BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Topic 7
Profit Planning
Mohamad Tarmizi bin Hj Waropis - 815736
Mohd Azmi bin Abu Bakar - 815511
Mohd Fauzi bin Abdul Aziz - 815510
Hj Mohammad Saimi bin Mat Som - 814646

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

BASIC FRAMEWORK
OF
BUDGETING
2

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Purposes of Budgeting Systems

Budget

1. Planning
- a detailed plan, expressed 2. Facilitating
in quantitative terms, that
Communication and
specifies how resources will
Coordination
be acquired and used during
3. Allocating Resources
a specified period of time.
4. Controlling Profit and
Operations
Master budget
5. Evaluating Performance
- a summary of a companys
and Providing Incentives
plans that sets specific
targets for sales, production,
distribution, and financing
activities.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Advantages of Budgeting
Define goal
and objectives
Communicating
plans

Think about and

plan for the future

Advantages
Coordinate
activities
Uncover potential
bottlenecks

Means of allocating
resources

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Choosing the Budget Period

Operating Budget

2008

2009

Operating budgets
- Ordinarily cover a one-year
period corresponding to a
companys fiscal year. Many
companies divide their
annual budget into four
quarters.

2010

2011

A continuous budget
-12 month budget that rolls
forward one month (or
quarter)
as the current month (or
quarter)
is completed.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Self-Imposed Budget

Top M anagem ent

M id d le
M anagem ent

S u p e r v is o r

S u p e r v is o r

M id d le
M anagem ent

S u p e r v is o r

S u p e r v is o r

A self-imposed budget or participative budget is a budget that is

prepared with the full cooperation and participation of managers
at all levels.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

PREPARING
THE MASTER
BUDGET
7

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

The Master Budget

A set of interconnected budgets of sales, production
costs, purchases, incomes and it also includes pro forma
financial statements.
Serves as planning and control tool to the management
since they can plan the business activities during the
period on the basis of master budget.
At the end of each period, actual results can be
compared with the master budget and necessary control
actions can be taken.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

The Master Budget: An Overview

Sales budget
Ending inventory
budget

Direct materials
budget

Production budget

Direct labor
budget

Selling and
administrative
budget

Manufacturing
overhead budget

Cash Budget

Budgeted
income
statement

Budgeted
balance sheet

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Factors considered in Sales Forecasting

General economic conditions

Industry trends
Market research studies
Anticipated advertising and promotion
Previous market share
Price changes
Technological developments

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Sales Budget
Approved by the budget committee and describes
expected sales in units and dollars.
The basis for all of the other operating budgets and most
of the financial budgets.
The first step in creating a sales budget is to develop the
sales forecast.
The sales forecast is just the initial estimate and it is
often adjusted by the budget committee.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Sales Budget for Jerrys Ice Cream

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Production Budget
Production budget is prepared after the sales budget.
Production budget lists the number of units that must
be produced during each budget period to meet sales
needs and to provide for the desired ending inventory.
Key Equation
Units to be produced=Expected sales in units +
Desired units of ending inventoryUnits in
beginning inventory

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Production Budget for Jerrys Ice Cream

*Information from "Sales Budget for Jerrys Ice Cream".

**Desired ending inventory = 10 percent Next quarter sales; for the first quarter, 4,800 = 0.10 48,000. Fourth quarter
desired ending inventory of 4,400 units is based on an estimate of sales in the first quarter of next year.
***Beginning inventory = Inventory at end of previous quarter; for example, second quarter beginning inventory = First
quarter ending inventory.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Direct Materials Budget

The direct materials budget details the raw
materials that must be purchased to fulfill the
production budget and to provide for adequate
inventories.
Direct materials purchased is based on materials
needed in production.
Key Equation
Materials to be purchased=Materials needed
in production + Desired materials
in ending inventoryMaterials in beginning inventory

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Direct Materials Budget for Jerrys Ice Cream

*Information from "Production Budget for Jerrys Ice Cream".

**Desired ending inventory = 20 percent Next quarter production needs; for the first quarter, 19,680 = 0.20
98,400. Fourth quarter desired ending inventory of 20,000 pounds is based on an estimate of materials needed in
production first quarter of next year.
***Beginning inventory = Inventory at end of previous quarter; for example, Second quarter beginning inventory
= First quarter ending inventory.
****$2 direct materials cost per unit = 2 pounds of materials required per unit $1 per pound.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Direct Labor Budget

The total direct labor hours and the direct labor

cost needed for the number of units in the
production budget.
The budgeted hours of direct labor are
determined by the relationship between labor
and output.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Direct Labor Budget for Jerrys Ice Cream

*From"ProductionBudgetforJerrysIceCream".
**$1.30directlaborcostperunit=0.10directlaborhoursperunit$13perhour.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Manufacturing Overhead Budget

The overhead budget shows the expected cost of all
production costs other than direct materials and direct
labor.
Many companies use direct labor hours as the driver
for overhead.
Then costs that vary with direct labor hours are
pooled and called variable overhead.
The remaining overhead items are pooled into fixed
overhead.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Manufacturing Overhead Budget for Jerrys Ice Cream

*From"ProductionBudgetforJerrysIceCream".
**$1.20=$240,480totaloverheadcost200,400unitstobeproducedfortheyear.
^Deductdepreciationtogettheactualcashpaymentforoverhead.Thisinformationisneededforthecashbudget
presentedin"CashBudgetforJerrysIceCream".

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Selling and Administrative Budget

The selling and administrative expenses budget

outlines planned expenditures for non
manufacturing activities.
Selling and administrative expenses can be
broken down into fixed and variable components.
Such items as sales commissions, freight and
supplies vary with sales activity.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Selling and Administrative Budget for Jerrys Ice Cream

*Deductdepreciationtogettheactualcashpaymentforsellingandadministrativecosts.
**Thisinformationisneededforthecashbudgetpresentedin"CashBudgetforJerrysIceCream".

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Cash Budget
The cash budget is an estimate of the amount and
timing of cash inflows and outflows for the budget
period.
A section of the cash budget will show when cash
from sales will be received.
The cash budget has the following sections:
Cash collections from sales
Cash payments for purchases of materials
Other cash collections and payments

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Cash Budget for Jerrys Ice Cream

*Based on sales budget shown in
"Sales Budget for Jerrys Ice Cream". All
sales are on credit: 60 percent collected in the
quarter of sale and 40 percent collected the
following quarter.
**Based on purchases budget shown in
"Direct Materials Purchases Budget for Jer
rys Ice Cream"
. All purchases are on credit: 70 percent paid in
the quarter of purchase and 30 percent paid
the following quarter.
***Does not include depreciation since
depreciation expense does not involve a cash
payment.
^Excess of collections over payments = Cash
collections from sales Cash payments for
materials purchases Other cash payments.
^^ Beginning cash balance = Cash balance at
end of previous period. Balance for first
quarter is given.
^^^ Ending cash balance = Excess of
collections over payments for the quarter +
Beginning cash balance.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Budgeted Income Statement

The budgeted income statement is an estimate of the
organizations profit for a given budget period.
Most organizations, prepare the budgeted income statement using
the accrual basis of accounting.
Revenues are recorded when earned and expenses are recorded
when incurred.
The management and employees throughout the organization use
this information for planning purposes and to evaluate company
performance.
The board of directors and budget committee are responsible for
approving the budget .

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Budgeted Income Statement for Jerrys Ice Cream

*Costofgoodssold=Perunitcostof$4.50(see
above)Unitssold(from
"SalesBudgetforJerrysIceCream");forthefirst
quarter,$180,000costofgoodssold=$4.50unit
cost40,000units.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Budgeted Balance Sheet

The budgeted balance sheet is developed by beginning
with the balance sheet from the beginning of the budget
period and adjusting it for the data contained in the various
schedules.
The budgeted balance sheet is an estimate of the ending
balances for all balance sheet accounts. Managers use
this to assess the impact that budgeted sales and costs will
have on the financial condition of the organization.

Budgeted Balance Sheet for Jerrys

Ice Cream
BKBM 5013 MANAGEMENT
ACCOUNTING
FOR MANAGERS
TOPIC 7 : PROFIT PLANNING

Budgeted Balance Sheet for Jerrys

Cream
*$124,800 Ice
= $312,000
in fourth quarter sales
("Sales Budget for Jerrys Ice Cream")
40 percent to be collected next quarter (
"Cash Budget for Jerrys Ice Cream").
**$20,000 = 20,000 pounds (
"Direct Materials Purchases Budget for Je
rrys Ice Cream"
) $1 per pound (
"Direct Materials Purchases Budget for Je
rrys Ice Cream"
).
***$19,800 = 4,400 units (
"Production Budget for Jerrys Ice Cream"
) $4.50 (
"Budgeted Income Statement for Jerrys
Ice Cream"
).
^Given.
^^ $30,576 = $101,920 in fourth quarter
purchases (
"Direct Materials Purchases Budget for Je
rrys Ice Cream"
) 30 percent to be paid next quarter (
"Cash Budget for Jerrys Ice Cream").
^^^$169,600 = $101,600 in retained earnings
at end of last year (given) + $68,000

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Benefits of Budgeting
Requires managers to plan
Promotes coordination
and communication
Helps managers
evaluate performance
motivates employees to
achieve company goals

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Conclusion
This topic is just an introduction to budgeting and profit planning.
This topic presents an overview of the budgeting process and shows
how the various operating budgets relate to each other.
The sales budget forms the foundation for profit planning.
Once the sales budget has been set, the production budget and the
selling and administrative expense budget can be prepared since they
depend on how many units are to be sold.
All of these various budgets feed into the cash budget and the
budgeted income statement and balance sheet.

BKBM 5013 MANAGEMENT ACCOUNTING FOR MANAGERS

TOPIC 7 : PROFIT PLANNING

Thank You