Chapter 9 - Financial Planning & Analysis

Triple M expects to sell 2,500 shirts at $7 per shirt during the first quarter. Triple M expects to collect 70% of the sales during the quarter they are sold and the balance in the next quarter. Collections in the first quarter are expected to be...

$12,250

Whole Foods expects to produce 7,000 units in January, 6,400 units in February and 6,800 units in March. Each unit requires 3/4 of a pound of materials at a cost of $24/lb. Whole Foods anticipates a beginning raw materials inventory for January of 525 lbs. Their policy is to have 10% of next month's materials in ending inventory. What is the budgeted cost of raw materials purchases for January?

$124,920 (Feb RM needed: 6,400*.75=4,800. JAn RM ending inventory: 4,800*10%=480lbs. Jan RM production: 7,000*.75=5,200lbs-525lbs beg + 480lbs =5,205 lbs purchases * 24 = 124,920)

Gov Ball is going to host 3 festivals per year. The May festival is predicting 125,000 attendees and a total of 150 direct labor hours. incidental costs related to the workers are budgeted at $1.75 per direct labor hour. Other budgeted costs for the May festival are $50k for liability insurance, $3,500 in advertising, $10,000 for grounds rental and $2,000 for tents. Gov ball also incurs annual costs evenly over the year, for the following: Gov Ball Director's salary = $120,000 Depreciation of offices = $1,200 General advertising = $600 Utilities = $900 What is the SG&A budget for the month of May?

$13,725 ( (120,000 +1,200 +600 +900)/12 = 10,225 allocated SG&A + 3,500 event ads)

Tarantino is hosting a preview of the horror films he created with the hope that he can sell copies of his films to help underwrite his next movie. He expects his showings to result in 3,200 people buying an average of 2 movies. Movie copies will only be made based upon orders and the copying costs per film is $2.75. What is the purchases budget based upon his estimated sales?

$17,600

Dildos.com is projecting the following unit sales per quarter: Q1: 10,500 Q2: 9,450 Q3: 14,800 Q4: 17,700 The sex toy company plans to increase their $5 per unit sales price by 20% in the 3rd Qtr, the beginning of their busy season. Calculate their budgeted sales revenue for the year

$294,750

Gov Ball is going to host 3 festivals per year. The May festival is predicting 125,000 attendees and a total of 150 direct labor hours. incidental costs related to the workers (sunscreen and water are budgeted at $1.75 per direct labor hour. Other budgeted costs for the May festival are $50k for liability insurance, $3,500 in advertising, $10,000 for grounds rental and $2,000 for tents. Gov ball also incurs annual costs evenly over the year, for the following: Gov Ball Director's salary = $120,000 Depreciation of offices = $1,200 General advertising = $600 Utilities = $900 What is the production overhead budget for the May festival?

$62,262.50 (Direct labor hours: 150. Total OH = 150hr*1.75 + 50k + 10k + 2k = 62,262.5)

How can the problem of budgetary slack be solved?

1. basing budget cuts on reviews of spending justifications 2. allowing some managerial discretion to exceed the budget 3. providing incentives for accurate projections

What are the subsystems of a complete FP&A system?

1. planning 2. measuring and recording results 3. evaluating performance

what does the cash flow budget reflect?

1. repayments of loans 2. cash outflows for merchandise purchases 3. cash inflow from customers 4. proceeds from the sale of fixed assets 5. cash inflows from other sources

What are the main reasons managers might pad their budgets?

1. to provide a cushion in the event of an unexpected cost 2. to meet projections in order to receive their incentive pay 3. to ensure that after cuts there is still sufficient resources to meet organizational goals

Budget

A detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time

budget committee

A group responsible for coordinating the preparation of the budget.

capital budget

A long-term budget that shows planned acquisition and disposal of capital assets, such as land, buildings, and equipment.

cash disbursements budget

A schedule detailing expected cash payments during a budget period.

Cash Receipts Budget

A schedule of the amounts and timings of the receipt of cash into a business.

Operational Budgets

A set of budgets that specify how operations will be carried out to produce an organization's services or goods.

financial planning model

A set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organization's activities.

Budget Manual

A set of written instructions that specify who will provide budgetary data, when and in what form the data will be provided, how the master budget will be prepared and approved, and who should receive the various schedules constituting the budget.

How does Activity Based Budgeting work?

ABB (1) forecasts demand, (2) determines activities needed to meet that demand, and (3) identifies the resources needed to perform that activity

e-budgeting

An electronic and enterprise wide budgeting process in which employees throughout the organization can submit and retrieve budget information electronically via the Internet.

which of the following would not be found on the cash disbursement budget? A. payments for overhead B. salaries expense C. depreciation expense D. payments for purchases

C. depreciation expense

true or false: direct materials budget is based upon the sales budget

False

What are the major factors in sales forecasting

Past sales levels, industry economic trends, and general economic trends

Other costs of production, besides purchases and direct labor are called...

Production Overhead Costs

the production budget is based upon which budget?

Sales budget

budgeted balance sheet

Shows the expected end-of-period balances for the company's assets, liabilities, and owners' equity.

budgeted income statement

Shows the expected revenue and expenses for a budget period, assuming that planned operations are carried out.

Sales Forecasting

The Process of predicting sales of services or goods. The initial step in preparing a master budget

budgetary slack

The difference between the budgetary projection provided by an individual and his or her best estimate of the item being projected. (For example, the difference between a supervisor's expected departmental utility cost and his or her budgetary projection for utilities.)

budget director (Chief Budget Officer)

The individual responsible for coordination and directing the overall budgeting process.

padding the budget

The process of building budgetary slack into a budget by overestimating expenses and underestimating revenue.

participative budgeting

The process of involving people throughout an organization in the budgeting process.

True or False: A master budget can, and should, be used by all types of businesses, government agencies, and individuals

True

Rolling budget (revolving/continuous budget)

a budget that is continually updated by adding another incremental time period and dropping the most recently completed period

Master Budget (profit plan)

a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time

Financial Planning and Analysis System (FP&A System)

a coordinated set of tools that helps managers assess the company's future and know if they are reaching their performance goals (for planning, measuring, and evaluating performance)

what is a budget for a period that is in excess of a year called?

a long-range budget

a merchandising firm does not need to prepare what type of budget?

a production budget

Purchases Budget

a schedule showing a company's plan for the resources they will need to acquire from outside the organization in order to produce the goods and services they plan to sell during the budget period

Selling, General and Administrative Expense Budget (SG&A Budget)

a schedule showing a company's selling, general, and administrative expenses during the period

Direct Materials Budget

a schedule showing the number of units and the cost of material to be purchased during a budget period

Financing Budget

a schedule that outlines how an organization will acquire financial resources during the budget period

Budgeted Financial Statements (pro forma financial statements)

a set of planned financial statement showing what an organization's overall financial condition is expected to be at the end of the budget period if planned operations carry out

Ending budgeted balance sheet account amounts equal...

account balances at the beginning of the year, plus or minus expected changes in account balances during budget period

final budget approval authority generally belongs to the

board of directors

The budged cost of goods manufactured schedule calculates what?

budgeted cost of goods completed and transferred to budgeted finished goods inventory

what is the final portion of the master budget?

budgeted financial statements

Which of the following are the budgeted financial statements? 1. budgeted income statement 2. cash budget 3. budgeted balance sheet 4. budgeted production schedule 5. budgeted statement of cash flows

budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows

A plan for the acquisition of fixed assets is a ___ budget

capital budget

A plan for the acquisition of fixed assets is a ______

capital budget

when the timing of cash flows does not precisely align with the expenditures in operational budgets, what additional budget must be prepared?

cash disbursements budget

the budget that reflects the time period in which the company expects to collect on its sales is what type of budget?

cash receipts budget

pulling together the plans of all the organization's managers is the purpose of...

communication and coordination

budgeted schedule of COGM and COGS

details the direct material, direct labor, and manufacturing overhead costs to be incurred and shows the cost of goods to be sold during a budget period

cash budget

details the expected cash receipts and disbursements during a budget period

The advantage of an FP&A system over a system that focuses solely on measuring and recording results is it....

encourages the cross functional communication necessary to create company financial and non-financial goals

True or False: Service industry firms do not prepare production budgets since they do not manufacture a tangible product

false

a system that includes planning, measuring an records results and evaluating performance for the entire organization is called ...

financial planning and analysis

what are budgets that project cash flow and identify likely cash shortfalls and surpluses called?

financing budgets

In manufacturing firms, units to be produced is calculated as budgeted sales + desired ____

finished goods ending inventory - expected beginning finished goods inventory

What is one of the most important benefits of the FP&A system?

forcing different parts of the organization to communicate with one another to create performance targets and set expectations about the financial and nonfinancial results of operations

what is the first step in activity based budgeting

forecasting of demand for products and services

disbursement

funds paid out

what are budgets that specify how activities will be carried out to meet sales demands called?

operational budgets

involving employees throughout the organization in the budgeting process is called...

participative

major factors in sales forecasting

past sales levels expected actions of competitors advertising ad promos economic climate political events

Financing budget

plan that shows how the organization will acquire its financial resources, such as through the issuance of stock or incurrence of debt

the starting point in the sales forecasting process is generally

prior year sales levels

what is the starting point for the direct materials purchases budget?

production budget

the order fo budget preparation in nonprofit organizations is generally...

program budgets and then funding sources (nonprofits generally begin with budgets for the services they plan to provide and use those budgets to determine how to generate the resources needed to meed their program goals)

What is the initial step in preparing a master budget?

sales forecasting

production budget

schedule showing how many units a company should produce during each budget period both to satisfy expected sales for that period and to end each period with a desired finished goods inventory level

when no inventories of merchandise is maintained, the purchases budget will equal the number of units expected to be sold plus...

the amount of resources needed to provide expected services

Activity Based Budgeting

the process of developing a master budget using information obtained from an activity based costing analysis

the main difference in budgeting for service industries vs manufacturing industries is...

the revenue source

what does the budget committee do?

they advise the budget director