FIN
short-range plan
covers the next 12 months Focus on the actions to be done in the coming year supplies a great deal of details and from time to time provides direct guidelines to the different heads of the organization
coordination
creates a harmonious relationship among the different units of the organization
cash budget
determine the financial needs of the company one of the most important and critical ingredients in financial planning shows the detailed list of all cash received and expenses for a particular period
manufacturing costs composed of:
direct materials direct labor factory overhead
Budget preparation
done in a sequential manner
indirect materials
ex. furniture = varnish, nails, paints
sales budget formula
expected sales in units x unit selling price = total sales
fixed factory overhead
expenses such as depreciation expense, utilities expense
Kolb & Demong, 1988
financial planning is a system that guides the top management to direct the actions the different units of the organization in accomplishing its objectives
financial planning
focuses on what the firm intends to do in the near future arduous process of setting in the primary objective, identifying the alternative courses of actions, and choosing the best alternative
planning
forces the company to set its objectives and its courses of actions
pro forma balance sheet
forecasted components of the balance sheet at a future date
long-range plan
has a time frame of 2 to 5 or more years does not require a great deal of details More difficult and more prone to errors subject to changes and usually revised every year
variable factory overhead
indirect materials and indirect labor
factory overhead
items not directly associated with production but are necessarily incurred as part of the cost of production
cash receipts section
list all the cash flow, except for financing, during the covered period of the budget
included in cash payments:
materials purchases direct labor factory overhead cash payments in budget preparation
manufacturing cost
necessary cost to incur to produce the desired units
indirect labor
not directly associated to production ex. salary of supervisors, managers, crews
ending inventory budget
number of units that a company desires to have in its balance sheet at the end of the period
master plan
combined budgets of the different units of the organization a control measure used by the firm to determine if the set of objectives are attained
cash payments section
consists of all cash outflow included in the budget period
direct labor
cost of labor directly associated to produce one unit hourly or per unit basis
financial plan
also known as the budget formal statement prepared by the company with regard to the expected sales, expenses, production, and other related financial transactions for a certain period used in directing the firm's operations and serves as a control device that help measure periodic or annual performance
control
an important tool in enhancing and measuring the performance of the company
financial budget
budgeted financial resources of the firm
selling and administrative expenses budget formula
budgeted sales volume x variable selling and administrative expense per unit + fixed selling and administrative expense
under financial budget
cash budget pro forma balance sheet
major sections of cash budget
cash receipts section cash payments section cash surplus or deficit section financing section
affects long-range planning
changes in the environment needs of the people composition of the top management political stability
production budget
number of units to be produced after the sales budget has been established and ending inventory has been set forth serves as the basis in getting the budget for the direct materials, direct labor, factory overhead, and expenses that are directly associated with production
direct materials
obvious materials used in producing the item ex. furniture = wood
pro-forma financial statement
one of the major schedules in financial planning that shows the projected income of the company
master budget classification
operating budget financial budget
selling and administrative expense budget
overall budgeted operating expenses in areas other than those included in manufacturing
production budget formula
planned sales + desired ending inventory = total needs - beginning inventory = units to be produced
sales budget
planned volume of production that a company is expected to sell based on forecasted sales
objectives of financial planning
planning coordination control
sales forecast
process of estimating the volume of sales mother of all the budget that every subsequent operating and financial budget should be reasonable and accurate
budgeting
process of transforming the planned courses of action in to quantitative terms —in the form of money
Basic steps in preparing the budget
projection of the firm's sales production cost inventory level cost of goods sold selling and administrative expenses cash budget pro forma income statement pro forma balance sheet
fixed selling and administrative expense
remains to be unchanged unless the firm goes beyond its normal capacity
under operating budget
sales budget production budget ending inventory budget selling and administrative budget pro-forma financial statement
selling and administrative budget
selling and administrative expenses in selling the products of the company
2 categories of financial planning
short-range plan long-range plan
financing section
show the borrowings and payments
cash surplus or deficit section
shows the difference between the cash receipts section and a cash payment section indicates the: firm needs to borrow funds to support the operation or use the excess money to pay their obligations or invest in other profitable activities
operating budget
shows the plan of operations and includes the details of sales, productions, and expenses
conversion cost
sum of direct labor and factory overhead
prime cost
sum of direct materials and direct labor
types of factory overhead
variable factory overhead fixed factory overhead
types of selling and administrative expense budget
variable selling and administrative expense fixed selling and administrative expense
variable selling and administrative expense
varies in direct proportion with sales
short range plan looks at the:
volatility of the market stability of firm's operations rate of change in technology