PLANNING AND
FORECASTING
WHAT IS THE FUTURE FOR C&C?
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5
Cash flow has been a problem. Is $7,000 in cash
enough to operate on?
C&C has borrowed money to finance operations
An increase in award jacket sales may be the
answer to more cash
C&C’s president, George Douglas, wants to
decrease inventory levels, but he is concerned
that customer satisfaction will be affected
© Tomwang112 / iStockphoto
PLANNING AND THE
BUDGETING PROCESS
Unit 5.1 Unit 5.2 Unit 5.3 Unit 5.4 Unit 5.5
51
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WHAT IS A BUDGET?
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An operating plan expressed in dollars
Shows how resources will be committed during the
coming period
Helps plan for the future
Communicates corporate direction and
coordinates corporate efforts
THE ROLES OF BUDGETING
5
BUDGETING INFORMATION FLOWS
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TOP-DOWN BUDGETS: ADVANTAGES
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Increase probability that the organization’s
strategic plans will be incorporated in planned
activities
Enhance coordination among divisional plans and
objectives
Use top management’s knowledge of overall
resource availability
Reduce the time frame for the budgeting process
TOP-DOWN BUDGETS: DISADVANTAGES
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May result in dissatisfaction, defensiveness, and
low morale among individuals who must work
under the budget
Reduces the feeling of teamwork
May limit the acceptance of the stated goals and
objectives
May create a view of the budget as a punitive
device
BOTTOM-UP BUDGETS: ADVANTAGES
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Gathers information from persons most familiar
with the needs and constraints of organizational
units
Allow organizational units to coordinate with one
another
Lead to better morale and higher motivation
Develop a high degree of acceptance of and
commitment to organizational goals and objectives
by operating management
BOTTOM-UP BUDGETS: DISADVANTAGES
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Require significantly more time
Effects of managerial participation may be
negated by top-management changes
Managers may be ambivalent or unqualified to
participate, creating an unachievable budget
May cause managers to introduce slack into the
budget
© Tomwang112 / iStockphoto
PERFORMANCE
STANDARDS
Unit 5.1 Unit 5.2 Unit 5.3 Unit 5.4 Unit 5.5
5.2
WHAT IS A STANDARD?
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Benchmark for measuring performance – an
expectation
What are some examples of standards you are
familiar with?
In accounting, you can think of it as a budget of a
single unit of output
THE STANDARD CONTINUUM
PRACTICAL
IDEAL
Where do you want to be?
Tight, but
attainable
5
Perfection,
“Factory Heaven”
IDEAL STANDARDS
ADVANTAGES
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Motivational tool
Constant reminder to
workers of need for
increased efficiency
DISADVANTAGES
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De-motivating because you
know you can never achieve
the standard
Employees may take
shortcuts and reduce
effectiveness
Poor planning tool
PRACTICAL STANDARDS
ADVANTAGES
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5
Motivate employees to
perform
Good planning tool
DISADVANTAGES
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SETTING STANDARDS
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Standards are set for both quantity and price of
each input (materials, labor and overhead)
Estimated cost to manufacture a single unit of
product or perform a single service
A budget for a single unit of output
HOW DO YOU SET MATERIALS STANDARDS?
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What are the inputs?
How much of each input is
required?
What is the required quality
of each input?
How much does each unit
of input cost?
C&C DIRECT MATERIALS STANDARDS
5
HOW DO YOU SET LABOR STANDARDS?
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What are the operations
required to produce the
product?
How long does it take to
perform each operation?
Who performs each
operation and how much
are they paid?
C&C DIRECT LABOR STANDARDS
Item
Base hourly rate
$8.00
Payroll taxes
0.60
Fringe benefits
1.00
Standard direct labor rate
Activity
5
Rate
$9.60
Direct Labor Hours
Cutting
.02
Sewing
.18
Machine down-time
.01
Rest period
.03
Standard direct labor hours
.25
$9.60 per direct labor hour x .25 direct labor hours = $2.40
HOW DO YOU SET OVERHEAD STANDARDS?
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The predetermined overhead rate
© Tomwang112 / iStockphoto
BUILDING THE MASTER BUDGET:
THE OPERATING BUDGET
Unit 5.1 Unit 5.2 Unit 5.3 Unit 5.4 Unit 5.5
5.3
COMPONENTS OF THE MASTER BUDGET
5
SALES BUDGET
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Shows budgeted sales revenue for the period,
which flows to the budgeted income statement for
the period
Begins with the sales forecast, which typically will
be prepared by the sales and marketing
departments
Requires a forecasted sales price in addition to the
sales volume forecast
Is prepared for each product
C&C’S SALES BUDGET
Notice that the individual
sales budget amount flows
to the overall sales budget.
5
SELLING & ADMINISTRATIVE EXPENSE BUDGET
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Shows expenses to be incurred to support the
budgeted level of sales
Includes variable and fixed expenses
Pay special attention to non-cash expenses such
as bad debt expense and depreciation expense.
These expenses do not flow to the cash budget.
C&C’S S&A EXPENSE BUDGET
5
PRODUCTION BUDGET
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Shows when and how many units to produce in
order to meet budgeted sales volume
Includes budgeted ending inventory of finished
goods to provide a cushion for unexpected sales
A retail establishment will have a purchases
budget rather than a production budget
C&C’S PRODUCTION BUDGET
Budgeted
Sales
5
+
Budgeted
End. Inv.
_
Budgeted
Beg. Inv.
=
Budgeted
Production
DIRECT MATERIALS PURCHASES BUDGET
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Shows when and how much of each direct
material to purchase in order to meet the
production budget
Includes budgeted ending inventory of direct
materials to provide a cushion for production
errors or supply shortfalls
Is prepared for each direct material input used in
the production process
C&C’S DIRECT MATERIALS BUDGET
5
Budgeted inventory levels are
calculated using the same principle as
in the production budget.
Notice that you must convert from units of
finished goods to units of the direct material
– here from pants to yards of fabric.
DIRECT LABOR BUDGET
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Shows when and how much of each direct labor
category to employ in order to meet the production
budget
May use average standard wage rates for each
class of direct laborer rather than actual wage
rates for each employee
C&C’S DIRECT LABOR BUDGET
5
NOTE: If the standard production time is stated
in minutes, you must convert to the hour
decimal equivalent since the standard
wage rate is stated on an hourly basis.
MANUFACTURING OVERHEAD BUDGET
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Is based on budgeted production levels of the
overhead application base
Uses the predetermined overhead rate for variable
overhead
Assumes budgeted fixed overhead cost is incurred
evenly throughout the budget period
Pay special attention to non-cash expenses such
as depreciation expense that do not flow to the
cash budget
C&C’S OVERHEAD BUDGET
5
Don’t forget to subtract the non-cash expenses to
determine the amount of cash expenditures that
will carry through to the cash budget.
ENDING INVENTORY AND COGS BUDGET
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Shows desired levels of ending inventory
Assists in the preparation of budgeted balance
sheet and income statement
C&C’S ENDING RAW MATERIALS BUDGET
5
DM usage is based on
budgeted production and
standard DM cost per unit
C&C’S ENDING FINISHED GOODS BUDGET
5
C&C’S COST OF GOODS SOLD BUDGET
5
© Tomwang112 / iStockphoto
BUILDING THE MASTER BUDGET:
THE OPERATING BUDGET
Unit 5.1 Unit 5.2 Unit 5.3 Unit 5.4 Unit 5.5
5.4
THE CASH BUDGET
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Cash available to spend
Cash disbursements
Cash excess or cash needed
Short-term financing
Ending cash balance
CASH AVAILABLE TO SPEND
5
CASH RECEIPTS BUDGET
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Based on sales budget
Requires knowledge of historical accounts
receivable collection patterns
Distinguishes between cash sales and credit sales
Provides ending accounts receivable balance for
the budgeted balance sheet
C&C’S CASH RECEIPTS BUDGET
5
CASH DISBURSEMENTS
5
CASH PAYMENTS FOR MATERIALS BUDGET
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Shows when payments for materials purchases
will be made
Requires knowledge of past accounts payable
payment patterns
Calculates ending accounts payable balance for
the budgeted balance sheet
C&C’S CASH PAYMENTS FOR MATERIALS BUDGET
5
CASH EXCESS (NEEDED)
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Cash available minus cash disbursements
Many banks require a minimum cash balance, and
that must be figured into the amount of cash
excess (needed)
C&C’S CASH EXCESS (NEEDED)
5
SHORT-TERM FINANCING
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This section is only prepared if there is a need to
borrow money or repay previously borrowed
money
Shows principal and interest amounts
Provides the ending cash balance for the
budgeted balance sheet and interest expense for
the budgeted income statement
C&CS’ SHORT-TERM FINANCING
5
C&c’s cash budget
© Tomwang112 / iStockphoto
PRO-FORMA FINANCIAL
STATEMENTS
Unit 5.1 Unit 5.2 Unit 5.3 Unit 5.4 Unit 5.5
55
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PRO-FORMA FINANCIAL STATEMENTS
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Reports “as-if” results rather than actual results
Shows the financial position of the company
assuming the budget is achieved
C&C’S PRO-FORMA INCOME STATEMENT
5