Chapter 13: Planning and Budgeting

Planning and BudgetingChapter 13Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinBudgets A budget is a financial plan of the resources needed to carry out activities and meet financial goals. Budgets play an important role in managing cash flows. Critical success factors are the strengths of a company that enable it to outperform competitors.LO1L.O. 1 Understand the role of budgets in overall organization plans.13 - *Human Element in BudgetingL.O. 2 Understand the importance of people in the budgeting process.OrganizationgoalsIndividualgoalsGoal congruence Participative budgeting: Use of input from lower- and middle-management employees; also called grass roots budgeting13 - *Sales ForecastingL.O. 3 Estimate sales. Forecasting sales is the most difficult aspect of budgeting. Sales staffMarket researchersDelphi techniqueTrend analysisEconometric models13 - *Forecasting ProductionL.O. 4 Develop production and cost budgets. A production budget is a plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales.Beginning balanceBBTransfers inTITransfers outTO+–=Ending balanceUnits in beginninginventoryRequiredproductionBudgetedsales+–=Units in endinginventory13 - *Cash BudgetL.O. 5 Estimate cash flows. The cash budget is a statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period. Cash receipts: – Collection of accounts receivable – Cash sales – Sales of assets – Borrowing – Issuing stock – Other13 - *Cash BudgetLO5 Cash disbursements: – Materials purchases – Manufacturing costs – Operating activities – Debt repayment – Acquisition of new assets – Income taxes – Dividends – Other activities13 - *Cash Collections ExampleLO5Santiago PantsMonthly Collection ExperienceSales on CreditCash collected from current month's sales 20%Cash collected from last month's sales 75Cash discounts taken (percentage of gross sales) 2Written off as bad debt 3Total disposition of credit sales in current month 100%Expected Sales for Three MonthsJanuary sales $500,000February sales $450,000March sales $600,00013 - *Cash Collections ExampleLO5Santiago PantsMultiperiod Schedule of Cash CollectionsFor the Quarter Ended March 31Beginning accounts receivable, January 1, $540,000January sales, $500,000aFebruary sales, $450,000bMarch sales, $600,000c Total cash collections$540,000 100,000$640,000$375,000 90,000$465,000$337,500 120,000$457,500January$ 540,000 475,000 427,500 120,000$1,562,500MonthFebruaryMarchTotal forQuartera 20% collected in January, 75% collected in February, and 5% not collectedb 20% collected in February, 75% collected in March, and 5% not collectedc 20% collected in March, 75% collected in April, and 5% not collected13 - *Cash Disbursements ExampleLO5Santiago PantsMonthly Disbursements for Purchases ExperienceCash disbursement for current month's purchases 50%Cash disbursement for prior month's purchases 48Cash discounts taken 2Total cash disbursement for purchases 100%Expected Purchases for Three MonthsJanuary sales $120,000February sales $200,000March sales $250,00013 - *Cash Disbursements ExampleLO5Santiago PantsMultiperiod Schedule of Cash DisbursementsFor the Quarter Ended March 31Beginning accounts payable, January 1, $256,000January purchases, $120,000aFebruary purchases, $200,000bMarch purchases, $250,000cAdditional cash payments Total cash disbursements$256,000 60,000 250,000$566,000$ 57,600 100,000 250,000$407,600$ 96,000 125,000 250,000$471,000January$ 256,000 117,600 196,000 125,000 750,000$1,444,600MonthFebruaryMarchTotal forQuartera 50% paid in January, 48% paid in February, and 2% discounts takenb 50% paid in February, 48% paid in March, and 2% discounts takenc 50% paid in March, 48% paid in April, and 2% discounts taken13 - *Budgeted Balance Sheet ExampleL.O. 6 Develop budgeted financial statements.AssetsCurrent assets: Cash Accounts receivable Inventories Other current assets Total current assetsLong-term assets: Property, plant, equipment Less: Accumulated depreciationTotal assetsBudget Year$ 830 540 155 161$1,686 1,866 (1,246)$2,306$ 6,940 7,200 4,265 -0- $18,405 1,470 (220)$19,651$ 7,399 6,840 3,995 100$18,334 -0- -0- $18,334$ 371 900 425 61$1,757 3,336 (1,470)$3,623BalanceJan 1AdditionsSubtractionsBalanceDec 31Santiago PantsBudget Balance SheetFor the Budget Year Ended December 31 ($000)13 - *Budgeted Balance Sheet ExampleLO6Liabilities and Shareholders EquityCurrent liabilities: Accounts payable Taxes payable Current portion of long-term debt Total current liabilitiesLong-term liabilitiesTotal liabilitiesShareholders' equity Common stock Retained earningsTotal shareholdersTotal liabilities and shareholders equityBudget Year$ 256 187 23$ 466 258$ 724$ 437 1,145$1,582$2,306$1,715 550 23$2,288 -0- $2,288$ -0- 1,149$1,149$3,437$1,694 350 23$2,067 23$2,090$ -0- 30 30$2,120$ 277 387 23$ 687 235$ 922$ 437 2,264$2,701$3,623BalanceJan 1AdditionsSubtractionsBalanceDec 31Santiago PantsBudget Balance SheetFor the Budget Year Ended December 31 ($000)13 - *Budgeting in Service OrganizationsMarketing andadministrativecost budgetSales forecastBudgeted costof servicesBudgetedincomestatementCash budgetBudgetedbalance sheetsL.O. 7 Explain budgeting in merchandising and service organizations. 13 - *Ethical Problems in BudgetingL.O. 8 Explain why ethical issues arise in budgeting. Budgets can create serious ethical issues for many people. The company must recognize the trade-off between encouraging unbiased reporting by managers and the use of budget information in performance evaluation and rewards.13 - *Budgeting Under UncertaintyL.O. 9 Explain how to use sensitivity analysis to budget under uncertainty. Budgets allow management to explore many alternatives. Spreadsheets are helpful in preparing budgets and quantifying “what-if” conditions.13 - *End of Chapter 13Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin