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Topic 7
Profit Planning
Mohamad Tarmizi bin Hj Waropis - 815736
Mohd Azmi bin Abu Bakar - 815511
Mohd Fauzi bin Abdul Aziz - 815510
Hj Mohammad Saimi bin Mat Som - 814646
BASIC FRAMEWORK
OF
BUDGETING
2
Budget
1. Planning
- a detailed plan, expressed 2. Facilitating
in quantitative terms, that
Communication and
specifies how resources will
Coordination
be acquired and used during
3. Allocating Resources
a specified period of time.
4. Controlling Profit and
Operations
Master budget
5. Evaluating Performance
- a summary of a companys
and Providing Incentives
plans that sets specific
targets for sales, production,
distribution, and financing
activities.
Advantages of Budgeting
Define goal
and objectives
Communicating
plans
Advantages
Coordinate
activities
Uncover potential
bottlenecks
Means of allocating
resources
2008
2009
Operating budgets
- Ordinarily cover a one-year
period corresponding to a
companys fiscal year. Many
companies divide their
annual budget into four
quarters.
2010
2011
A continuous budget
-12 month budget that rolls
forward one month (or
quarter)
as the current month (or
quarter)
is completed.
Self-Imposed Budget
M id d le
M anagem ent
S u p e r v is o r
S u p e r v is o r
M id d le
M anagem ent
S u p e r v is o r
S u p e r v is o r
PREPARING
THE MASTER
BUDGET
7
Direct materials
budget
Production budget
Direct labor
budget
Selling and
administrative
budget
Manufacturing
overhead budget
Cash Budget
Budgeted
income
statement
Budgeted
balance sheet
Sales Budget
Approved by the budget committee and describes
expected sales in units and dollars.
The basis for all of the other operating budgets and most
of the financial budgets.
The first step in creating a sales budget is to develop the
sales forecast.
The sales forecast is just the initial estimate and it is
often adjusted by the budget committee.
Production Budget
Production budget is prepared after the sales budget.
Production budget lists the number of units that must
be produced during each budget period to meet sales
needs and to provide for the desired ending inventory.
Key Equation
Units to be produced=Expected sales in units +
Desired units of ending inventoryUnits in
beginning inventory
*From"ProductionBudgetforJerrysIceCream".
**$1.30directlaborcostperunit=0.10directlaborhoursperunit$13perhour.
*From"ProductionBudgetforJerrysIceCream".
**$1.20=$240,480totaloverheadcost200,400unitstobeproducedfortheyear.
^Deductdepreciationtogettheactualcashpaymentforoverhead.Thisinformationisneededforthecashbudget
presentedin"CashBudgetforJerrysIceCream".
*Deductdepreciationtogettheactualcashpaymentforsellingandadministrativecosts.
**Thisinformationisneededforthecashbudgetpresentedin"CashBudgetforJerrysIceCream".
Cash Budget
The cash budget is an estimate of the amount and
timing of cash inflows and outflows for the budget
period.
A section of the cash budget will show when cash
from sales will be received.
The cash budget has the following sections:
Cash collections from sales
Cash payments for purchases of materials
Other cash collections and payments
*Costofgoodssold=Perunitcostof$4.50(see
above)Unitssold(from
"SalesBudgetforJerrysIceCream");forthefirst
quarter,$180,000costofgoodssold=$4.50unit
cost40,000units.
Benefits of Budgeting
Requires managers to plan
Promotes coordination
and communication
Helps managers
evaluate performance
motivates employees to
achieve company goals
Conclusion
This topic is just an introduction to budgeting and profit planning.
This topic presents an overview of the budgeting process and shows
how the various operating budgets relate to each other.
The sales budget forms the foundation for profit planning.
Once the sales budget has been set, the production budget and the
selling and administrative expense budget can be prepared since they
depend on how many units are to be sold.
All of these various budgets feed into the cash budget and the
budgeted income statement and balance sheet.
Thank You