WEEK 6 DECK Essay

Submitted By Thomas-Thayil
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Pages: 12
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Chapter
Fourteen
Planning for
Profit and
Cost Control

© 2015 McGraw-Hill Education.

LO
LO 11
Describe the budgeting process and the benefits it provides. 14-2

Three Levels of Planning
1.
1. Strategic
Strategic planning planning involves involves making making long-term long-term decisions decisions such such as as defining defining the the scope scope of of the the business, business, determining determining which which products products to to develop develop or or discontinue discontinue and and identifying identifying the the most most profitable profitable markets. markets. 2.
2. Capital
Capital budgeting budgeting focuses focuses on on intermediate-range intermediate-range planning planning and and involves involves decisions decisions such such as as whether whether to to buy buy or or lease lease equipment, equipment, whether whether to to stimulate stimulate sales, sales, or or whether whether to to increase increase company company assets. assets. 3.
3. The
The Operations
Operations budget budget describes describes short-term short-term objectives objectives in in specific specific amounts amounts of of sales sales targets, targets, production production goals, goals, and and financing financing plans. plans. 14-3

Advantages of Budgeting
Promotes
Planning

Promotes
Coordination

Budgeting
Enhances
Performance
Measuremen
t

Enhances
Corrective
Actions
14-4

Budgeting and Human Behavior
Upper management must be sensitive to the impact of the budgeting process on employees.
Budgets are constraining.
They limit individual freedom in favor of an established plan.

Many people find evaluation based on budget expectations stressful. Think of students and exams.

Upper management must demonstrate that budgets are sincere efforts to express realistic goals employees are expected to meet.
14-5

Cash Receipts and Payments
Schedules

Operating
Budgets
Start

Pro forma
Financial
Statements

Cash receipts Sales budget Income statement Cash payments for inventory Inventory purchases budget

Balance sheet Cash payments for S & A

S&A expense budget

Statement of cash flows

Cash budget 14-6

LO
LO 12
Prepare a sales budget and related schedule of cash receipts.

14-7

Sales Budget
Detailed schedule prepared by the marketing department showing expected sales for the coming periods and expected collections on those sales. It is critical to the success of the entire budgeting process. 14-8

Sales Budget
Hampton Hams (HH) is preparing a sales budget for the last quarter of the year.
Sales of hams are expected to peak in the months of October, November and
December (the holiday seasons). The store sales for October are expected to total $160,000 ($40,000 in cash sales, and $120,000 in sales on account). Sales are expected to increase by 20% per month for November and December.
Let’s prepare a sales budget.
14-9

Sales Budget: Projected Sales Section
Accounts receivable at December 31stst are
$172,800, the uncollected sales on account. $40,000
$40,000 ×× 120%
120% = $48,000
$48,000

$120,000
$120,000 ×× 120%
120% = $144,000
14-10

Sales Budget:
Schedule of Cash Receipts
Hampton Hams (HH) will collect cash sales in the month of sale. Past experience shows the company will collect cash from its credit sales in the month following the month of the sale
(October credit sales will be collected in full in November).
Let’s prepare the cash receipts budget.

14-11

Sales Budget:
Schedule of Cash Receipts
Exhibit 14.2 Sales Budget

Sales revenue on the income statement will be the sum of the monthly sales
($582,400).

14-12

Pro Forma Data

$160,000

14-13

LO
LO 13
Prepare an inventory purchases budget and related schedule of cash payments.

14-14

Inventory Purchases Budget
The total amount of inventory needed for each month is equal to the amount of the cost of budgeted sales plus the desired ending inventory.

14-15

Inventory Purchases Budget
HH’s policy is that ending inventory should be equal to 25% of next
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