Budgeting Software Packages

Remember that financial models essentially are used to generate pro forma financial statements and financial ratios. These are the basic tools for budgeting and profit planning. Also, the financial model is a technique for risk analysis and what-if experiments. The financial model is also needed for day-to-day operational and tactical decisions for immediate planning problems. For these purposes, the use of computers is essential. Spreadsheet software and computer-based financial modeling...

Strategic Planning

Strategic plans are long-term, broad plans ranging from 2 to 30 years, with 5 to 10 years being most typical. Strategic planning is continuous and looks where the company is going. It is done by upper management and divisional managers. Most of the information used is external to the company. The strategic plan is the mission of the company and looks to existing and prospective products and markets. Strategic plans are designed to direct the company's activities, priorities, and goals. They try...

Cash Budget

The budget preparation process normally begins with the sales budget and continues through the preparation of pro forma financial statements. The last schedule prepared before the financial statements is the cash budget. The cash budget is a schedule of estimated cash collections and payments. The various operating budgets and the capital budget are inputs to the cash budgeting process. The cash budget is prepared for the purpose of cash planning and control. It presents the expected cash...

Definition of Variables

Fundamental to the specification of a financial model is the definition of the variables to be included. Basically, the three types of variables are policy variables Z , external variables X , and performance variables Y . Policy variables often called control variables are those over which management can exert some degree of control. Examples of financial variables are cash management, working capital, debt management, depreciation, tax, merger-acquisition decisions, the rate and direction of...

Comprehensive Sales Planning

Chapter 5 gave an overview of a comprehensive profit plan. The initiating management decisions in developing the plan were the statements of broad objectives, specific goals, basic strategies, and planning premises. The sales planning process is a necessary part of profit planning and control because 1 it provides for the basic management decisions about marketing, and 2 based on those decisions, it is an organized approach for developing a comprehensive sales plan. If the sales plan is not...

Ending Finished Goods Inventory Budget

The ending finished goods inventory budget provides us with the information required for the construction of budgeted financial statements. After completing Schedules 1 to 5, sufficient data will have been generated to compute the per-unit manufacturing cost of finished product. This computation is required for two reasons 1 to help compute the cost of goods sold on the budgeted income statement, and 2 to give the dollar value of the ending finished goods inventory to appear on the budgeted...

Planning and Control of Direct Labor

Direct labor is paid either by piecework, in which the factory labor is paid so much per piece, or by day work, in which the labor is paid a stipulated hourly rate regardless of the job he is assigned. Planning and control of direct labor has two primary objectives 1. To obtain the maximum output from each of the employees 2. To ensure that product costs reflect proper labor charges Planning and budgeting direct labor costs is considered straightforward for two reasons. First, direct labor...

Who Uses Forecasts

Forecasts are needed for marketing, production, purchasing, manpower, and financial planning. Further, top management needs forecasts for planning and implementing long-term strategic objectives and planning for capital expenditures. More specifically, marketing managers use sales forecasts to determine optimal sales force allocations, set sales goals, and plan promotions and advertising. Market share, prices, and trends in new product development are also required. Production planners need...

Fixed Budgets versus Flexible Budgets and Performance Reports

A fixed static budget presents budgeted amounts at the expected capacity level. It is best used when the department's activities e.g., sales are stable. A deficiency with the static budget is the lack of flexibility to adjust to unexpected changes. The fixed budget is suitable for a department whose workload does not have a direct relationship to sales, production, or other volume related to a department' s operations. The workload is determined primarily by management decision instead of sales...

Profit Variance Analysis

Gross profit analysis is determining the causes for the change in gross profit. Any variances that have an impact on gross profit are reported so corrective steps may be taken. Changes in unit sales price and cost Changes in the volume of products sold Analysis of the changes furnishes data needed to bring actual operations in line with budgeted expectations. Comparisons should be made between budgeted and actual operations for the current year or between actual operations for the previous year...

Authorization of Capital Budget

If capital expenditures exceed authorized limits, special approval by top management is required. A project not meeting expectations or that is no longer appropriate, given current circumstances, may be canceled. It is better to cancel a project if the cost benefit relationship indicates that the project is no longer viable. If a project is a succession of individual projects, a partial authorization may be made. Exhibit 13.1 is an illustrative capital budget request schedule form. An...

Genesis of Forecasting and Profit Planning

A comprehensive master budget is a formal statement of management's expectation regarding sales, expenses, volume, and other financial transactions for the coming period. It consists basically of a pro forma income statement, pro forma balance sheet, and cash budget. At the beginning of the period, the budget is a plan or standard. At the end, it serves as a control device to help management measure its performance against the plan so that future performance may be improved. With the aid of...

Types of Budgets

It is necessary to be familiar with the various types of budgets to understand the whole picture and how these budgets interrelate. The types of budgets include master, operating for income statement items comprised of revenue and expenses , financial for balance sheet items , cash, static fixed , flexible, capital expenditure facilities , and program appropriations for specific activities such as research and development, and advertising . These budgets are briefly explained below. A master...

Sales Mix Analysis

Break-even and cost-volume-profit analysis requires some additional computations and assumptions when a company produces and sells more than one product. In multiproduct firms, sales mix is an important factor in calculating an overall company break-even point. Different selling prices and different variable costs result in different unit CM and CM ratios. As a result, the break-even points and CVP relationships vary with the relative proportions of the products sold, called the sales mix. In...

Contribution Margin Income Statement

Contribution Margin Chart

The traditional income statement for external reporting shows the functional classification of costs, that is, manufacturing costs versus nonmanufacturing expenses or operating expenses . An alternative format of income statement, known as the contribution margin income statement, organizes the costs by behavior rather than by function. It shows the relationship of variable costs and fixed costs a given cost item is associated with, regardless of the functions. The contribution approach to...