View the step-by-step solution to:

ectives What is a budget Purpose of budgets Importance of budgets Keys to effective budgets Budget calendar The budget process steps What is a Budget?...

Please describe how budgets are set in your organization and how you are linked to the budgeting process. If you do not know, go and ask the right people about your organization's budgeting process. Do not report company confidential information here in this semi-public forum.

 Questions: how does your budget process compare to the one described in Lesson 3? Does the budget affect your work? How would you improve your firm’s budget process? What inputs do you have or provide to the budget process for your group or your organization?

We expect you to contrast and compare budgeting methods noting the strengths and weaknesses based on your learning in Lesson 3.


Please reference the answer to the attached documents

Lesson 3 notes and example are attached

Please this question is for Rudra only

BUDGETING TECHNIQUES Lesson 3 for EGMT531
Background image of page 01
Learning Objectives What is a budget Purpose of budgets Importance of budgets Keys to effective budgets Budget calendar The budget process steps
Background image of page 02
Show entire document
An Example of the Budgeting Process- Before you can create a budget, you must answer three questions: How much net profit do you want the business to generate during the calendar year? How much will it cost to produce the profit? How much sales revenue is necessary to support both profit and costs? To answer the above questions, consider expected sales and all costs, direct or indirect, associated with the product or service. To make the safest estimates when budgeting, most companies prefer to overestimate expenses; conversely, they prefer to underestimate sales revenue. Constructing a Budget Start with either a forecast of sales or a forecast of profits. In other words, decide what profit you want to make and then list the expenses you will incur to make that profit. To create a budget: Target desired profit. Determine operating expenses. Calculate gross profit margin. Estimate sales revenues. Adjust figures. A sample budget for the L3NewTech Company illustrates the main steps in budget preparation. As you follow the steps, calculate all the figures yourself. Once you have calculated projected sales, expenses and profit, organize the figures into the format of an income statement as shown in Tables 1, 2 and 3. Refer to Table 1 for L3NewTech Company's income statements for the past three years. Step 1: Target desired profit. During the three-year period, the company averaged an annual net profit of $63,100. During Year 2, the company had its highest net profit of $65,000. In Year 3, sales were up, but net profit declined. For the coming year (Year 4), the company is targeting a net profit of $65,000. Step 2: Determine operating expenses. L3NewTech estimates it will have many additional expenditures in Year 4. It will award a 5 percent wage increase to its two employees and purchase a more comprehensive medical insurance package for them at an additional annual cost of $2,400. The company also plans to install additional telephone services at a cost of $1,500. Table 1 - L3NewTech Company Historical (Actual) Income Statements for Years 1, 2, and 3 Year 1 Year 2 Year 3 Total Average Average percent of sales Sales $490,000 $508,333 $513,233 $1,511,566 $503,855 100% Cost of goods sold $343,000 $355,833 $359,263 $1,058,096 $352,698 70% Gross profit margin $147,000 $152,500 $153,970 $453,470 $151,157 30% Operating expenses: Advertising $3,200 $3,700 $3,600 $10,500 $3,500 0.7% Depreciation $4,000 $4,000 $4,000 $12,000 $4,000 0.8% Insurance $1,700 $1,700 $1,700 $5,100 $1,700 0.3% Legal and accounting expenses $3,400 $3,605 $3,800 $10,805 $3,602 0.7% Office expenses $2,200 $2,400 $2,650 $7,250 $2,417 0.5% Rent $24,000 $24,000 $24,000 $72,000 $24,000 4.8% Repair and maintenance $300 $550 $420 $1,270 $424 0.1% Salaries $33,000 $33,000 $33,000 $99,000 $33,000 6.6% Telephone and utilities $6,000 $6,350 $6,200 $18,550 $6,183 1.2% Miscellaneous $9,200 $8,195 $10,300 $27,695 $9,231 1.8% An Example of Profit Planning file:///home/stephen/Desktop/L3Example.htm 1 of 8 07/23/2013 11:16 AM
Background image of page 1
Total operating expenses $87,000 $87,500 $89,670 $264,170 $88,057 17.5% Net profit $60,000 $65,000 $64,300 $199,330 $63,100 12.5% Note that the budget categories are expressed as a percentage of sales in the last column. This is called “common sizing” the income statement and helps to provide a basis for estimating costs that scale with sales levels. In addition, the company's accountant has advised it to plan on a 3 percent overall inflation rate next year. Taking these factors into consideration, L3NewTech Company figures its expenses as shown in the preliminary budget ( Table 2 ). Table 2 - L3NewTech Company Preliminary Budget, Year 4 Amount ($) Percent of sales Sales 533,730 100% Cost of goods sold 373,611 70% Gross profit margin 160,119 30% Operating expenses Advertising 3,605 0.7% Depreciation 4,000 0.8% Insurance 4,100 0.8% Legal and accounting expenses 4,142 0.8% Office expenses 2,995 0.6% Rent 24,000 4.5% Repair and maintenance 437 0.1% Salaries 34,650 6.5% Telephone and utilities 7,683 1.4% Miscellaneous 9,507 1.8% Total operating expenses 95,119 17.8% Net profit 65,000 12.2% Under fixed costs, the company estimates that Rent will remain unchanged at $24,000 per year. Depreciation will remain unchanged at $4,000 per year. Salaries will be raised by 5 percent (.05). Salary raises are calculated by multiplying prior salary expenses ($33,000) by 1.05, equaling budgeted salaries of $34,650. The annual insurance expense of $1,700 will be increased by $2,400 to provide for additional medical coverage, so will now be budgeted at $4,100. The company calculates variable costs as follows: Telephone and utilities expenses will be budgeted for $7,683. This figure includes average annual cost of $6,183 plus the $1,500 expected increase. (Average annual cost is used because the amount fluctuated over the three years.) Advertising, repair and maintenance, and miscellaneous expenses also fluctuate annually. These figures are computed by multiplying the three-year average amount ($3,500) by the 3 percent inflation factor (3500 x .03 = 105) and adding the amount of increase to the three-year average amount (105 + 3,500 = 3,605) (or, using the shortcut explained above, multiplying 3,500 by 1.03). Due to company growth, office expenses increased 10 percent each year. To compute office expenses for the budget, the company adds the 10 percent growth factor to the 3 percent inflation rate (total increase equals 13 percent) and multiplies one plus this growth factor (I. 13) by the most recent office expenses in Year 3, $2,650. Budgeted office expenses are then estimated at $2,995 (2,650 x 1. 1 3 = 2,995). Legal and accounting expenses increased 6 percent each year. To compute legal and accounting expenses for the budget the company adds a 6 percent growth factor to the 3 percent inflation rate (totaling 9 percent) and multiplies one plus this rate (1.09) by legal and accounting expenses in Year 3, $3,800. Legal and accounting expense is then budgeted for $4,142 (3,800 x 1.09 = 4,142). Estimated office, legal and accounting expenses show an expected 3 percent inflation increase. As these expenses are steadily rising, the highest and most recent figures are used to compute budget figures. Step 3: Calculate gross profit margin. Gross profit margin is the sum of net profit and total operating expenses, computed by working the preliminary budget backwards. L3NewTech Company's gross profit margin is obtained by adding net profit of $65,000 to operating expenses of $95,119, equaling $160,119. Step 4: Estimate sales revenue. An Example of Profit Planning file:///home/stephen/Desktop/L3Example.htm 2 of 8 07/23/2013 11:16 AM
Background image of page 2
Show entire document
Sign up to view the entire interaction

Top Answer

The way to answer this question is ... View the full answer

Order ID 9234907.doc

Running head: BUDGET MAKING PROCESS Budget Making Process
Name
Institution 1 BUDGET MAKING PROCESS 2
Budget Making Process A budget can get described as a systematically drawn plan that list...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online