CHAPTER Profit Planning and Budgeting PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL ☼ This chapter shows how a short-term operating budget is established and how it fits into the overall plan for achieving organization goals You will also learn how ethical issues affect the budgeting and performance evaluation process LO BUDGET: BUDGET: Definition Definition Is a plan of the resources needed to carry out tasks and meet financial goals LO STRATEGIC PLANNING Companies Companies start start the the strategic strategic planning planning process process by by stating stating their their critical critical success success factors, factors, that that is is the the most most important important things things the the company company must must do for for success success Companies Companies build build on on critical critical success success factors factors to to expand expand operations operations LO MASTER BUDGET A master budget is part of the overall organization plan for the next year and includes: Organizational goals Strategic long-range profit plan Master budget (a tactical short-range profit plan) LO ORGANIZATIONAL ORGANIZATIONAL GOALS: GOALS: Definition Definition Are broad objectives management establishes and employees work to achieve STRATEGIC LONG-RANGE PROFIT PLAN LO Any plan that focuses on the intermediate or distant future is stated in broad terms Cost control Optimize contribution from existing product lines by holding product cost increases to less than the general rate of inflation Market share Maintain market share by providing a level of service and quality comparable to top competitors LO Budgeting Budgetingisis an an information information gathering gathering process processwhere where information information comes comesfrom from both bothinternal internal and andexternal external sources sources EXHIBIT 9.1 LO PARTICIPATIVE PARTICIPATIVE BUDGETING: BUDGETING: Definition Definition Is a process of gathering information from lower- and middle-management employees LO RESPONSIBILITY RESPONSIBILITY CENTER: CENTER: Definition Definition Is a division, department responsible for managing a particular group of activities in the organization 10 DEVELOPING SALES BUDGET LO Forecasting Sales is the heart of the budgeting process and perhaps the most difficult Information is sought from many sources Sales staff Market researchers Delphi technique Trend analysis Econometric models 15 LO EXAMPLE: Victoria’s Gourmet Coffee Victoria’s Gourmet Coffee is preparing its budget for the year Five Five departments departments are areinvolved involved ininbudgeting budgeting process process EXHIBIT 9.2 V G C Continued 16 V G C LO VICTORIA’S SALES BUDGET Victoria’s Gourmet Coffee forecasts three levels of sales for budgeting purposes EXHIBIT 9.3 Ultimately, Ultimately, Victoria’s Victoria’s chose chosethe the expected expectedlevel level of ofsales, sales, 70,000 70,000units units@ @ $6 $6each, each,for for their theirbudgeting budgeting process process 17 DEVELOPING PRODUCTION BUDGET LO Production budgets begin with Beginning Inventory (BI) They combine this with estimate of units to be sold and desired Ending Inventory (EI) to estimate production Units Produced = Units to be sold + Desired EI – Units BI 18 LO V G C EXHIBIT 9.4 Production Production budgets budgetsinclude include direct directmaterials, materials, direct directlabor, labor,and and variable variableand and fixed fixedoverhead overhead 19 LO V G C EXHIBIT 9.5 Marketing Marketing budgets budgetsare are comprised comprisedof of variable variable(unit) (unit) and andfixed fixed (customer (customerand and facility) facility)costs costs Continued 20 LO V G C EXHIBIT 9.6 Administrative Administrative budgets budgetsare are comprised comprisedof of fixed fixedcosts, costs, some someof ofwhich which are are discretionary discretionary Continued 21 LO EXHIBIT 9.7 V G C Budget BudgetProfit Profit plans planscombine combine information information from fromall allprior prior budgets budgetstoto project projectan an estimate estimateof of profit profit 22 LO MANAGERS WANT TO KNOW! What happens if projected profit is not the desired profit? What happens if actual sales and production differ from projected levels? When projected profit does not meet the desired level, managers will seek ways to improve profits Managers can develop a flexible budget to compare actual with projected levels 23 LO V G C EXHIBIT 9.7 Flexible Flexiblebudget budget based basedon onactual actual sales salesvolume volume show showhigher higher profit profit 24 LO What the terms “favorable” and “unfavorable” variance mean? Favorable means the variance will increase profits; unfavorable means the variance will decrease profits 25 LO IMPORTANCE OF BUDGETS Budgets Budgets affect affect both both organizational organizational and and individual individual performance performance If If sales sales forecasts forecasts are are too too high, high, excess excess inventory inventory arises arises Forecasts Forecasts too too low low lead lead to to lost lost sales sales Individuals Individuals are are rewarded rewarded when when performance performance measures measures are are met met 26 LO SUMMARY OF THE MASTER BUDGET The master budget summarizes management’s plans for the period covered Preparing the master budget requires the participation of all managerial groups, from local plant and sales managers to the top executives of the firm and the board of directors Once management adopts the budget, it becomes the major planning and control instrument Master budgets are almost always static budgets; that is, they consider the likely results of the operations at the one level of operations specified in the budget Computerizing the process makes it less costly to develop multiple master budgets that take into account various uncertainties facing the firm, such as market conditions, material prices, labor difficulties, and government regulations.27 LO IMPLICATIONS FOR INCENTIVE PLANS Typical implications for developing good incentive plans include: developing incentive methods that provide rewards for both accurate forecasts and good performance rewards that are positively related to forecasted sales to give incentives to forecast high rather than low additional rewards for employees who beat the forecast and penalties for results worse than forecast 28 End of CHAPTER 29 ... critical success success factors factors to to expand expand operations operations LO MASTER BUDGET A master budget is part of the overall organization plan for the next year and includes: Organizational... lines by holding product cost increases to less than the general rate of inflation Market share Maintain market share by providing a level of service and quality comparable to top competitors... organizational and and individual individual performance performance If If sales sales forecasts forecasts are are too too high, high, excess excess inventory inventory arises arises Forecasts Forecasts too