Business Planning - Amazon S3Budget… · Operational Budgeting Levels of Business Planning Strategic Planning: Decisions regarding such long-range questions as which products to

Operational Budgeting

Levels of Business Planning

Strategic Planning:Decisions regarding such long-range questions as which products to make and sell, how to market the products, and how to finance the resources necessary to achieve the organization's goals.

Capital Budgeting:Planning for the acquisition of operational or long-term assets such as property, plant and equipment.

Operational Budgeting:Detailed plans of immediate goals for prospective sales, production, expenses, cash flows and financial statement results.

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Business Planning

Personal Budget (Cash Flow)

Budgeted Cash Inflows: Salary/Wage Income Interest Income Parental Subsidy Student Loan ProceedsBudgeted Cash Outflows: Rent Utilities Food Entertainment Tuition Books Insurance- Health Auto Payments Auto Gas & Maint. Insurance- Auto Miscellaneous

Net Cash Flow

Jan. Feb. Mar.The Importance of Budgeting

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Communication

Setting Goals and Objectives

Problem Resolution

Coordination

Authorization

Performance Evaluation

Motivation

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Personal Budgeting

The Benefits of Budgeting for a Business

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Setting Goals and Objectives

Problem Resolution

Coordination

Authorization

Performance Evaluation

Motivation

Management Communication

Elements and Sequencing of an Operating Budget

- Merchandising Business -

SalesBudget

Selling &Admin. Expense

Budget

InventoryPurchases

Budget

Cash Flow Budget

Pro-formaIncome

Statement

Pro-forma Balance

Sheet

SalesBudget


BudgetProduction

Budget

DirectMaterials

Budget

DirectLaborBudget

Mfg.Overhead

Budget

Cash Flow Budget

Pro-formaIncome

Statement

Pro-forma Balance

Sheet


-Manufacturing Business-

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Business Budgeting

Example: Given the information and assumptions provided below for PowerPak, Inc., prepare the following budgets for the months noted in 20X3:

PowerPak, Inc. makes and sells a food supplement drink that comes in a one pint carton. One carton of PowerPak is made by mixing plain tap water with a 6 oz. powder mix purchased directly from a manufacturer of nutritional products based on a formula developed by PowerPak.

The product sells for $3.00 a carton and budgeted sales for the months of September, October and November of 20X3 are 20,000, 22,000 and 25,000 units, respectively.

A. Sales Budget (Sept., Oct.,Nov.)B. Production Budget (Sept., Oct.)C. Direct Materials Budget (Sept.)D. Direct Labor Budget (Sept.)E. Cash Flow Budget (Sept.)

Units to be sold

Sales price/unit

Total Sales Revenue

20,000

x 3.00

$60,000

22,000

x 3.00

$66,000

25,000

x 3.00

$75,000

SEPT. OCT. NOV.

SALES BUDGET

Management would like to keep a balance of finished inventory on hand equal to 20% of the following month's anticipated sales volume to be able to handle unexpected sales volume. Assume that there are 4,000units of finished goods on hand at 8/31/X3. Given this information, the Production Budget can be prepared.

PRODUCTION BUDGET

SEPT. OCT. NOV.Units to be soldDesired ending inventory

20,0004,400

24,400

22,0005,000

27,000

25,000

* Calculated based on 20% of the subsequent month's budgeted sales.

(4,000)20,400

(4,400)22,600

Beginning inventoryUnits to be produced

*

The product costs are budgeted to include:

Fixed Mfg. Overhead- Per Month

Variable Costs Per Unit- Direct Materials- 6 oz. Mix Carton Direct Labor Mfg. Overhead

* Amount includes $1,500 of equipment depreciation.

$.90 per unit$.20 per unit$.10 per unit$.30 per unit

$7,000*

Management likes to have on hand inventory of mix and cartons equal to 30% of the following months budgeted materials usage. Assume that there are 6,120 six oz. packets of mix and 6,120 cartons in materials inventory at 8/31/X3. Given this information, the Direct Materials Purchase and the Direct Labor Budget can be prepared.

MATERIALS USAGE BUDGET

Units to be produced

One 6oz. Mix and OneCarton per unit produced

Mix and cartons to be used

SEPT. OCT.20,400

x 1

20,400

22,600

x 1

22,600

MATERIALS PURCHASE BUDGETSEPT. OCT.

Units of Mix & Cartons to be usedDesired ending inventory*

20,400 22,600

*Calculated based on 30% of subsequent month's budgeted usage.

Beginning InventoryMix and Cartons to purchasePrice per Mix and CartonTotal Material purchases

6,78027,180(6,120)21,060x 1.10

$23,166

??

(6,780)?

x 1.10?

MATERIALS USAGE BUDGET


One 6oz. Mix and OneCarton per unit produced

Mix and cartons to be used

SEPT. OCT.20,400

x 1

20,400

22,600

x 1

22,600

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DIRECT LABOR BUDGET

Units to be producedLabor cost per unitTotal Direct Labor

20,400x .10

$2,040

22,600x .10

$2,260

SEPT. OCT.

Budgeted selling and administrative expenses amount to $ .40 per unit of variable costs and $5,000 per month of fixed costs which include $700 of budgeted depreciation expense. Prepare the September Cash Flow Budget given the following additional assumptions:

All sales are made on account and experience shows that about 60%of sales are collected in the month of sale with 40% in the following month. No sales are anticipated to be uncollectible. The A/R balance at 8/31/X3 amounts to $21,000.

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Direct materials are always purchased on account with 50% paid in the month of purchase and the remainder paid in the following month. The A/P balance at 8/31/X3 amounts to $10,500.

Assume all direct labor, manufacturing overhead costs and selling and administrative costs are paid in the month incurred.

The cash balance at the beginning of the month is $6,000 and assume that PowerPak operates in a world of no income taxes.

CASH FLOW BUDGET$6,000

36,00021,00063,000

11,58310,500

2,040

6,1205,500

8,0004,300

14,9570

$14,957

SEPT.

Calculated at $.30 times the # of units budgeted for production.

**

Calculated at $.40 times the # of units budgeted for sale.

***

Collections of A/R are calculated at 60% in the month of sale and 40% in the subsequent month. Payments on purchases of direct materials, all on account, are calculated at 50% in the month of purchase and 50% in the subsequent month

*

Beginning cashAdd collection of A/R:

Current month* ($60,000 x 60%)Preceding month

Deduct disbursements:Direct materials-

Current month*($23,166 x 50%)Preceding month

Direct laborManufacturing Overhead-

Variable**(20,400 x $.30)Fixed (excluding depreciation of $1,500)

Selling & Administrative-Variable***(20,000 x $.40)Fixed (excluding depreciation of $700)

Cash balance/(deficiency)Cash capitalization requiredEnding cash balance

Jordan Corp. sells cakes for $10 per unit. Budgeted sales volume in # of units for the first 3 months of the year is noted below:

Jordan anticipates that 70% of sales will be made on account and accounts receivables are expected to be collected at the following rates:

25,000 30,000 35,000

Determine the amount of budgeted cash inflows for the month of March.

100%

50% in the month of sale35% in the first month following the month of sale10% in the second month following the month of sale

5% uncollectible

JAN. FEB. MAR.MAR.

From January Sales: 25,000 x $10 x 70% x 10% =

From February Sales: 30,000 x $10 x 70% x 35% =

From March Sales: Cash Sales 35,000 x $10 x 30% =

Credit Sales 35,000 x $10 x 70% x 50% =

Total Cash Collections

$17,500

$73,500

$105,000

$122,500

$318,500

March Cash Collections: Jordan Corp. has budgeted sales volume in units as follows:

Jordan wishes to maintain an inventory level of finished goods equal to 30% of the following month's budgeted sales. Finished goods inventory at the start of business on Jan. 1st amounts to 7,000 units.

25,000 30,000 35,000Jan. Feb. Mar.

One unit of production requires 3 lbs. of flour which costs $2/lb.Jordan plans to maintain a level of flour inventory (raw materials) constant with the current inventory balance.

If Jordan plans to buy all raw materials on account paying 50% in the month of purchase and 50% in the following month, how much cash outflow for the purchase of flour should be budgeted for in February?

Solution: Operational Budgeting

Problem: Operational Budgeting

Problem: Various Budgets

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Materials Purchases Budget

Lbs. to be used in productionAdd: Desired Ending InventoryLess: Beginning InventoryBudgeted PurchasesCost per lb.Cost of Materials Purchases

Production Budget

Budgeted SalesAdd: Desired Ending Inventory

Less: Beginning InventoryUnits to be Produced

Materials Usage Budget

Units to be produced(x) 3 lbs. per unitlbs. to be used in production

Mar.35,000

??

?(10,500)

Feb.30,00010,50040,500

31,500(9,000)

Jan.25,000

9,00034,000

27,000(7,000)

Feb.94,500

94,500 lbs.x $2

$189,000

Feb.31,500

x 394,500

Jan.81,000

81,000 lbs.x $2

$ 162,000

Jan.27,000

x 381,000

February Cash Payment on Flour Purchases:

Payments on January Purchases: ($162,000 x .50%)Payments on February Purchases: ($189,000 x .50%)

$81,000

$94,500$175,500

Problem: Various Budgets Solution: Various Budgets

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SalesBudget


BudgetProduction

Budget

DirectMaterials

Budget

DirectLaborBudget

Mfg.Overhead

Budget

Cash Flow Budget

Pro-formaIncome

Statement

Pro-forma Balance

Sheet

Business Feasibility Study forHEAVENLY MOLDS, INC.

As noted in the prior lesson, Heber Smith is seriously investigating what he believes is a promising business opportunity. His idea is to manufacture and sell plastic jello molds in the form of famous LDS religious symbols such as the Salt Lake Temple. Based on Heber's personal research and preliminary marketing efforts, he believes that the following is a reasonable estimate of total sales volume at a price of $2.50 per unit for the first quarter of operations beginning September 1, 20X1:

Heber currently plans to manufacture the jello molds rather than contract out their production. The raw materials required for production of a single jello mold, regardless of design, is 1 lb. of polypropylene which can be purchased from a local supplier for $.30per lb. Direct manufacturing labor costs are projected on a piece rate basis at $.20 per unit produced.

Projected sales in # of units Sept.2,000

Oct.3,000

Nov.4,000

ADDITIONAL BUDGETARY INFORMATION:Following November, 20X1, Heber projects that sales volume

will increase at a rate of 100 units per month. Inventory levels for finished goods are to be budgeted at a level of 25% of the following month's anticipated sales volume. Inventory levels for raw materials are budgeted at a level of 10% of the following month's budgeted materials usage.Required: (Given the above information round all calculations to the nearest whole unit or dollar, as the case may be.)

Given the information above, prepare the following budgets for Heavenly Molds for the months of September through November, 20X1:

A. Sales Budget (using $2.50 sales price per unit)B. Production BudgetC. Materials Usage and Purchases BudgetD. Direct Labor Budget

4,000

x 2.50

$ 10,000

SALES BUDGET

NOV.Units to be sold

Sales price/unit

Total Sales Revenue

2,000

x 2.50

$ 5,000

3,000

x 2.50

$7,500

DEC. JAN.4,100

x 2.50

$10,250

4,200

x 2.50

$10,500

SEPT. OCT.

PRODUCTION BUDGET

Units to be sold

Add: Desired ending inventory*

Less: Beginning inventory


NOV. DEC.SEPT. OCT.

*Calculated based on 25% of the subsequent month's budgeted sales.

2,000

7502,750

( 0 )

2,750

3,000

1,0004,000

(750)

3,250

4,000

1,0255,025

4,025

(1,000)

4,100

1,0505,150

4,125

(1,025)

MATERIALS USAGE BUDGETNOV.SEPT. OCT.


Polypropylene per unit produced

lbs. to be used

2,750

x 1 lb.

2,750

3,250

x 1 lb.

3,250

4,025

x 1 lb.

4,025

MATERIALS PURCHASE BUDGETNOV.SEPT. OCT.

lbs. to be used

Add: Desired ending inventory*

Less: Beginning inventory

lbs. to purchase

Price per lb.

Total purchases

*Calculated based on 10% of the subsequent month's budgeted usage.

2,750

3253,075

( 0 )

3,075

x .30

$ 923

3,250

4033,653

(325)

3,328

x .30

$ 998

4,025

4134,438

(403)

4,035

x .30

$ 1,211

DIRECT LABOR BUDGET

NOV.SEPT. OCT. Units to be produced

(X) Labor cost per unit

Total direct labor

2,750

x .20

$ 550

3,250

x .20

$ 650

4,025

x .20

$ 805

Problem: Heavenly Molds Part 2-A

Problem: Heavenly Molds Part 2-A Solution: Heavenly Molds Part 2-A

Problem: Heavenly Molds Part 2-A Solution: Heavenly Molds Part 2-A

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Heavenly Molds Budgets

Given the budgets prepared in the previous problem and the information provided below, prepare a Cash Flow Budget for Heavenly Molds for the months of September through November, 20X1.

Additional Cash Flow Budgeting Information: For cash flow budgeting purposes assume that all sales are expected to be made on account with 30% budgeted for collection in the month of sale and 70% budgeted for collection in the subsequent month (no uncollectible receivables are anticipated). All purchases of raw materials will be made on account with 25% budgeted for payment in the month of purchase with the remainder to be paid in the subsequent month.

On September 1, 20X1, Heavenly Molds will have to make an initial refundable deposit on the building and the injection molding machine leases of $3,000 and $2,000, respectively. In addition, the $20,000 cost of the original production molds will be due upon delivery at September 1, 20X1.

For simplicity's sake, all direct labor, manufacturing overhead and selling and administrative costs are budgeted to be paid in the month incurred. Based on the work done in the prior lesson, the following budgeted amounts are also available:

Hint: In the cash flow budget, variable costs of manufacturing should be based on the # of units to be produced while the variable selling and administrative costs would be based on the # of units budgeted for sale in any particular month. Remember that depreciation expense included in the variable manufacturing overhead costs are non-cash costs and should be excluded from the cash flow budget. Assume that any cash flow deficiency will be reflected as "Cash Capitalization Required" and Heber wishes the cash budget to reflect a minimum cash balance of $10,000 to insure adequate cash capitalization throughout the period.

Variable Manufacturing Overhead Costs,Includes $ .10/unit noitaicerped

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$.30/unit$3,830$.10/unit$1,570

CASH FLOW BUDGET

Beginning cashAdd collection of A/R:

Current monthPreceding month

Deduct disbursements:Direct materials

Current monthPreceding month

Direct laborManufacturing Overhead

VariableFixed

Selling & AdministrativeVariableFixed

Deposit onMachine leaseBuilding

Original mold costCash balance/(deficiency)Cash capitalization requiredEnding cash balance

NOV.$10,000

3,0005,250

18,250

303749805

8053,830

4001,570

9,788212

$10,000

OCT.$10,000

2, 2503,500

15,750

250692650

6503,830

3001,570

7,8082,192

$10,000

SEPT.$ 0

1,500

1,500

231

550

5503,830

2001,570

2,0003,000

20,000(30,431)

40,431$10,000

a.a.

b.b.

c.

d.

Run over the letters to see the footnotes( )

Sales RevenuesLess: Cost of Goods SoldGross MarginLess: Selling and AdministrationNet Income (Loss)

PRO-FORMA INCOME STATEMENTS

a.

b.

Provided below are the pro-forma income statements for the first three months of budgeted operations and the pro-forma balance sheet as of 11/30/X1, prepared from the previously provided budgetary information. Included with these statements are certain footnotes and calculations explaining the source of the amounts. Review these statements to understand how the various elements were determined and then respond to questions which follow.

* a and b see next two pages

NOV.$10,000)

(7,230)$2,770)(1,970)

$800)

OCT.$7,500)(6,098)1,402)

(1,870)($468)

SEPT.$5,000)(4,380)

620)(1,770)

($1,150)

a. Cost of Goods Sold calculation:First, the average budgeted manufacturing cost per unit of production is calculated for each month separately.

Next, calculate Cost of Goods Sold:

Manufacturing costs:Variable @ $.80 per unitFixedTotal Manufacturing cost

Units Produced Per unit cost

..

SEPT. OCT. NOV.

$2,2003,830

$6,0302,750$2.19

$2,6003,830

$6,4303,250$1.98

$3,2203,830

$7,0504,025$1.75

# units sold

cost/unit

Sept.Oct.

2,000 x $2.19 = $4,380

Nov.

750 x $2.19 = $1,6432,250 x $1.98 = $4,455

$6,0983,0001,000 x $1.98 = $1,9803,000 x $1.75 = $5,250

$7,2304,000

Total selling and administrative costs are calculated based on the # of units budgeted for sale.

b.

Variable ($.10/unit)Fixed

SEPT.$ 200

1,570$1,770

OCT.$ 300

1,570$1,870

NOV.$ 400

1,570$1,970

Problem: Heavenly Molds Part 2-B

Solution: Heavenly Molds Part 2-B

Problem: Heavenly Molds Part 2-B

Problem: Heavenly Molds Part 2-C

Problem: Heavenly Molds Part 2-CProblem: Heavenly Molds Part 2-C

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PRO-FORMA BALANCE SHEETNovember 30, 20X1

ASSETSCurrent Assets:

CashAccounts Receivable ($10,000 x 70%)Inventory:

Raw Materials (413 lbs. x $.30)Finished Goods (1,025 x $1.75)

Mold Development costs:Less: Accumulated Depreciation

Deposits: Machine Lease Building Lease Total Assets

LIABILITIES AND OWNER'S EQUITYLiabilities:

Accounts PayableOwner's Equity:

Contributed CapitalRetained Deficit

Total Liabilities and Owner's Equity* $10 difference with total assets due to rounding

*

$10,000 7,000

124 1,794

819,81$ 20,000

(1,003)$18,997 2,000 3,000$42,915

$ 908

42,835 (818)

$42,925

As of November 30, 20X1, how much total capital does Heber plan to have invested in the business? How was this amount determined?

Why is the total amount of projected owner's equity at 11/30/X1, less than the planned capital contributions? If the budget were extended an additional three months to 2/28/X2, would you expect owner's equity to increase or decrease and why? (Do not do the actual budget through 2/28/X2, simply identify the relevant trends.)

What is the primary cause of improved budgeted profitability from September to November? Calculate cost of goods sold as a % of sales revenues in each month and generally explain the cause of the change.

Based on your review, is the company using the Fifo or Lifo inventory cost flow assumption? Show how "Accumulated Depreciation" amounting to $1,003 was determined on the 11/30/X1 pro-forma balance sheet. Explain how "Accounts Payable" of $908 was calculated on the same balance sheet.

Given the CVP analysis previously performed and the results of the budgetary process, what is your opinion of Heber's business opportunity and why? How much investment capital do you think is actually at risk? What do you think is the most significant factor in determining Heavenly Molds' ultimate success?

(A)

(B)

(C)

(D)

(E)

$42,835. This number is reflected on the balance sheet as "Contributed Capital." The amount comes from the combined amount of "Cash Capitalization Required" from the cash flow budget for the first three months of operations.

As of November 30, 20X1, how much total capital does Heber plan to have invested in the business? How was this amount determined?

(A)

Total owner's equity at 11/30/X1 is $818 less than the contributed capital due to retained deficits or the cumulative losses from operations. Over the next three months, owner's equity will increase due to a budgeted trend of profitable operations and cash flows.

Why is the total amount of projected owner's equity at 11/30/X1 less than the planned capital contributions? If the budget were extended an additional three months to 2/28/X2would you expect owner's equity to increase or decrease and why? (Do not do the actual budget through 2/28/X2, simply identify the relevant trends.)

(B)

What is the primary cause of improved budgeted profitability from September to November? Calculate cost of goods sold as a % of sales revenues in each month and generally explain the cause of the change.

(C)

This reduction is due to the fixed manufacturing costs which are spread out over more units through increased volume, thus reducing the cost per unit of production and cost of goods sold per unit.

Sept.87.6%

Oct.81.3%

Nov.72.3%

Improved profitability results from increased volume and the resulting lower cost of goods sold per unit. Cost of goods sold, as a % of sales revenues, declines as follows:

Based on your review, is the company using the Fifo or Lifo inventory cost flow assumption? Show how "Accumulated Depreciation" amounting to $1,003 was determined on the 11/30/X1 pro-forma balance sheet. Explain how "Accounts Payable" of $908 was calculated on the same balance sheet.

(D)

Fifo.

Accumulated Depreciation: $.10 x # of units produced .10 x 10,025 = $1,003 rounded

Accounts Payable: Raw material purchases in November amount to $1,211, of which 75% are budgeted for payment in the following month and are therefore payable as of 11/30/X1.


Solution: Heavenly Molds Part 2-C Solution: Heavenly Molds Part 2-C

Solution: Heavenly Molds Part 2-C Solution: Heavenly Molds Part 2-C


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,Given the CVP analysis previously performed and the results of the budgetary process, what is your opinion of Heber's business opportunity and why? How much investment capital do you think is actually at risk? What do you think is the most significant factor in determining Heavenly Molds' ultimate success?

(E)

Answer to Part E - Listen to Walk Through for answer

Solution: Heavenly Molds Part 2-C

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