Managerial accounting and introduction to concepts methods and user 11e by maher chapter 09

CHAPTER 9
Profit Planning
and Budgeting
PowerPoint Presentation by
LuAnn Bean
Professor of Accounting
Florida Institute of Technology
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Managerial Accounting 11E
Maher/Stickney/Weil

1


☼

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.

2


LO 1

BUDGET:
BUDGET: Definition
Definition
Is a plan of the resources
needed to carry out tasks and
meet financial goals.

3


LO 1

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
do for
for
success.
success. Companies
Companies build
build on
on critical
critical
success
success factors
factors to
to expand
expand operations.
operations.

4


LO 1

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)

5


LO 1

ORGANIZATIONAL
ORGANIZATIONAL GOALS:
GOALS:
Definition
Definition

Are broad objectives
management establishes and
employees work to achieve.

6

STRATEGIC LONG-RANGE
PROFIT PLAN

LO 1

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
7


LO 1

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
8


LO 2

PARTICIPATIVE
PARTICIPATIVE BUDGETING:
BUDGETING:
Definition
Definition

Is a process of gathering
information from lower- and
middle-management

employees.

9


LO 3

RESPONSIBILITY
RESPONSIBILITY CENTER:
CENTER:
Definition
Definition

Is a division, department
responsible for managing a
particular group of activities in
the organization.

10


LO 3

RESPONSIBILITY CENTERS:
Four Types
 Cost centers
 Example: Manufacturing departments
 Managers responsible for managing costs
Engineered cost centers: well-established input/output relations
 Production departments

Discretionary cost centers: input/output relations not well specified
 Research departments

 Revenue centers
 Example: Marketing departments
 Managers responsible for revenues
Continued
11


RESPONSIBILITY CENTERS:

LO 3

Four Types
Profit centers
Managers responsible for managing costs and
revenues

Investment centers
Example: Corporate divisions
Managers responsible for costs, revenues, and
assets

12


LO 3

ESTABLISHING BUDGETS: Using
Cost Hierarchies
Activity
Category

Example

Unit

Converts resources into products

Direct labor

Batch

Batch of same setup, personnel

Machine setups

Product

Support a particular product line

Design work

Customer

Meet customer needs

Customer service

Facility

Support entire organization

Human resources
13


B
U
D
G
E
T
P
R
O
C
E
S

LO 4
SALES BUDGET

PRODUCTION BUDGET

MARKETING BUDGET

ADMINISTRATIVE BUDGETS

PROFIT PLANNING BUDGET

14


DEVELOPING SALES
BUDGET

LO 4

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 4

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 4

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 4

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 4

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 4

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 4

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 4

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 4

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 5

V
G
C

EXHIBIT 9.7

Flexible
Flexiblebudget
budget
based
basedon
onactual
actual
sales
salesvolume
volume
show
showhigher
higher
profit.
profit.

24


LO 5

What do the terms
“favorable” and
“unfavorable”
variance mean?
Favorable means the
variance will increase
profits; unfavorable
means the variance will
decrease profits.

25