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Presented by
Samuel Sihombing
Sepri Simatupang
Sabar
Profit Planning
What is it?
Why is it important?
Financial changes occur constantly
Trace in your company
Benchmark others
Importance of Accounting
Accounting Records
Balance Sheet
Financial structure
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Long-term Liabilities
Bonds and mortgages
Working capital
Owners’ Equity
Retained Earnings
Income Statement
Revenues
Expenses
Fixed
Variable
Profit
Profit Planning Process
1. Establish the Profit Goal
How much to do want to make?
What rate of return do investors want?
2. Determine the Planned Sales
Volume
Sales forecast
Factors
FEED BACK
Planning A set of goals is
often necessary to guide and
focus individual and group
actions. Directing Once the
budget plans are in place, they
can be used to direct and
coordinate operations in order to
achieve the stated goals.
Controlling A time passes, the
actual performance of an
operation can be compared
against the planned goals
Nature and Objectives of
Budgeting
Human Behavior and budgeting
In the budgeting process, business, team, and individual
goals are established. Human behavior problems can arise
if 1) the budget goal is unachievable (too tight), 2) the
budget goal is very easy to achieve (too loose), or 3) the
budget goals of the business conflict with the objectives of
employees (goal conflict).
1. Setting Budget Goals too Tightly
People can become discouraged if performance
expectations are set too high.
2. Setting Budget Goals too Loosely
Although it is desirable to establish attainable goals.
3. Setting Conflicting Budget Goals
Goal conflict occurs when individual self-interest
differs from business objectives.
Budgeting
Systems
• Budgeting systems very among businesses
because of such factors as organizational
structure, complexity of operations, and
management philosophy. Differences in
budget systems are even more significant
among different types of business, such as
manufacturers and service businesses.
• There are several methods of developing budget
estimates.
One method, termed zero-based budgeting.
1. Static Budget
Shows the expected results of
responsibility center for only one
activity level.
2. Flexible Budget
Shows the expected results of a
Budgeting Systems
2. Flexible Budget
Colter Manufacturing Company
Assembly Department Budget
For the Year Ending July 31, 2008
Units of Production 8,000 9,000
10,000
Variable cost :
Direct labor ($5 per unit) 40,000 45,000
50,000
Electric power ($0.50 per unit) 4,000 4,500
5,000
Total variable cost 44,000 49,500
55,000
Fixed cost :
Electric power 1,000 1,000
1,000
Budgeting Systems
Static and Flexible Budgets
Over Budget
Over Budget
purchases budget
DL FG COS
Direct labor cost budget
budget FO Sale NI
Selling and administrative
expenses budget S&A
Income Statement
Budgets
Income Statement
Budgets
We will illustrate the major elements of the income statement
budget
Sales Budget
Production
Budget
Production
Budget
Factory
Direct Material Direct Labor
Overhead Cost
Cost Budget Cost Budget
Budget
Selling & Adm Cost Of Good
Expenses Budget Sold Budget
Income
Statment
Budget
Income Statement
Sales Budget
Budgets
The sales budget normally indicates for each product
1) The quantity of estimated sales and
2) the expected unit selling price.
This date are often reported by regions or by sales
representatives.
In estimating the quantity of sales for each product, past sales
volumes are often used as a starting point. These amounts
are revised for factors that are expected to affect future
sales, such as the factors listed below.
- backlog of unfilled sales orders
- planned advertising and promotion
- expected industry and general economic conditions
- productive capacity
- projected pricing policy
- findings of market research studies
Income Statement
Budgets
Elite Accessories Inc.
Sales Budget
For the Year Ending March 31, 2008
Product and Region Unit Sales Unit Selling
Total
Volume Price Sales
Wallet :
East 287,000 $ 12.00 $
3,444,000
West 241,000 $ 12.00 $
2,892,000
Total 528,000 $
6,336,000
Handbag :
East 156,400 $ 25.00 $
3,910,000
West 123,600 $ 25.00 $
Income Statement
Budgets
Production Budget
Production should be carefully coordinated with the sales
budget to ensure that production and sales are kept
in balance during the period. The number of units to
be manufactured to meet budgeted sales and
inventory needs for each product is set forth in the
production budget. The budgeted volume of
production is determined as follows
Expected Unit to be Sold
+ Desired units in ending inventory
- Estimate units in beginning inventory
Unit
wallet Handbag
Expected units to be sold 528,000 280,000
Plus desired ending inventory 80,000
60,000
Total 608,000
340,000
Less estimated beginning inventory 88,000
48,000
Total units to be produced 520,000
292,000
Income Statement
Budgets
• Direct Materials Purchases Budget
The production budget is the starting point for determining
Note A : Cutting Department : 520,000 units x 0.10 hour per unit = 52,000
hour
Sewing Department : 520,000 units x 0.25 hour per unit =
130,000 hour
Note B : Cutting Department : 292,000 units x 0.15 hour per unit = 43,800
hour
Sewing Department : 292,000 units x 0.40 hour per unit =
Income Statement
Budgets
• Factory Overhead Cost Budget
The estimated factory overhead costs
necessary for production make up the
factory overhead cost budget. This budget
usually includes the total estimated cost for
each item of factory overhead. A business
may prepare supporting departmental
schedules, in which the factory overhead
costs are separated into their fixed and
variable cost elements. Such schedules
enable department managers to direct
their attention to those costs for which they
are responsible and to evaluate
Income Statement
Budgets
Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending March 31, 2008
January February
March
Selling and administrative expenses 160,000 165,000
145,000
Balance Sheet Budgets
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2008
January February
March
Estimated cash receipts from :
Cash sales 108,000 124,000
97,000
Collections of accounts receivable 953,200 1,058,400
970,200
Interest revenue
24,500
Total cash receipts 1,061,200 1,182,400
1,091,700
Estimated cash payments for :
Manufacturing costs 802,000 771,000
780,000
Selling and administrative expenses 160,000 165,000
145,000
Capital additions 274,000
Interest expenses 22,500
Income taxes
Balance Sheet Budgets
Capital Expenditures Budget
The capital expenditures budget summarizes plans for
acquiring fixed assets. Such expenditures are necessary as
machinery and other fixed assets w ear out, become
obsolete, or for other reasons need to be replaced. In
addition, expanding plant facilities may be necessary to
meet increasing demand for a company’ s product.
The useful life of many fixed assets extends over long
periods of time. In addition, the amount of the
expenditures for such assets may vary from year to year. It
is normal to project the plans for a number of periods into
the future in preparing the capital expenditures budget
Balance Sheet Budgets
Elite Accessories Inc.
Capital Expenditures Budget
For the Five Years Ending December 31, 2008