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Chapter 9 Profit Planning Projected revenues and expenses for a plan of action Budget Marketing Department Production Department Sales CGS Gross margin Selling expenses Admin. expenses Net Income $ 1,600 960 $ 640 170 225 $ 30 Cash Budget Quarter-by-quarter projection of cash flows 1st Qtr Based on budgeted income statement Beg. cash balance Cash receipts 95 312 $ 407 Cash disbursements Expenses Asset purchases Financing plan $ Short-term loan End. cash balance 340 175 $ (108) 200 $ 92 … Preparing the Master Budget 1. Sales budget 2. Production budget 3. Direct materials budget DM used & DM purchased 4. Direct labor budget 5. Manufacturing overhead budget 6. Standard cost per unit 7. Selling and administrative expense budget 8. Budgeted income statement Advantages of Budgeting Planning Communication and coordination between production and marketing between finance and operations Performance evaluation budget = standard against which performance can be judged Control comparison between budget and actual highlights potential problems Budgeting Issues Responsibility accounting Should managers be evaluated based on their budget performance? Should incentives be tied to the budget? Who should participate in the budgeting process? better information commitment to the budget plan budgetary slack How achievable should the budget be? What might this comparison suggest? YTD Actual YTD Budget Sales CGS $ 822 526 $ 800 480 Gross margin Selling expenses Admin. expenses Net income $ 296 104 107 $ 85 $ 320 85 112 $ 123