Transcript Slide 1

BUDGETING FOR OPERATION
Budget and Budgeting
Budget quantitative model of the expected consequences of the organization’s
short term operating activities.
Budgeting process of preparing budget and requires several important skills,
including forecasting, a knowledge of how activities affect costs, and the ability to
see how the organization’s different activities fit together.
Purpose of budget and budgeting are for planning and control.
Planning and control and the role of budgets
Exp.
Objectives:
a. Achieve an ROI of 10 % during 2009 – 2014
b. Become number one in global automotive market share by 2011
c. Increase domestic cars and trucks market share by 5 % by 2012
d. Reduce unit costs by 6 % in 2011
Strategy:
Grow by concentrating all resources in the car and truck industry. Focus on
developing fuel-efficient cars and trucks
Vertically integrate and continually modernize manufacturing facilities with
state of the art technology to reduce costs and to control raw materials
Engage in joint ventures with foreign auto manufacturers to build and sell cars
and trucks in developing countries.
Budgets:
Prepare budgets showing cost benefit analysis of each plan
Develop procedures needed to sell enough bonds and common stocks to
finance the construction of the world car division
Develop procedures for negotiation teams to follow when looking joint venture
partners
Develop a series of procedures to follow in order to purchase a steel company
Develop procedures to convert manned to robot work station
Develop procedures to convert to front wheel drive
Projected Financial Statements:
a. the Projected Balance Sheet
b. the Projected Income Statement
Master Budget Output
Master budget has two sets of outputs:
A. Operating budgets/operating plans.
a.
b.
c.
d.
e.
f.
The Sales PlanIdentifies the planned level of sales for each product
The Capital Spending Plan  Specifies when long term capital
investments must be made to meet activitity objectives
The Production Plan  Schedules all required production
The Materials Purchasing Plan  Schedules all required purchasing
activities
The Labor Hiring and Training Plan  Schedules the number, hiring,
and training of people to achieve its activity objectives
The
Administrative
and
Discretionary Spending Plan

Includes
staffing, R & D, and advertising plans
B. Financial budgets.
a.
b.
The Projected Balance Sheet and Income Statement Evaluating the
financial consequences of proposed decision
The Projected Cash Flows  to Plan when excess cash will be
generated or cash shortages
Budgeting Process
Steps of budgeting process.
A. The Demand Forecasting.
The budgeting process is drived by the demand forecast
Demand forecast  an estimate of the market demand or sales potential for a
product under specified conditions.
Organizations develop demand forecasts in ways:
a.
b.
Sophisticated market
staffs
Statistical models
surveys
by
outside
experts
or
their
own
sales
B. The Production Plan
Planner must match sales plan with inventory policy and capacity levels to
determine a production plan.
Some organizations use some policies ;
Producing for inventory and attempt to keep predetermined or target number of
units in inventory.
Just in time inventory policy “A Chase Demand Strategy” is the inventory policy
of producing for demand. Implementing this policy requires flexibility among
employees, equipment and suppliers and well designed production process.
Demand drives the production plan directly: the production in each period equals
the next period’s planned sales.
C. Developing the Spending Plans
Having identified a feasibile production plan, planners can make tentative resources
commitments.
The Purchasing group prepares a materials purchasing plan
The personnel and production groups prepare the labor hiring and training plans
Staff and other groups prepare an administrative and discretionary spending plan
for R & D, advertising, and training.
Discretionary expenditures (fixed costs) provide infrastructure required by the
emerging production and sales plan.
The long term plan includes top management approves the capital spending plan
for putting new productive capacity in place
D. Choosing the Capacity Levels
Types of capacity levels:
a. Flexible resources that the organization can acquire in the short run to
meet current production (monthly production)
b. Committed resources that the organization must acquire for the
intermediate term such as adding expert.
c. Committed resources that the organization must acquire for the long
term such as plans to rent a shop or to build an oil refinery
Summary of capacity types and commitment time
Term
Type of Capacity Acquired
Short term
Provides the ability to use existing capacity
Intermediate
term
General
purpose
capacilty
that
is
transferable between organizations, given
time
Long term
Special
purpose
capacity
that
customized for the organization’s use
is
Examples
Raw materials,
supplies
and
casual labors
People, general
purpose
equipment,
specialty
raw
materials
Buildings,
Special purpose
equipments
E. Financial Plans
Once the planners have developed the operating plans, they can prepare a
financial summary of the tentative operating plans.
Format of the Cash Flow Statement.


Retail price $ 80
Sales to dealer $ 55 per unit and the average collection period is 30 % in
the month folloeing the sale, 45 % in the second month, 20 % in the third
month, and 5 % never collected
Demand and Sales Data, Number of Units, 2008
JAN
FEB
APRIL
MAY
Retail
100
105
115
75
demand
Dealer
375
400
350
300
demand
Total
475
505
465
375
demand
Shop
800
800
800
800
capacity
Painting
400
400
400
400
capacity
Production
400
400
400
375
capacity
Retail
100
105
115
75
units
made and
sold
Dealer
300
295
285
300
units
made and
sold
Total units
400
400
400
375
made and
sold
JUNE
60
JULY
50
DEC
350
250
300
400
310
350
750
800
800
800
400
200
600
310
200
600
60
50
350
250
150
250
310
200
600
ABC Corporation: Cash Flow and Financing Data - 2008
Cash Inflows
 Retail sales
 Dealer
collections – 1
month
 Dealer
collections – 2
month
 Dealer
collections – 3
month
Total
Month (2008)
AGT
SEPT
$4,400
$6,000
2,475
2,392
JAN
$ 8,000
2,887
FEB
$ 8,400
4,950
JULY
$4,000
4,125
OCT
$12,000
2,062
DEC
$ 28,000
5,115
10,519
4,331
7,425
6,188
3,713
3,589
7,425
5,610
4,675
3,135
3,300
2,750
1,650
1,375
27,016
22,356
18,685
16,363
14,855
19,301
41,915
$ 900
1,260
1,100
$ 900
1,260
1,100
$450
630
550
$450
630
550
$450
630
550
$1,013
1,418
1,238
$ 1,350
1,890
1,650
780
3,000
780
3,000
390
1,500
390
1,500
390
1,500
878
3,375
1,170
4,500
$ 4,000
$ 4,000
2,000
$2,000
$2,000
$6,000
$ 6,000
4,800
2,500
0
2,500
4,800
2,500
0
2,500
0
2,500
4,800
2,500
0
2,500
1,667
1,667
1,667
1,667
1,667
1,667
1,667
0
3,333
163
3,333
17
3,333
208
3,333
177
3,333
160
3,333
145
3,333
23,340
$ 3,676
18,703
$ 3,653
17,837
$ 848
13,228
$ 3,134
13,197
$ 1,658
26,380
-$7,079
24,205
$ 17,710
Cash
Outflows
For
flexible
resources:
 Buoys
 Paint costs
 Other supplies
costs
 Packing costs
 Shipping costs
For
committed
resources:
 Painters’
salaries
 Shop rent
 Manager’s
salary
 Other
shop
costs
 Interest paid
 Advertising
costs
Total
Net cash flow this
month
Finnacing
Operations
$ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
 Opening cash
0 - 20,000
0
0
0
 Cash invested - 20,000
(withdrawn)
 Cash available -11,324 8,653 -14,152 8,134 6,658 -2,079
0 16,324 1,652 20,803 17,669 16,010
 Opening loan
16,324
0 19,152
0
0 7,079
 Borrowing
made
0 3,653
0 3,134 1,658
0
 Borrowing
repaid
16,324 12,671 20,803 17,669 16,010 23,089
 Ending Loan
5,000 5,000 5,000 5,000 5,000 5,000
 Ending cash
$ 5,000
0
22,710
14,541
0
14,541
0
8,168
Net cash flows = Net cash inflows - Net cash outflows
Ending cash = Net cash flows + operating cash + effect of financing operations
Calculation for July 2008
Retail sales from July
$80 * 50 units
30% from June dealer sale $ 55 * 30 % * 250 unit
45% from June dealer sale $ 55 * 30 % * 300 unit
20% from June dealer sale $ 55 * 30 % * 285 unit
Total cash inflow
ITEM
AMOUNT
$ 4,000
$ 4,125
$ 7,425
$ 3,135
_______
$ 18,685
FORMULA
 Buoys
 Paint costs
 Other supplies
costs
 Packing costs
 Shipping costs
 Painters’ salaries
$450
630
550
July production * price per buoy
July production * price per buoy
July production * price per buoy
200 * $2.25
200 * $3.15
200 * $2.75
390
1,500
2,000
200 * $1.95
200 * $7.50
1 * $2,000





4,800
2,500
1,667
17
3,333
July sales * packing cost per buoy
July sales * shipping costs per buoy
Number of painters in July * monthly
salary
Units of capacity * capacity per unit
Annual salary/12
Annual other costs/12
June ending loan balance * 1%
Annual advertising/12
Shop rent
Manager’s salary
Other shop costs
Interest paid
Advertising costs
800 * $6
$30,000/12
$20,000/12
$1,652 * 1%
$40,000/12
Format of FinnacingSection of Cash Flow Statement
Net cash flow from operations
Opening cash
Cash invested (withdrawn)
Cash available
Opening loan
Borrowing made
Borrowing repaid
Ending Loan
Ending cash
$ 848
$ 5,000
- 20,000
-14,152
1,652
19,152
0
20,803
5,000
Controlling Discretionary Expenditure
Organization has
expenditures:
three
general
approaches
to
budget
discretionary
a. Zero based budgeting
An
approach
to
developing
appropriations
for
discretionary
expenditures that assume that starting point for each discretionary
expenditure item is zero.
This approach can be used to asses most government expenditures
Profit seeking organization only for R & D, advertising and employee
training
Planners allocate the oragization’s resources to
proposals will best achieve the organizational’s goals
their
spending
a. incremental budgeting
An approach to developing appropriations for discretionary
expenditures that assume that starting point for each discretionary
expenditure item is the amount spent on it in the previous budget.
b. Project funding
An approach to developing appropriations for discretionary
expenditures that organizes appropriations into package that focuses
on achieving defined output.
People proposing discretionary expenditures state their request in
terms of project proposal that include:


How long the project will last
How much money will be required each period during the life of the
project