Oxford Tole Art purchases all flexible assets for cash in the month they are needed. The bank pays interest on the first day of each month on the balance on the account at the end of the previous month.
Demand Forecast
The Production Plan
Each intermediate period becomes shorter and shorter until the organization achieves just-in-time production. In organizations using a just-in-time inventory strategy, demand drives the production schedule directly—that is, production in each interim period corresponds to the next interim period's planned sales.
Developing the Spending Plans
Committed resources General purpose capacity Employees, general- acquired for what is transferable equipment, medium-term among organizations given special raw materials (several weeks to six months) time. Committed resources Special capacity, such as Buildings, specially procured for the long term, is tailored to the purpose equipment (more than six months) the organization's use.
Choosing the Capacity Levels
The number of full-time staff employed by a bank determines the long-term capacity available over a medium-term period. The short-term capacity decision reflects the time required to establish short-term capacity.
Handling Infeasible Production Plans
3. How can we improve capacity selection decisions to make capacity cheaper or more flexible? By choosing the capacity plan – by making the commitments to acquire capacity for the medium and long term – the company commits to its expenditure for the medium and long term.
Interpreting the Production Plan
Analysts evaluate medium- and long-term activities using efficiency and effectiveness considerations and ask questions such as these:. Selection of the production plan - that is, selection of the level of the short-term activities - determines the short-term expenses that the budget summarizes. the painting capacity provided by employing artists) and the short-term capacity (the capacity provided by the short-term procurement of materials).
The Financial Plans
For example, in August, retail demand is 55 units and dealer demand is 325 units, for a total of 380 units. The planned production and sale of 200 units represents the minimum of total demand (380 units) and production capacity (200 units).
Understanding the Cash Flow Statement
Exhibit 10-13 shows a common format used in the financing section of the cash flow statement with the corresponding numbers for July. The financing section of Oxford Tole Art's cash flow statement provides information about the credit line balance.
Using the Financial Plans
The format for the financing section of the statement of cash flows in Exhibit 10-8 to Oxford Tole Art does not follow the format used in Exhibit 10-13. Many organizations include the line of credit information in the statement of cash flows because financial statements readers should be aware of the limits that could potentially limit operations.
Using the Projected Results
April might also wonder, "What if retail sales would increase by 50% if Oxford Tole Art opened a retail store that would cost $40,000 a year to operate (including all costs). It took only a few seconds to answer April's question using of the spreadsheet developed to prepare Oxford Tole Art's cash flow forecast.
Evaluating Decision-Making Alternatives
For example, at Oxford Tole Art, April may consider raising prices, opening a store, or using other employment strategies. April may be wondering, “What if I lower the prices of my retail products by 5% and then sales increase by 10%. This revised profit figure was found by inserting the revised price and demand schedule into the spreadsheet used to prepare the original budget figures.
The structure and information required to prepare the master budget can easily be used to provide the basis for what-if analysis. This spreadsheet is available from this text's website for you to try out the what-if analysis for yourself.).
Sensitivity Analysis
The cost-volume-profit analysis discussed in Chapter 3 provided insight into how revenues, costs, and profits respond to changes in the amount of product made and sold. In this case, Gael would use the same store capacity; the painters employed in the four quarters of the year would be respectively three, two, two and four; and the projected profit will increase to $56,553. If small forecast errors of an estimate used in the production plan change the plan, we say that the model is sensitive to that estimate.
Note, however, that the profit associated with order 1 is uncertain, while the profit associated with order 2 is certain. Small changes in the estimate of this factor, which is the most important productive resource, produce large changes in the expected or planned profit.
Variance Analysis
A variance is a signal that is part of a control system for monitoring results. Variations therefore give a signal that the work has not gone as planned. When compared with the performance of other organizations engaged in similar tasks, the differences demonstrate the effectiveness of the control systems that operational employees use.
Basic Variance Analysis
Canning Cellular Services
The direct labor costs consist of two components: One of them is the cost of the seller, who describes the different services available and draws up the sales contract. The other component is the cost of the sales force employees who activate new cell phones by calling the control center and providing electronic serial numbers and customer-related information such as names, addresses, and payment information. One of these is the salaries of the data processing employees who enter customer-related information into the CCS customer database.
This includes the cost of the computer and data processing systems that support the process of entering each new customer into the system and activating the customer on the system. On average, the activation process takes 0.15 hours on the computer and the cost of computer time is estimated at €300 per hour.
First-Level Variances
Decomposing the Variances
Fred referred Sharon to Exhibit 10-19, which details the flexible budget calculations. Based on the result that 1.1 million new customers were added instead of the planned 1 million, the expected or budgeted cost level is now. 2.The actual unit costs of four of the five items in the budget exceeded the standard unit costs used to develop the forecast.
3. Unit consumption of both work items and one of the two support costs was lower, reflecting the results of the process improvements ordered by Sharon. The unit spend of the second support element was higher, but only because Sharon developed a more extensive form in the middle of the year that required more input for new customers.
Planning and Flexible Budget Variances
Therefore, the flexible budget reflects a cost budget or forecast based on the level of volume actually achieved rather than the planned volume - and it is the planned volume that underlies the master budget. A cost difference between a master budget and flexible budget is a planning variance because it reflects the difference between planned activity and actual activity. Fred pointed out to Sharon that the planning variance and flexible budget variance are called second-level variances, which together add up to the first-level variance.
She pointed out to Fred that these flexible budget variances reflect both quantity variances - the difference between the planned and actual usage rates per output unit - and price variances -. Sharon asked Fred to prepare an exhibit that would highlight the incremental effects of quantity differentials and the incremental effects of price differentials.
Quantity and Price Variances for Material and Labor
Flexible budget cost: The cost of the standard quantity of material ⫽ standard quantity (SQ) ⫻standard price (SP). Exhibit 10-21 diagrams the flexible budget variances for direct materials costs, and Exhibit 10-22 illustrates a graphical approach that represents these variances when the price-adjusted cost and the price-adjusted quantity are equal. Flexible budget costs: The cost of the standard quantity of labor ⫽standard labor hours (SH)⫻standard labor rate (SR).
Exhibit 10-24 shows the flexible budget variances for direct labor costs, and Exhibit 10-25 shows a graphical approach to representing these variances. These three elements, combined with the data in Exhibit 10-19, allow Fred to develop the information in Exhibit 10-29, which explains the total flexible budget variance for system activation support costs.
Sales Variances
This means that because sales of the regular bagel were less than the planned percentage of total sales, $600 of revenue was lost on this product. This means that because sales of the superior bagel were more than the planned percentage of total sales, $385 in revenue was earned on this product. This means that because deluxe bagel sales were more than the planned percentage of total sales, $560 of revenue was earned on this product. 2. Because the sales were different than planned.
Exhibit 10-33 summarizes the focus of the budgeting process in manufacturing, natural resource, service, and NFP organizations. The length of the budget period used in rolling budgeting reflects the competitive forces, skill requirements, and technological changes facing the organization.
Incremental Budgeting
Although planners can update or revise budgets at any time during the budget period, periodic budgeting is typically done once per year. budget period. In a continuous budget cycle, as a budget period—usually a month or a quarter—passes, planners drop the current budget period from the master budget and add a future budget period in its place. Therefore, if Oxford Tole Art used continuous budgeting with a one-year cycle, April would drop one month from the beginning of the budget period and add one month to the end of the budget period as each month passes, while possibly changes in the estimates for the original months 2 through 12 that appear appropriate given new information that arrived during period 1.
For example, at the end of February 2011, April would remove February 2011 from the budget and add February 2012. The budget period should be long enough to allow the organization to anticipate and adapt to significant environmental changes, yet short enough to ensure that the estimate - partners before the end of the period will be reasonable and be realistic.
Zero-Based Budgeting
Project Funding
Criticisms of the Traditional Budgeting Model and the “Beyond Budgeting” Approach
New employees are hired in the required month, on the first day of the month. Prepare a weekly budget for the hotel that shows the following:. a) Number of housekeeping staff to be employed (b) Number of linen and towel units to be contracted. The following table summarizes estimated unit sales for each product in each of the third quarter months:
Based on the information given, determine the cash outflows for the next year. Increase in selling price with no change in ingredients. a) The sales manager is confident that an intensive advertising campaign will double sales volume. The company's management wants to determine the efficiency of activities related to the production of Robot Ranger.
Round the quantities in the problem.). a) Prepare a sales forecast, personnel plan, production plan, estimated cash flow statement, pro forma income statement for the year ended December 31, 2012, and pro forma balance sheet as of December 31, 2012. b) Level of concerns of bad debts controller of Judd's Reproductions.
