MODULE 5 AND 6: ANNUAL PROFIT PLAN AND SUPPORTING SCHEDULES

I. Sales Budget – is the first and the foundation for the development of the entire budget

o Sales forecast is based on the following:

 Past pattern of sales
 Sales estimates
 General economic conditions
 Competitors’ actions
 Changes in the firm’s price and product mix
 Result of market research studies
 Ads and sales plans

II. Production Budget – units that are expected to be produced

o Based on sales unit and budgeted beginning and ending inventory
o Foundation for the Materials, Labor and Overhead budgeting
o Ending Finished Goods – function of sales volume, risk of stockouts and cost of
inventory maintenance (insurance, storage fees and obsolescence risk)

o Other factors that affect production budgeting:

 Policies regarding stable prod
 Condition of prod equipment
 Availability of prod resources
III. Direct Materials, Direct Labor and Overhead Budgets
o Direct Materials Budget:
 Number of raw materials needed
 Desired beginning and ending inventory
 Safety stock requirements
 Reliability of suppliers
 Time to receive the goods

o Direct Labor budget

Factors:
  Skills level
 Contracts and hiring process
 Benefit costs

IV. Cost of Goods Sold Budget

V. Selling and Administrative Expense Budget
o Nonmanufacturing expenses
o Can be fixed or variable
o Increase in variable SG&A reduces the contribution margin, unless the investment
drives sales higher

VI. Operating Budget

Combination of the following:
o Sales
o Production
o Direct Materials, Labor and Overhear (Manufacturing Cost)
o Cost of Goods Sold
o Selling and Administrative Expense
VII. Cash Receipts
o Cash budget is the detailed projection of cash receipts and disbursements derived
from operating and capital budget
Sections:
 Cash available
 Cash disbursements
 Financing
o Cash balances are limited by:
 Minimum required cash on hand
 Compensating balance agreement
o To speed up collection:
 Timely billing
 Payment discounts
 Electronic fund transfers
 Lockbox systems
VIII. Cash Disbursement – cash outlays associated with purchases
o Cash paid for purchases during the period
o Cash disbursements to pay for current accounts payable

IX. Financing Budget

o Used to project shortfalls of cash for needs
o Determines where to invest excess cash to ensure liquidity and returns
o Minimum cash requirement to be maintained after:
 All cash receipts are received
 All cash disbursements are made

X. Preparation of Cash Budgets

XI. Capital Expenditure Budgeting
o Capital additions or continuation of capital projects over multiyear period
o Highly dependent on availability of cash or credit
o Requires timeline and assessment of purchase cost or outflows
Includes:
 Asset purchase
 Cost incurred to prepare the asset for use
 Additional investments over the life of the assets
o Financing comes from borrowing of cash reserve