Profit Planning I

I. Budgeting

A. What is a budget?

A budget is a formal expression of policies, plans, objectives and goals laid down in advance by top management for the firm as a whole and each subdivision thereof.

The full potential of budgeting can best be realized through a comprehensive budgetary program embracing all phases of operations and utilized for planning, coordination and control. The concept of a comprehensive budgetary program involves much more than the traditional idea of a plan of operations that is included in the planning or forecast budget. The principal components of a comprehensive program are:

1. The Master Budget (Planning or Forecast Budget) composed of:

a. The operating budget

1) Budgeted income statement

a) Master income statement

b) Income statement by quarter and/or months

c) Income statement by sales division and or product

2) Income statement's supporting schedules

a) Sales forecast

i) By sales districts by quarter and/or year

ii) By product by quarter and/or year

b) Production budget

i) Schedule of inventories

ii) Materials budget

iii) Purchases budget

iv) Direct labor budget

v) Manufacturing overhead budget

(a) Producing departments

(b) Service departments

c) Administrative expense budget

i) President's budget

ii) Treasurer's budget

iii) Personnel department budget

iv) Engineering and research budget

v) Others

d) Selling expense budget

e) Appropriation type budgets

i) Advertising budget

ii) Research budget

iii) Others

b. The financial budget

1) Budgeted balance sheet

2) Balance sheet supporting schedules

a) Cash budget

b) Receivables budget

c) Capital additions budget

d) Depreciation schedules

e) Others

2. Flexible budget

a. Provides data for the planning budget for:

1) Manufacturing expenses

2) Selling expenses

3) Administrative expenses

b. Provides data for cost control

3. Supplemental statistics

a. Breakeven analysis

1) By department

2) By product

3) For overall operations

b. Historical growth and cost-volume-profit tables and charts

4. Budget reports to management

a. Comparisons of actual and budgeted costs, revenues, assets, and equities to determine the extent to which the forecast (plan) was met or exceeded.

b. Comparison of actual expenses with the variable budget allowances adjusted to actual volume attained in order to measure the effectiveness with which costs are controlled.

c. Analysis of variations between actual expenses and budgeted expenses to determine budget, efficiency, and volume variations.