PROFIT PLANNING

BUDGET - a quantitative plan for acquiring and using resources over a specified time period.
INCOME EXPENS ES

PROFIT PLANNING MASTER BUDGET -Refers to a summary of a companys plans including specific targets for sales , production and financing activities. Budgets are used for two distinct purposes : planning control

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Planninginvolves developing goals and preparing various budgets to achieve those goals. Control- involves the steps taken by management to increase the likelihood that all parts of the organization are working together to achieve the goals set down at the

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ADVANTAGES OF BUDGETING: 1. Budgets communicate managements plans throughout the organization. 2. Budgets force managers to think about and plan for the future. 3. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.

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4. The budgeting process can uncover potential bottlenecks before they occur.

5. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts.
6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

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In administering the budget program, it is particularly important that top management not use the budget to pressure or blame employees. Or else, it will cause: rather than:

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BUDGET COMMITTEE -usually responsible for overall policy relating to the budget program and for coordinating the preparation of the budget itself. - may consist of the president; vice-presidents in charge of various functions such as sales, production, and purchasing; and the controller. - resolves the difficulties and disputes relating to the budget. - approves the final budget.

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MASTER BUDGET
- Consists of a number of separate but interdependent budgets.

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Steps in Preparing the Master Budget: 1. Prepare a sales budget. 2. Prepare the production budget ( DM Budget, DL Budget, MOH Budget) 3. Combine the data from the production budget, sales budget and the selling and administrative expenses budget. 4. Determine the cash budget.

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SALES BUDGET - the starting point in preparing the master budget. - it is a detailed schedule showing the expected sales for the budget period. - based on the companys sales forecast which may require the use of sophisticated mathematical models and statistical tools.

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PRODUCTION BUDGET -prepared after the sales budget. - it is the no. of units that must be produced to satisfy the sales needs and to provide for the desired ending inventory.
Budgeted units sales Add: desired Ending Inventory Total Needs Less: Beginning Inventory Required Production xxxx xxxx xxxx xxxx xxxx

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MERCHANDISE PURCHASE BUDGET - it shows the amount of goods to be purchased from suppliers during the period.
Budgeted Sales Add: Desired ending Mdse. Inventory Total Needs Less: Beginning Mdse. Inventory Required Purchases Xxxx Xxxx Xxxx Xxxx xxxx

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DIRECT MATERIALS BUDGET -prepared after the production requirements have
been computed. - details the raw materials that must be purchased to fulfill the production budget an to provide for adequate inventories.
Raw materials needed to meet the production schedule Add: Desired ending inventory of raw materials Total raw materials needs Less: Beginning Inventory of Raw materials Xxxx Xxxx Xxxx Xxxx

Raw materials to be purchased

xxxx

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DIRECT LABOR BUDGET -shows the direct labor-hours required to satisfy the production budget.

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MANUFACTRING OVERHEAD BUDGET - lists all costs of production other than direct materials and direct labor.

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ENDING FINISHED GOODS INVENTORY BUDGET - shows the computation of the carrying cost of the unsold units.

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SELLING AND ADMINISTRATIVE EXPENSES - lists the budgeted expenses for areas other than manufacturing.

Selected information concerning sales and production for Cabot Co. For July are summarized as follows: A. Estimated sales: Product K: 40, 000 units at 30 per unit Product L: 20, 000 units at 65 per unit B. Estimated Inventories, July 1, 2013 Material A: 4, 000 lbs Product K: 3, 000 units @ 17 per unit 51, 000 Material B: 3, 500 lbs Product L: 2, 700 units @ 35 per unit 94, 500 There were no work in process inventories estimated for July 1, 2012 145, 000 C. Desired inventories at July 31, 2012 Material A: 3, 000 lbs Product K: 2, 500 @ 17 per unit 42, 500 Material B: 2, 500 lbs Product L: 2, 000 @ 35 per unit 70, 000 There were no work in process inventories desired for July 31, 2013 112, 500 D. Direct Materials used in production: Product K Material A: 0. 7 lb per unit Material B: 1.2 lbs per unit E. Unit Costs for Direct Material: Material A: 4 per lb Material B: 2 per lb

Product L 3.35 lb per unit 1.8 lbs per unit

F. Direct Labor Requirements: Product K unit Product L unit Direct Labor Rate Department 1 Department 2 0.4 hr per unit 0.15 hr per 0.6 hr per unit Department 1 12 per hr 0.25 hr per

Department 2 16 per hr

H. Estimated factory overhead costs for July: Indirect factory wages Depreciation of plant and equipment 40,000 Power of light Indirect materials Total

$200,000

25,000 34,000 $299,000

Instructions:
1.Prepare a sales budget for July. 2.Prepare a production budget for July. 3.Prepare a direct materials purchases budget for July. 4.Prepare a direct labor costs for July.

Sales Budget

A 1 2 3 4 Product

B Cabot Co. Sales Budget

For the Month Ending July 31, 2012 Unit Sales Volume 40,000 20,000 Unit Selling Price $30.00 65.00 Total Sales $1,200,000 1,300,000 $2,500,000

5 Product K 6 Product L 7 Total revenue from sales

A 1 2 3 4 5 6 Sales 7 Plus desired inventories at July 31, 2012 8 Total 9 Less estimated inventories, July 1, 2012 10 Total Production Cabot Co. Production Budget

For the Month Ending July 31, 2012 Units Product K 40,000 2,500 42,500 3,000 39,500 Product L 20,000 2,000 22,000 2,700 19,300

A 1 2 3 4 5 6 7 8 9 10 11 Units required for production: Product K (39,500X lbs. per unit) Product L (19,300X lbs. per unit) Plus desired units of inventory, July 31, 2012 Total

B Cabot Co.

Direct Materials Purchases Budget For the Month Ending July 31, 2012 Direct Materials Material A Material B Total

27,650 67,550

lbs* **

47,400 34,740

lbs* **

3,000 98,200 lbs.

2,500 84,640 lbs.

12
13 14 15 16 17 18 19

Less estimated units of inventory,

July 1, 2012 Total units to be purchased Unit Price Total Direct Materials 4,000 94,200 X $4.00 $ 376,800 lbs. 3,500 81,140 X $2.00 $162,280 $539,080 lbs.

*27,65=39,500x0.7 **67,550=19,300x3.5

47,400=39,500x1.2 34,740=19,300x1.8

A 1 2 3 4

C Cabot Co.

Direct Labor Cost Budget For the Month Ending July 31, 1012 Department 1 Department 2 5,925 * 4,825 ** 10,750 x$16.00 $172,000 $500,060 Total

5 Hours required for Production 6 7 8 9 10 11 12 13

*15,800=39,500x0.4 **11,580=19,300x0.6 5,925=39,500x0.15 4,825=19,300x0.25

Product K (39,500X lbs. per unit) Product L (19,300X lbs. per unit) Total Hourly rate Total Direct Labor cost

15,800 * 11,580 ** 27,380 X$12.00 $328,560