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