Budget

The Master Budget

Sales
Budget

Sales
Forecast

EI Budget

Production
Budget

S&A Exp
Budget

DM Budget

DL Budget

Overhead
Budget

Capital
Budget

Cash Budget

Pro Forma
Inc. Stmt

Pro Forma
Bal. Sht

Pro Forma
SCF

The

Master Budget

The Text Example

Hampton Freeze

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 companys business is
highly seasonal, with most of the sales
occurring in spring and summer.

In 2002, the companys 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.

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.

1
6

8
9

10

The Sales

Budget

A budget showing the

number of units, sales
price and total sales for
each quarter (or
month).

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.

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.

Finished
Units
to be
Produce
d

Expecte
d Sales
in Units

Desired
EI of
Finished
Units

BI of
Finished
Units

 Hampton Freeze would like the ending

inventory of finished goods to be equal
to 20% of next quarters sales.
The company has 2,000 units of
beginning inventory.

2.Equals expected
sales in units

3.Plus Desired EI
of finished units.

4.Less BI of
finished units.

1.Finished units to
be produced

Desired Ending
Inventory of
Finished Goods
equals 20% of next
quarters sales.

Ending Inventory for one quarter

equals Beginning Inventory for next
quarter.

Notice how inventories are

accounted for on the spreadsheet.

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.

Required
Purchases
of Raw
Materials

Amount
Desired
EI of
Required
+
Raw
for
Material
Productio
n
s

BI of
Raw
Material
s

 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.

 To prepare the Schedule of

Expected Cash Disbursements for
Materials, Hamptons 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.

2.Equals
amount
required for
production.

3.Plus Desired EI
of raw materials.

4.Less BI of raw
materials.
1.Required
purchases of Direct
Materials

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.

 Each case produced requires 0.4 direct

labor hour.
Each hour costs $15

The Direct Labor Budget

The MOH

Budget

A budget showing all

costs of production other
than direct materials and
direct labor.

The MOH Budget

The Ending Finished

Goods Inventory
Budget

A budget showing the

carrying cost of the
unsold units remaining in
inventory.

The Ending FG Inventory Budget

The Selling and

Administrative
Expense Budget

A budget showing
expenses for areas other
than manufacturing.

The S&A Expense Budget

The Cash

Budget

The Budgeted
(Pro-Forma)
Income

Statement

The Budgeted
Balance Sheet