Fifth Edition Fundamental Managerial Accounting Concepts Thomas P. Bor-Yi Tsay Philip R. McGraw-Hill/Irwin
Edmonds Olds 7-1 Copyright 2009 by The McGraw-Hill Companies, Inc. All rights re CHAPTER 7 Planning for Profit and Cost Control 7-2 Learning Objective
Describe the budgeting process and the benefits it provides. LO1 LO1 7-3 Three Levels of Planning 1. 1. Strategic Strategic planning planning involves involves making making long-term
long-term decisions decisions such such as as defining defining the the scope scope of of the the business, business, determining determining which which products products to
to develop develop or or discontinue discontinue and and identifying identifying the the most most profitable profitable markets. markets. 2. 2. Capital Capital budgeting
budgeting focuses focuses on on intermediateintermediaterange range planning planning and and involves involves decisions decisions such such as as whether whether to to buy buy or or lease
lease equipment, equipment, whether whether to to stimulate stimulate sales, sales, or or whether whether to to increase increase company company assets. assets. 3.
3. The The Operations Operations budget budget describes describes short-term short-term objectives objectives in in specific specific amounts amounts of of sales sales targets, targets, production
production goals, goals, and and financing financing plans. plans. 7-4 Advantages of Budgeting Promotes Planning Promotes Coordination
Budgeting Enhances Performance Measuremen t Enhances Corrective Actions 7-5 Learning Objective Explain the relationship between budgeting
and human behavior. LO2 LO2 7-6 Budgeting and Human Behavior Upper management must be sensitive to the impact of the budgeting process on employees. Budgets are Many people find constraining. evaluation based They limit on budget
individual expectations freedom in favor stressful. Think of of an established students and plan. exams. Upper management must demonstrate that budgets are sincere efforts to express realistic goals employees are expected to meet. 7-7
Cash Receipts and Payments Schedules Operating Budgets Start Pro forma Financial Statements Cash receipts
Sales budget Income statement Cash payments for inventory Inventory purchases budget Balance
sheet Cash payments for S & A S&A expense budget Statement of cash flows Cash budget
7-8 Learning Objective Prepare a sales budget and related schedule of cash receipts. LO3 LO3 7-9 Sales Budget Detailed schedule prepared by the marketing department showing expected
sales for the coming periods and expected collections on those sales. It is critical to the success of the entire budgeting process. 7-10 Sales Budget Hampton Hams (HH) is preparing a sales budget for the last quarter of the year. Sales of hams are expected to peak in the months of October, November and December (the holiday seasons). The store sales for October are expected to total $160,000 ($40,000 in cash sales, and $120,000 in sales on account). Sales
are expected to increase by 20% per month for November and December. Lets prepare a sales budget. 7-11 Sales Budget Accounts receivable at December 31stst are $172,800, the uncollected sales on account. $40,000 120% = $48,000 $120,000 120% = $144,000 7-12
Schedule of Cash Receipts Hampton Hams (HH) will collect cash sales in the month of sale. Past experience shows the company will collect cash from its credit sales in the month following the month of the sale (October credit sales will be collected in full in November). Lets prepare the cash receipts budget. 7-13 Schedule of Cash Receipts Sales revenue on the income statement will be the sum of the monthly sales ($582,400).
7-14 Learning Objective Prepare an inventory purchases budget and related schedule of cash payments. LO4 LO4 7-15 Inventory Purchases Budget The total amount of inventory needed for
each month is equal to the amount of the cost of budgeted sales plus the desired ending inventory. 7-16 Inventory Purchases Budget HHs policy is that ending inventory should be equal to 25% of next months projected cost of goods sold. At HH, cost of goods sold normally equal 70% of sales. Suppliers require HH to pay 60% of inventory purchases in the month goods are purchased and the remaining 40% in the month after the purchase.
Lets prepare the inventory purchases budget and the schedule of cash payments for inventory purchases. 7-17 Inventory Purchases Budget $134,400 25% = $33,600 $155,960 40% = $62,384 Accounts 7-18 $145,600 60% = $87,360
$145,600 40% = $58,240 7-19 Learning Objective Prepare a selling and administrative expense budget and related schedule of cash payments. LO5 LO5 7-20
Selling and Administrative Expense Budget The details of the Selling and Administrative (S&A) Budget are shown on the next two screens. It is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense (based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the month following the usage of the electricity, gas, and water. 7-21 Selling and Administrative Expense Budget
HH HH plans plans to to purchase, purchase, for for cash, cash, store store fixtures fixtures with with aa cost cost of of $130,000 $130,000 in in October.
October. HH HH borrows borrows or or repays repays principal principal and and interest interest on on the the last last day day of of each
each month. month. Any Any money money borrowed borrowed from from the the bank bank bears bears interest interest at at an an annual annual rate rate
of of 12% 12% (1% (1% per per month). month). The The management management at at HH HH wants wants to to maintain maintain aa cash cash balance
balance of of at at least least $10,000 $10,000 at at the the end end of of every every month. month. 7-25
Cash Budget 7-26 Cash Budget 7-27 7-28 Check Yourself Astor Company expects to incur the following operating expenses during September: Salary Expense, $25,000; Utility Expense, $1,200; Depreciation Expense, $5,400, and Selling Expense,
$14,000. It pays operating expenses in cash in the month in which it incurs them. Based on this information, the total amount of cash outflow reported in the Operating Activities section of the pro Depreciation is a non-cash forma Statement of Cash FlowsExpense would be: a. $45,600. b. $31,600. charge to income and will not appear on the Statement of Cash Flows.
c. $40,200. d. $44,400 7-29 Learning Objective Prepare a pro forma income statement, balance sheet, and statement of cash flows. LO7 LO7 7-30
Pro Forma Income Statement The pro forma income statement gives management an estimate of the expected profitability of HH. If the project appears to be unprofitable, management can make the decision to abandon it. Although managers remain responsible for data analysis and decision making, computer technology offers powerful tools to assist in those tasks. 7-31 Pro Forma Income Statement 7-32
Pro Forma Balance Sheet The new store has no contributed capital because its operations will be financed through debt (line-of-credit) and retained earnings. The amount of retained earnings will be equal to the net income because there are no prior periods. The fixtures purchased in October will be depreciated for a full three months. Total accumulated depreciation will be $3,000. 7-33 7-34
Pro Forma Statement of Cash Flows Almost all the information for the Pro Forma Statement of Cash Flows can be found on the Cash Budget. 7-35 7-36 End of Chapter 7 7-37
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