CHAPTER 9 Financial Planning and Analysis The Master

CHAPTER 9 Financial Planning and Analysis: The Master Budget Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Financial Planning and Analysis (FP&A) Systems A financial planning and analysis (FP&A) system helps managers assess the company’s future and know if they are reaching their performance goals. A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance. The planning component of the FP&A system is called the master budget. It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization. 9 -2

Purposes of Budgeting Systems Budget 1. Planning a detailed plan, expressed in 2. Facilitating quantitative terms, that Communication and specifies how resources will be acquired and used during a Coordination specified period of time. 3. Allocating Resources 4. Controlling Profit and Operations 5. Evaluating Performance and Providing Incentives 9 -3

Types of Budgets Materials Production Covering all phases of a company’s operations. Sales Master Budget Detail Budget 9 -4

Types of Budgets Income Statement Budgeted Financial Statements Balance Sheet Statement of Cash Flows 9 -5

Types of Budgets Capital budgets with acquisitions that normally cover several years. Financial budgets with financial resource acquisitions. Long Range Budgets Continuous or 2011 Rolling Budget 2012 2013 2014 This budget is usually a twelve-month budget that rolls forward one month as the current month is completed. 9 -6

Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods Ending Inventory Budget Direct Materials Budget Direct Labor Budget Overhead Budget Cash Budget Selling and Administrative Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9 -7

Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods When the interactions of the elements Ending Direct budget Directare expressed. Selling of the master as and Overhead Inventory Materials Labor Administrative Budget a set of mathematical relations, it Budget Direct Materials becomes a financial planning model that can be used to answer “what if” Cash Budget questions about unknown variables. Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9 -8

Sales Budget ÊBreakers, Inc. is preparing budgets for the quarter ending June 30. ËBudgeted sales for the next five months are: April May June July August 20, 000 units 50, 000 units 30, 000 units 25, 000 units 15, 000 units. ÌThe selling price is $10 per unit. 9 -9

Sales Budget 9 -10

Production Budget The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. On March 31, 4, 000 units were on hand. Let’s prepare the production budget. 9 -11

From sales budget Production Budget Ending inventory becomes beginning inventory the next month March 31 ending inventory 9 -12

Direct-Material Budget At Breakers, five pounds of material are required per unit of product. Management wants materials on hand at the end of each month equal to 10% of the following month’s production. On March 31, 13, 000 pounds of material are on hand. Material cost $. 40 per pound. Let’s prepare the direct materials budget. 9 -13

From our production budget Direct-Material Budget 10% of the following month’s production March 31 inventory 9 -14

Direct-Material Budget 9 -15

Direct-Labor Budget At Breakers, each unit of product requires 0. 1 hours of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 3, 000 hours per month. Let’s prepare the direct labor budget. 9 -16

Direct-Labor Budget From our production budget This is the greater of labor hours required or labor hours guaranteed. 9 -17

Overhead Budget Here is Breakers’ Overhead Budget for the quarter. 9 -18

Selling and Administrative Expense Budget At Breakers, variable selling and administrative expenses are $0. 50 per unit sold. Fixed selling and administrative expenses are $70, 000 per month. The $70, 000 fixed expenses include $10, 000 in depreciation expense that does not require a cash outflow for the month. 9 -19

Selling and Administrative Expense Budget From our Sales budget 9 -20

Cash Receipts Budget At Breakers, all sales are on account. The company’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following the sale, 5% is uncollected. The March 31 accounts receivable balance of $30, 000 will be collected in full. 9 -21

Cash Receipts Budget 9 -22

Cash Disbursement Budget Breakers pays $0. 40 per pound for its materials. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the following month. No discounts are available. The March 31 accounts payable balance is $12, 000. 9 -23

Cash Disbursement Budget 140, 000 lbs. × $. 40/lb. = $56, 000 9 -24

Cash Disbursement Budget Breakers: Maintains a 12% open line of credit for $75, 000. Maintains a minimum cash balance of $30, 000. Borrows and repays loans on the last day of the month. Pays a cash dividend of $25, 000 in April. Purchases $143, 700 of equipment in May and $48, 300 in June paid in cash. Has an April 1 cash balance of $40, 000. 9 -25

From our Cash Receipts Budget (Collections and Disbursements) Cash Budget From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget To maintain a cash balance of $30, 000, Breakers must borrow $35, 000 on its line of credit. 9 -26

Cash Budget (Collections and Disbursements) 9 -27

Cash Budget (Collections and Disbursements) 9 -28

Cash Budget Ending cash balance for April is the beginning May balance. (Financing and Repayment) 9 -29

Cost of Goods Manufactured 9 -30

Cost of Goods Sold 9 -31

Budgeted Income Statement 9 -32

Budgeted Statement of Cash Flows 9 -33

Budgeted Balance Sheet Breakers reports the following account balances on March 31 prior to preparing its budgeted financial statements for June 30: • Land - $50, 000 • Building (net) - $148, 000 • Common stock - $217, 000 • Retained earnings - $46, 400 9 -34

25%of June sales of $300, 000 11, 500 lbs. at $. 40 per lb. 5, 000 units at $4. 60 per unit. 50% of June purchases of $56, 800 9 -35

Budget Administration The Budget Committee is a standing committee responsible for. . . overall policy matters relating to the budget. l coordinating the preparation of the budget. l 9 -36

International Aspects of Budgeting Firms with international operations face special problems when preparing a budget. 1. Fluctuations in foreign currency exchange rates. 2. High inflation rates in some foreign countries. 3. Differences in local economic conditions. 9 -37

Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget. ” 9 -38

Participative Budgeting Flow of Budget Data 9 -39

End of Chapter 9 9 -40