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Profit Planning

Presented by
Samuel Sihombing
Sepri Simatupang
Profit Planning
 What is it?
 Why is it important?
 Financial changes occur constantly
 Trace in your company
 Benchmark others
 Importance of Accounting
 Accounting Records
Balance Sheet
 Financial structure
 Assets
 Current Assets
 Cash
 Accounts Receivable

 Inventory

 Short-term investments and Prepaid

 Fixed Assets
 Buildings, machines, trucks
Financial Structure
 Liabilities
 Current Liabilities
 Accounts Payable
 Notes Payable

 Long-term Liabilities
 Bonds and mortgages
 Working capital

 Owners’ Equity
 Retained Earnings
Income Statement
 Revenues
 Expenses
 Fixed
 Variable
 Profit
Profit Planning Process
1. Establish the Profit Goal
 How much to do want to make?
 What rate of return do investors want?
2. Determine the Planned Sales
 Sales forecast
 Factors

3. Estimate Expenses the Planned

Sales Volume
 Variable v. fixed costs
Profit Planning Process
1. Determine the Estimated Profit
 Sales income + Other income - Expenses
2. Compare Estimated Profit with
Profit Goal
 Did it meet goals?
3. List Possible Alternatives to Improve
 Increasing sales income
 Decreasing planned expenses
 Decreasing cost per unit / new products
Profit Planning Process

1. Determine How Expenses Vary with

Changes in Sales Volume
 Can base on history?
2. Determine How Profits Vary with
Changes in Sales Volume
 Breakeven point
Profit Planning Process

1. Analyze Alternatives from a Profit

 Change sales price
 Change media/ advertising budget
 Reduce variable costs
 Change quality of products
 Stop making and selling low-margin
2. Select and Implement the Plan
Budget Planning

 • Nature and Objectives of

 • Budgeting Systems
 • Master Budget
 • Income Statement Budgets
 • Balance Sheet Budgets
 Natureand Objectives
of Budgeting
Nature and Objectives of
 Establishing specific goals for future operations is part of
the planning function of management, while
executing actions to meet the goals is the directing
function of management. Periodically comparing
actual results with these goals and taking
appropriate action is the controlling function of

 Planning A set of goals is
often necessary to guide and
focus individual and group
actions. Directing Once the
budget plans are in place, they
can be used to direct and
coordinate operations in order to
achieve the stated goals.
 Controlling A time passes, the
actual performance of an
operation can be compared
against the planned goals
Nature and Objectives of
 Human Behavior and budgeting
 In the budgeting process, business, team, and individual
goals are established. Human behavior problems can arise
if 1) the budget goal is unachievable (too tight), 2) the
budget goal is very easy to achieve (too loose), or 3) the
budget goals of the business conflict with the objectives of
employees (goal conflict).
 1. Setting Budget Goals too Tightly
People can become discouraged if performance
expectations are set too high.
2. Setting Budget Goals too Loosely
Although it is desirable to establish attainable goals.
3. Setting Conflicting Budget Goals
Goal conflict occurs when individual self-interest
differs from business objectives.
• Budgeting systems very among businesses
because of such factors as organizational
structure, complexity of operations, and
management philosophy. Differences in
budget systems are even more significant
among different types of business, such as
manufacturers and service businesses.
• There are several methods of developing budget
One method, termed zero-based budgeting.
1. Static Budget
Shows the expected results of
responsibility center for only one
activity level.
2. Flexible Budget
Shows the expected results of a
Budgeting Systems
 2. Flexible Budget
Colter Manufacturing Company
Assembly Department Budget
For the Year Ending July 31, 2008
Units of Production 8,000 9,000
Variable cost :
Direct labor ($5 per unit) 40,000 45,000
Electric power ($0.50 per unit) 4,000 4,500
Total variable cost 44,000 49,500
Fixed cost :
Electric power 1,000 1,000
Budgeting Systems
 Static and Flexible Budgets
Over Budget

Over Budget

Actual Static Actual

Result Static Budget Result
Static Budget 10,000
Static Budget 9,000 Unit
Budget 8,000 Unit

$ 60,000 $ 72,000 $ 60,000 $ 65,500 $ 71,000

$ 72,000
Master Budget
Master Budget
• Manufacturing operations require a series of budgets that
are linked together in a master budget. The major part
the master budget are as follows.

Budgeted Income Budgeted Balance Sheet

Statement  Cash budget

Sales budget  Capital expenditures

Cost of goods sold budget budget

 Production budget
 Direct materials

purchases budget
 Direct labor cost budget

 Factory overhead cost

budget FO Sale NI
Selling and administrative
expenses budget S&A
Income Statement
Income Statement
We will illustrate the major elements of the income statement
Sales Budget


Direct Material Direct Labor
Overhead Cost
Cost Budget Cost Budget
Selling & Adm Cost Of Good
Expenses Budget Sold Budget

Income Statement
 Sales Budget
The sales budget normally indicates for each product
1) The quantity of estimated sales and
2) the expected unit selling price.
This date are often reported by regions or by sales
In estimating the quantity of sales for each product, past sales
volumes are often used as a starting point. These amounts
are revised for factors that are expected to affect future
sales, such as the factors listed below.
 - backlog of unfilled sales orders
 - planned advertising and promotion
 - expected industry and general economic conditions
 - productive capacity
 - projected pricing policy
 - findings of market research studies
Income Statement
Elite Accessories Inc.
Sales Budget
For the Year Ending March 31, 2008
Product and Region Unit Sales Unit Selling
Volume Price Sales
Wallet :
East 287,000 $ 12.00 $
West 241,000 $ 12.00 $
Total 528,000 $

Handbag :
East 156,400 $ 25.00 $
West 123,600 $ 25.00 $
Income Statement
 Production Budget
Production should be carefully coordinated with the sales
budget to ensure that production and sales are kept
in balance during the period. The number of units to
be manufactured to meet budgeted sales and
inventory needs for each product is set forth in the
production budget. The budgeted volume of
production is determined as follows
Expected Unit to be Sold
+ Desired units in ending inventory
- Estimate units in beginning inventory

= Total units to be produced

Income Statement
Elite Accessories Inc.
Production Budget
For the Year Ending March 31, 2008

wallet Handbag
Expected units to be sold 528,000 280,000
Plus desired ending inventory 80,000
Total 608,000
Less estimated beginning inventory 88,000
Total units to be produced 520,000
Income Statement
• Direct Materials Purchases Budget
 The production budget is the starting point for determining

the estimated quantities of direct materials to be

purchased. Multiplying these quantities by the
expected unit purchase price determines the total
cost of direct materials to be purchased.

Direct Materials required for production

+ Desired ending Matrials inventory
- Estimate beginning Matrial inventory

= Direct Material To Be Purchased

Income Statement
 Budgets
In Elite Accessories Inc.’s production operations. Leather
and lining are required for wallets and handbags. The
quantity of direct materials expected to be used for each
unit of product is as follows:
Wallet : Handbag :
 Leather : 0.30 square yard per unit Leather : 1.25 square yards
per unit
 Lining : 0.10 square yard per unit Lining : 0.50 square yard per

 Based on these data and the production budget, the

direct materials purchases budget is prepared. Elite
Accessories Inc. to produce 520,000 wallets, 156,000
square yards (520,000 units x 0.30 square yard per
unit) of leather are needed. Likewise, to produce
292,000 handbags, 365,000 square yards (292,000
units x 1.25 square yards per unit) of leather are
Income Statement
Elite Accessories Inc.
Direct Material Purchases Budget
For the Year Ending March 31, 2008
Direct Materials
Leather Lining Total
Square yards required for production :
 Wallet 156,000 52,000
 Handbag 365,000 146,000
 Plus desired inventory, (Ending) 20,000 12,000
 Total 541,000 210,000
 Less estimated inventory, (Beginning) 18,000 15,000
 Total square yards to be purchased 523,000 195,000
 Unit price (per square yard) x 4.50 x 1.20
 Total direct materials to be purchased 2,353,500 234,000
Note A : Leather : 520,000 units x 0.30 sq. per unit = 156,000 sq. yds.
Lining : 520,000 units x 0.10 sq. per unit = 52,000 sq. yds
Income Statement
 Budgets
Direct Labor Cost Budget
 The production budget also provides the starting point for
preparing the direct labor cost budget. For Elite
Accessories Inc., the labor requirements for each unit of
product are estimated as follows:
Wallet : Handbag :
 Cutting Department : 0.10 hour per unit Cutting Department 0.15 hour
per unit
 Sewing Department 0.25 hour per unit Sewing Department 0.40 hour
per unit

Based on these data and the production budget, Elite

Accessories Inc. prepares the direct labor budget. To
produce 520,000 wallets. 52,000 hours (520,000 units x
0.10 hour per unit) of labor in the Cutting Department are
required. Likewise, to produce 292,000 handbags, 43,800
hours (292,000 units x 0.15 hour per unit) of labor in the
Cutting Department are required
Income Statement
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending March 31, 2008

Hours required for production :

Cutting Sewing Total
 Wallet 52,000 130,000
 Handbag 43,800 116,800
 Total 95,800 246,800
 Hourly rate x 12.50 x 15.00
 Total direct labor Cost 1,149,600 3,702,000

 Note A : Cutting Department : 520,000 units x 0.10 hour per unit = 52,000
Sewing Department : 520,000 units x 0.25 hour per unit =
130,000 hour
 Note B : Cutting Department : 292,000 units x 0.15 hour per unit = 43,800
Sewing Department : 292,000 units x 0.40 hour per unit =
Income Statement
 • Factory Overhead Cost Budget
 The estimated factory overhead costs
necessary for production make up the
factory overhead cost budget. This budget
usually includes the total estimated cost for
each item of factory overhead. A business
may prepare supporting departmental
schedules, in which the factory overhead
costs are separated into their fixed and
variable cost elements. Such schedules
enable department managers to direct
their attention to those costs for which they
are responsible and to evaluate
Income Statement
Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending March 31, 2008

 Indirect factory wages $ 732,800

 Supervisor salaries $ 360,000
 Power and light $ 306,000
 Depreciation of plant and equipment $ 288,000
 Indirect materials $ 182,800
 Maintenance $ 140,280
 Insurance and property taxes $ 79,200
 Total factory overhead cost $ 2,089,080
Income Statement

• Cost of Goods Sold Budget
 The direct materials purchases budget, direct labor cost
budget, and factory overhead cost budget are the starting
point for preparing the cost of goods sold budget, To
illustrate, these data are combined with the desired
ending inventory and the estimated beginning inventory.
 Estimated inventories on January 1, Desired inventories on
December 31,
 Finished goods 1,095,600 Finished goods
 Work in process 214,400 Work in process

 Note A : Leather : (18,000 sq. yds. x 4.50 per sq. yd.)

 Lining : (15,000 sq. yds. x 1.20 per sq. yd.)
 Direct materials inventory, (Beginning)
Income Statement
Accessories Inc.
Cost of goods Sold Budget
For the Year Ending March 31, 2008
 Finish goods inventory, (Beginning)
 Work in process inventory, (Beginning) 214,400
 Direct materials :
 Direct materials inventory, (Beginning) 99,000
 Direct materials purchases 2,587,500
 Cost of direct material available for use 2,686,500
 Less direct materials inventory, (Ending) 104,400
 Cost of direct materials placed in production 2,582,100
 Direct labor 4,851,600
 Factory overhead 2,089,080
 Total manufacturing costs 9,522,780
 Total work in process during period 9,737,180
 Less work I process inventory, (Ending) 220,000
 Cost of goods manufactured
 Cost of finished goods available for sale
Income Statement
 Budgets
• Selling and Administrative Expenses Budget

 The sales budget is often used as the starting point

for estimating the selling and administrative
expenses. For example, a budgeted increase in sales
may require more advertising.
 Detailed supporting schedules are often prepared for
major items in the selling and administrative
expenses budget. For example, an advertising
expenses schedule for the Marketing Department
should include the advertising media to be used
(newspaper. Direct mail. Television), quantities
(column inches, number of pieces, minutes), and the
cost per unit. Attention to such details results in
realistic budgets, Effective control results from
assigning responsibility for achieving the budget to
department supervisors.
Income Statement
Elite Accessories Inc.
Selling and Administrative Expenses Budget
For the Year Ending March 31, 2008
 Selling expenses :
 Sales salaries expense 715.000
 Advertising expense 360,000
 Travel expense 115,000
 Total selling expenses 1,190,000
 Administrative expenses :
 Officers’ salaries expense 360,000
 Office salaries expense 258,000
 Office rent expense 34,500
 Office supplies expense 17,500
 Miscellaneous administrative expenses 25,000
 Total administrative expenses 695,000
 Total selling and administrative expenses 1,885,000
Income Statement
 Budgeted Income Statement

The budgets for sales, cost of goods sold,

and selling and administrative expenses,
combined with the data on other income,
other expense, and income tax, are used to
prepare the budgeted income statement.
The budgeted income statement
summarizes the estimated of all phases of
operations. This allows management to
assess the effects of the individual budgets
on profits for the year. If the budgeted net
income is too low. Management could
review and revise operating plans in an
attempt to improve
Income Statement
Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending March 31, 2008
 Revenue from sales
 Cost of goods sold
 Gross profit
 Selling and administrative expenses :
 Selling expenses 1,190,000
 Administrative expenses 685,000
 Total selling and administrative expenses
 Income from operations
 Other income :
 Interest revenue 98,000
 Other expense :
 Interest expense 90,000
Balance Sheet Budgets
Balance Sheet Budgets

 Balance Sheet Budgets

 Balance sheet budgets are used by

managers to plan financing. Investing, and
cash objectives for the firm. The balance
sheet budgets illustrated for Elite
Accessories Inc, in the following sections
are the cash budget and the capital
expenditures budget.
Balance Sheet Budgets
 • Cash Budget
 The cash budget is one of the most important
elements of the budgeted balance sheet. The cash
budget presents the expected receipts (inflows) and
payments (outflows) of cash for a period of time.

 We illustrate the monthly cash budget for January,

February, and March , for Elite Accessories Inc. We
begin by developing the estimated cash receipts and
estimated cash payments portion of the cash
Balance Sheet Budgets
 • Estimated Cash Receipts
 Estimated cash receipts are planned additions to cash from
sales and other sources, such as issuing securities or
collecting interest. A supporting schedule can be used in
determining the collections from sales. (assume the
following information)
Accounts receivable, January 1………..370,000
January February March
 Budgeted sales 1,080,000 1,240,000 970,000
Elite Accessories Inc. Expects to sell 10% of its merchandise
for cash. Of the remaining 90% of the sales on account, 60%
are expected to be collected in the month of the sale and the
remainder in the next month.The cash receipts from sales on
account are determined by adding the mounts collected from
credit sales earned in the current period (60%) and the
amounts accrued from sales in the previous period as
accounts receivable (40%)
Balance Sheet Budgets
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2008
January February
Receipts from cash sales :
Cash sales (10% x current month’s sales) 108,000 124,000
Receipts from sales on account :
Collections from current month’s sales 583,200 669,600
Collections from prior month’s sales 370,000 388,800
Total receipts from sales on account 953,200 1,058,400
Note A : 108,000 = 1,080,000 x 10%
124,000 = 1,240,000 x 10%
97,000 = 970,000 x 10%
Note B : 583,200 = 1,080,000 x 90% x 60%
Balance Sheet Budgets
• Estimated Cash Payments
Estimated cash payments are planed reductions in cash
from manufacturing costs, selling and administrative
expenses, capital expenditures, and other sources, such as
buying securities or paying interest or dividends. A
supporting schedule can be used in estimating the cash
payments for manufacturing costs.
(assume the following information)

Accounts payable, January 1………..190,000

January February March
Manufacturing costs 840,000 780,000

Depreciation expenses on machines is estimated to be

24,000 per month and is included in the manufacturing
costs. The accounts payable were incurred for
manufacturing costs. Elite Accessories Inc. expects to pay
75% of the manufacturing costs in the month in which they
Balance Sheet Budgets
Elite Accessories Inc.
Schedule of Payments for Manufacturing Sales
For the Three Months Ending March 31, 2008
January February
Payments of current month’s
manufacturing costs 612,000 567,000
Payments of prior month’s
manufacturing cost 190,000 204,000
Total payment 802,000 771,000

Note A : 612,000 = (840,000 – 24,000) x 75%

567,000 = (780,000 – 24,000) x 75%
591,000 = (812,000 – 24,000) x 75%
Note B : 190,000, given as January 1, Accounts Payable
Balance Sheet Budgets
Completing the Cash Budget
To complete the cash budget for Elite Accessories Inc.
(assume the following information)
Cash balance on January 1
Quarterly taxes paid on March 31
Quarterly interest expense paid on January 10
Quarterly interest revenue received on March 21
Sewing equipment purchased in February 27

January February
Selling and administrative expenses 160,000 165,000
Balance Sheet Budgets
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2008
January February
Estimated cash receipts from :
Cash sales 108,000 124,000
Collections of accounts receivable 953,200 1,058,400
Interest revenue
Total cash receipts 1,061,200 1,182,400
Estimated cash payments for :
Manufacturing costs 802,000 771,000
Selling and administrative expenses 160,000 165,000
Capital additions 274,000
Interest expenses 22,500
Income taxes
Balance Sheet Budgets
Capital Expenditures Budget
The capital expenditures budget summarizes plans for
acquiring fixed assets. Such expenditures are necessary as
machinery and other fixed assets w ear out, become
obsolete, or for other reasons need to be replaced. In
addition, expanding plant facilities may be necessary to
meet increasing demand for a company’ s product.
The useful life of many fixed assets extends over long
periods of time. In addition, the amount of the
expenditures for such assets may vary from year to year. It
is normal to project the plans for a number of periods into
the future in preparing the capital expenditures budget
Balance Sheet Budgets
Elite Accessories Inc.
Capital Expenditures Budget
For the Five Years Ending December 31, 2008

Item 2006 2007 2008 2009

Cutting Department 400,000 280,000
Sewing Department 274,000 260,000 560,000 200,000
Office equipment 90,000
Total 674,000 350,000 560,000 480,000
Balance Sheet Budgets
Budgeted Balance Sheet
The budgeted balanced sheet estimates the financial
condition at the end of a budget period. The
budgeted balance sheet assumes that all operating
budgets and financing plans are met. It is similar to
a balance sheet based on actual data in the
accounts. For this reason, we do not illustrate a
budgeted balanced sheet for Elite Accessories Inc. If
the budgeted balance sheet indicates a weakness in
financial position, revising the financing plans or
other plans may be necessary. Fro example a large
amount of long-term debt in relation to stockholders’
equity might require revising financing plans for
capital expenditures. Such revisions might include
issuing equity rather than debt.