Lecture 21Lecture 21• Operational Budgeting• Operational Budgeting Exercises

Lecture 21Lecture 21• Operational Budgeting• Operational Budgeting Exercises

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Willamette Widget Corp.Sales Forecasts

JAN FEB MARSales $400 $500 $800

This information comes from the sales force, merchandisers, marketing personnel, and possibly the finance & planning group.

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Pro Forma Income Statements JAN FEB MARSales $400 $500 $800Cost of Goods Sold 240 300 480Gross Profit & Contribution Margin 160 200 320Fixed Costs 150 150 150 Income $ 10 $ 50 $170

The Sales line comes from the previous schedule.The Cost of Goods Sold line and Fixed Cost line come from assumptions about cost behavior (contribution margin is 40%).

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Beginning Balance Sheet Dec 31AssetsCash $ 80Accounts Receivable 310Inventory 540Fixed Assets, net 1580Total $ 2510LiabilitiesAccounts Payable $ 195Stockholders’ Equity 2315 Total $ 2510

This is all given.

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Purchases Budget JAN FEB MARCost of Goods Sold $240 $300 $480Budgeted ending inv. 780 900 780Total requirements 1020 1200 1260 Beginning inventory 540 780 900Purchases $480 $420 $360

The COGS line comes from the pro forma income statement.Budgeted ending inventory is a target.Beginning inventory is given.

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Cash Budget JAN FEB MARBeginning Balance $ 80 $ 52 $ 50Cash receipts 590 470 710Total available 670 522 760Cash disbursements 618 579 519Indicated balance 52 -57 241Borrow 107(Repay) 107Ending balance $52 $50 $134The beginning balance for January comes from the beginning balance sheet.

Cash Budget

JAN FEB MARBeginning Balance $ 80 $ 52 $ 50Cash receipts 590 470 710Total available 670 522 760Cash disbursements 618 579 519Indicated balance 52 -57 241Borrow 107(Repay) 107Ending balance $52 $50 $134

Cash Receipts Budget

JAN FEB MARSales for the month $400 $500 $800From prior mo., 30% 310 120 150From current mo., 70% 280 350 560Total Receipts $590 $470 $710

Note: 70% of sales are collected in the month sold, and the remaining 30% are collected in the subsequent month.

Cash Budget

JAN FEB MARBeginning Balance $ 80 $ 52 $ 50Cash receipts 590 470 710Total available 670 522 760Cash disbursements 618 579 519Indicated balance 52 -57 241Borrow 107(Repay) 107Ending balance $52 $50 $134

Cash Disbursements Budget

JAN FEB MARFor merchandise $483 $444 $384Other 135 135 135Total $618 $579 $519

Cash Disbursements Budget

JAN FEB MARFor merchandise $483 $444 $384Other 135 135 135Total $618 $579 $519

Cash Disbursements Budget for Purchases

JAN FEB MARFrom prior mo., 40% $195 $192 $168From current mo., 60% 288 252 216Total $483 $444 $384

Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month.

Purchases Budget

JAN FEB MARCost of Goods Sold $240 $300 $480Budgeted ending inv. 780 900 780Total requirements 1020 1200 1260 Beginning inventory 540 780 900Purchases $480 $420 $360

60% of $480 is $28840% of $480 is $192

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Cash Budget JAN FEB MARBeginning Balance $ 80 $ 52 $ 50Cash receipts 590 470 710Total available 670 522 760Cash disbursements 618 579 519Indicated balance 52 -57 241Borrow 107(Repay) 107Ending balance $52 $50 $134

The Cash Budget also indicates short-term financing needs.

Sales Forecasts+

+

++

Assumptions about cost behavior

pro forma income statement

Assumptions about inventory levels, collections of receiv-ables, & disburse-ments

Long-term financing & capital spending

Beg. Balance Sheet Cash Bud-

get & S-T Financing

Purchases and Production

pro forma balance sheet

Start here

Pro Forma Balance Sheet March 31AssetsCash $ 134Accounts Receivable 240Inventory 780Fixed Assets, net 1535Total $ 2689LiabilitiesAccounts Payable $ 144Stockholders’ Equity 2545 Total $ 2689

Cash comes from the Cash Budget. A/R is 30% of March sales. Inventory is from Purchases Budget. A/P is 40% of March purchases.

Cash Budget

JAN FEB MARBeginning Balance $ 80 $ 52 $ 50Cash receipts 590 470 710Total available 670 522 760Cash disbursements 618 579 519Indicated balance 52 -57 241Borrow 107(Repay) 107Ending balance $52 $50 $134

Cash Receipts Budget

JAN FEB MARSales for the month $400 $500 $800From prior mo., 30% 310 120 150From current mo., 70% 280 350 560Total Receipts $590 $470 $710

Note: $800 - $560 = $240.

Purchases Budget

JAN FEB MARCost of Goods Sold $240 $300 $480Budgeted ending inv. 780 900 780Total requirements 1020 1200 1260 Beginning inventory 540 780 900Purchases $480 $420 $360

Note: 60% of purchases are paid for in the month purchased, and the remaining 40% are paid in the subsequent month. So at the end of March, Payables are 40% of $360.

Lecture 21Lecture 21• Operational Budgeting• Operational Budgeting Exercises

1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31?

1. K-Mart expects sales of $100,000 in April, $145,000 in May and $250,000 in June. Sales are collected 30% in the month of sale with the remainder collected the month after sale. What will accounts receivable be on May 31?

70% of $145,000 = $101,500

2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May?

2. Sam’s Club expects to make purchases of $100,000 in April; $240,000 in May; $350,000 in June; and $230,000 in July. Purchases are paid 30% in the month of purchase and 70% in the month after purchase. What would accounts payable be at the end of May?

70% of $240,000 = $168,000

3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March?

3. Costco expects sales of $100,000 in January, $150,000 in February, $180,000 in March, and $200,000 in April. Cost of Sales is 70% of sales. Ending inventory is expected to equal 40% of the next month's unit sales. How much inventory would be purchased in March?In March Costco would purchase 60% of March cost-of-sales and 40% of April cost-of-sales.(60% of $180,000 x .7)+(40% of $200,000 x .7)= $75,600 + $56,000= $131,600

4. Price Club expects sales as follows:

January $100,000February $150,000March $180,000April $200,000

Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March?

4. Price Club expects sales as follows:January $100,000February $150,000March $180,000April $200,000

Sales are made 20% for cash, and 80% on credit. Credit sales are collected 60% in the month of sale and 40% in the next month. What are collections for March?

20% + (60% of 80%) = 68%(68% of $180,000) + (40% of 80% of $150,000)= $122,400 + $48,000 = $170,400