0806-01 - Master budgeting => Given a set of projects that a firm's management has chosen to accept as a result of capital budgeting(e.g NPV

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Unformatted text preview: Master budgeting => Given a set of projects that a firm's management has chosen to accept as a result of capital budgeting (e.g., NPV) analyses, the firm must develop a plan for the use of the firms resources to ensure that those projects can be efficiently implemented. => The overall plan for the efficient use of the firm's resources can be decomposed into plans for: (1) (2) (3) (4) Sources and uses of financial resources (i.e., cash), Purchases of inputs to the production process (e.g., DM, etc.), Production of goods and services, and Sales of goods and services. => Since the demand for the firm's products determines the volume of products products which the firm will sell, it becomes necessary to develop these plans in the following (reverse chronological) order: (4) (3) (2) (1) Sales of goods and services. Production of goods and services. Purchases of inputs to the production process (e.g., DM, etc.). Sources and uses of financial resources (i.e., cash). => These plans are developed through a "budget" process where information is exchanged by various managers throughout the firm, and agreements are reached among those managers as to the most efficient plan for the use of the firm's resources. Accordingly, such plans are individually termed "budgets" and collectively as the "master budget." (Note that this budget process is not independent of the capital budgeting process). Capital budget <=> Sales/Production budget <=> Purchases budget <=> Period 1 Period 2 Period 3 Production budget Example (p.133) Budgeted unit sales volume ........................................................................................ 10000 12000 15000 Target ending FG inventory (units) .................................................................................. 1200 1500 Total FG unit requirement .................................................................................. 11200 -800 Less beginning FG inventory (units) ........................................................ -1200 Period 2 -1500 15100 Period 3 Unit production requirement .......................................................................................... 10400 12300 1500 13800 -1300 Less beginning DM inventory (units) ........................................................ Period 4 15100 Target DM ending inventory (units) .................................................................................. 1500 1500 Total DM unit requirement .................................................................................. 11900 16000 16600 FG unit production requirement .......................................................................................... 10400 12300 Period 1 Period 4 1600 13500 Material purchases budget Cash budget 16600 -1500 -1500 DM unit purchase requirement .......................................................................................... 10600 12300 15100 Cost per DM unit .................................................................................. $4.50 $4.50 $4.50 DM purchases requirements .......................................................................................... $47,700 $55,350 $67,950 Cash budget Period 1 Period 2 Period 3 Budgeted information: $20.00 $20.00 Average selling price per unit ..................................................................................................... SP = 12,000 ($4.50) ($4.50) Average variable cost per unit ..................................................................................................... VC = (Not X) 10,400 12,300 Unit production requirement .......................................................................................... $20.00 15,000 ($4.50) 15,100 Profit before income taxes -Sales revenues ....................................................................................................... SP*X = $200,000 Total variables costs ................................................................................................ VC*X = (45,000) $240,000 (54,000) $300,000 (67,500) -50000 Fixed costs ....................................................................................................... FC = Profit before income taxes ........................................................................................ $105,000 -50000 -50000 $136,000 $182,500 Revenue/receivables collection pattern .......................................................................................30% 50% Fixed cost payment pattern ....................................................................................... 70% 30% 10% 0% Unit sales volume ........................................................................................ 10,000 X= CASH INFLOWS (OUTFLOWS) Operating activities -Revenue collections ..................................................................... $200,000 240,000 300,000 $100,000 $60,000 120,000 $20,000 72,000 150,000 Variable cost payments (DM) ..................................................................... -47700 -55350 -67950 Fixed cost payments ..................................................................... -50000 -50000 -50000 -35000 -15000 -35000 -0 -15000 -35000 Operating cash flows -- net .............................................................................................. 17300 Investing cash flows ...................................................................................................0 1700 Financing cash flows ................................................................................................... 74650 0 124050 0 -74650 -124050 Increase (decrease) in cash ..................................................................................... 19,000 0 20000 20000 Cash -- ending ................................................................................................... $20,000 n 0 Cash -- beginning ...................................................................................................000 1 $20,000 $20,000 ...
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This note was uploaded on 01/13/2012 for the course ACC 202 taught by Professor Sue during the Fall '10 term at Michigan State University.

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