Ahmed arfan

Pointer summery
Profit planning

Definitions:

Budgeting: It is a process that help business to plan ahead and control by comparing what
happened to what was expected in the budget.
Planning: is looking ahead to what actions should be taken to realize particular goals.
Control: is involves the past which looking backward so to determine what actually happened
and comparing it with previously planned outcomes.

Advantages of budgeting:
 Planning
 Information for decision making
 Standards for performance evaluation
 Improved communication

The master budget

Is the comprehensive plan for the organization as a whole and it is for one-year period.

Major components of the master budget

 Operating budget: describe the income generating activities of a firm
 Financial budget: detail the inflows and outflows of cash and the overall financial
position.

Preparing the operating budget

 Sales budget
 Production budget
 Direct materials purchase budget
 Direct labor budget
 Overhead budget
 Selling and administrative expenses budget
 Ending finished goods inventory budget
 Cost of goods sold budget

Sales budget
A sales budget provides an estimate of the volume of goods and services that a company
proposes to sell in a future period. It is usually made for the following year. Most sales budgets
include monthly and quarterly figures as well. Additionally, the budget provides details in both
dollars and units.

Production budget
Production budget is a schedule showing planned production in units which must be made by a
manufacturer during a specific period to meet the expected demand for sales and the planned
finished goods inventory. The required production is determined by subtracting the beginning
finished goods inventory from the sum of expected sales and planned ending inventory of the
period.

Planned Production in Units = Expected Sales in Units + Planned Ending Inventory in Units −
Begining Inventory in Units

Direct materials purchases budget

Tells the amount and cost of raw materials to be purchased in each time period, it depends on
the expected use of materials in production and the raw materials inventory needs of the firm.

Purchases = direct materials needed for production + direct materials in desired ending
inventory – direct materials in beginning inventory

Direct labor budget

Shows the total direct labor hours and the direct cost needed for the number of units in
production budget.

Overhead budget
Shows the expected cost of all production costs other than direct materials and direct labor.

Ending finished goods inventory budget

It is needed for the balance sheet and also serves as an important input for the preparation of
the cost of goods sold budget.

Preparing the financial budget

 Cash budget
a. Cash available
b. Cash disbursements
c. Cash excess or deficiency
d. Borrowings and repayments
e. Ending cash balance
 Budgeted balance sheet
 Budget for capital expenditures

Using budget for performance evaluation

Key futures that promote a reasonable degree of positive behavior:
 Frequent feedback on performance: allows managers to know how successful their
efforts have been.
 Monetary and nonmonetary incentives: means to an organization uses to influence a
manager to exert effort to achieve an organization goal.
 Participative budgeting: allowes managers to considerable say in how the budgets are
established.
 Realistic standards:
a. Actual levels of activity
b. Seasonal variations
c. Efficiencies
d. General economic trends
 Controllability of costs: costs whose level a manager can influence
 Multiple measures of performance: it is important to use other measures ort else it will
lead to milking the firm or myopia.