Profit Planning CVP Analysis and Short Term Budgeting

P R O F IT P LA N N IN G A N D
C- V-P A N A L YS IS
PROFIT PLANNING
• IS THE PROCESS OF ANTICIPATING PROFIT UNDER VARYING

CONDITIONS AND ANALYZING THE EFFECTS OF VARIABLES
AFFECTING IT. IT DIRECTLY RELATES TO NORMAL OPERATING
ACTIVITIES AND IS SHORT TERM IN NATURE.
THINGS TO REMEMBER:
•FORECASTING PRECEDES PROFIT PLANNING.
•VARIABLES OF PROFIT: (1) UNIT SALES PRICE, UNIT VARIABLE
COSTS, TOTAL FIXED COSTS, SALES VOLUME (OR VOLUME), AND
THE SALES MIX.
COSTING METHOD IN PROFIT
PLANNING
• VARIABLE COSTING OR THE CONTRIBUTION MARGIN APPROACH.
• A PESO INCREASE IN THE CONTRIBUTION MARGIN IS A PESO INCREASE IN
OPERATING PROFIT
• CONTRIBUTION MARGIN MUST BE GREATER OR EQUAL TO THE FIXED COST
TO GENERATE PROFIT OR TO BREAK EVEN RESPECTIVELY.
LEVELS OF PROFIT PLANNING
•BASIC COST – VOLUME PROFIT ANALYSIS

•MULTI – PRODUCT COST-VOLUME PROFIT ANALYSIS
•SENSITIVITY COST-VOLUME PROFIT ANALYSIS
•DEGREE OF OPERATING LEVERAGE
CVP ANALYSIS
•SYSTEMATIC EXAMINATION OF THE RELATIONSHIPS

AMONG COSTS, COST DRIVER, AND PROFIT.
ASSUMPTIONS
Basic Assumptions Sensitivity
Assumptions
Sales volume Changes Changes
Unit sales price Constant Changes
Unit variable cost Constant Changes
Total Fixed Cost Constant Changes
Sales mix Constant Changes

FORMULAS:
• WITHOUT PROFIT OR KNOWN AS BREAK – EVEN POINT (BEP) (SINGLE PRODUCT)

• BEP IN UNITS = FIXED COST (FC) / CONTRIBUTION MARGIN PER UNIT (CM).
• BEP IN PESOS = FC / CM IN %
• CM = UNIT SELLING PRICE – UNIT VARIABLE COST AND EXPENSES
• CM IN % = SALES – (VARIABLE COST AND EXPENSES / SALES) X 100%
• WITH PROFIT (SINGLE PRODUCT)
• SALES VOLUME = FIXED COST + DESIRE PROFIT BEFORE TAX / CM UNIT
• SALES PESO = FIXED COST + DESIRED PROFIT BEFORE TAX / CM IN %
MULTI – PRODUCT COST VOLUME PROFIT ANALYSIS
•TWO OR MORE PRODUCTS ARE INVOLVED; ASSUMPTIONS

SIMILAR TO BASIC CVP ANALYSIS.
FORMULAS:
• MARGIN OF SAFETY – BUDGETED SALES – BREAK EVEN SALES
• MULTI – PRODUCT
• BEP IN UNITS = FIXED COST / WEIGHTED AVERAGE CONTRIBUTION
MARGIN PER UNIT
• BEP IN PESOS = FIXED COST / WEIGHTED AVERAGE CONTRIBUTION
MARGIN IN %
DEGREE OF OPERATING LEVERAGE
•USED TO MEASURE THE EXTENT OF THE CHANGE IN PROFIT
BEFORE TAX RESULTING FROM THE CHANGE IN SALES
•DOL = TOTAL CM/ PROFIT BEFORE TAX OR
•DOL – CHANGE IN PROFIT BEFORE TAX/ CHANGE IN SALES
•DOL = 1/ MSR
SHO R T T E R M
BU D G E TI NG
SHORT TERM PLANNING
•PROGRAMS TO ENSURE THE ACHIEVABILITY OF OBJECTIVES
USING THE AVAILABLE RESOURCES, AND DIFFERENT
MANAGEMENT TECHNIQUES WITHIN A SHORT-GIVEN PERIOD OF
TIME.
REQUISITE:
•LEADING AND THE SCIENCE OF MANAGING - LET’S GET
THINGS DONE THROUGH PEOPLE!
• ENCOURAGE EMPLOYEE PARTICIPATION AND INVOLVEMENT AND ENLIST
THEIR COMMITMENTS TOWARDS THE ORGANIZATIONAL OBJECTIVES.
• THIS COULD BE DONE THROUGH THE PROCESS OF BUDGETING.
THE BUDGETARY SYSTEM … AN EXCELLENT
MODEL!
•USES: (1) COMMUNICATION; (2) MOTIVATION; (3) STANDARDS;

(4) PLANNING; (5) ORGANIZING AND DIRECTING; AND (5)
CONTROLLING AND PERFORMANCE EVALUATION
THE BUDGET COMMITTEE…DEVELOP AN EXECUTIVE TEAM!
• BUDGETARY PROCESS (EACH PART OF THE COMPANY IS INTERRELATED)

• BUDGET MANUAL (HOW THE BUDGET IS TO BE PREPARED?)
• BUDGET PLANNING CALENDAR
• BUDGET INSTRUCTION
• BUDGET REPORT (ACTUAL VS. STANDARD)
THE BUDGET PROCESS… A FINANCIAL MODEL!
•BUDGETS – ARE PLANS EXPRESSED IN QUANTITATIVE FORM,

PRIMARILY IN FINANCIAL EXPRESSION.
•STARTS WITH THE QUESTION, IS THERE A MARKET IN THE
BUSINESS?
STATIC BUDGET VS. FLEXIBLE BUDGET
• MASTER BUDGET – THE PLANS FOR THE COMING YEAR.
• STATIC BUDGET – ALSO KNOWN AS THE MASTER BUDGET.
• PROFIT PLAN – INCOME STATEMENT PART OF THE BUDGET.
• STATIC BUDGET ARE SET AT THE BEGINNING OF THE PERIOD AND REMAIN CONSTANT.
THEY ARE USEFUL FOR PLANNING AND OPERATING PURPOSES, BUT CAN BE
PROBLAMATIC WHEN USED IN CONTROL.
• FLEXIBLE BUDGETS ARE BASED ON THE ACTUA NUMBER OF UNITS PRODUCED RATHER
THAN THE BUDGETED UNITS OF PRODUCTION. IT IS USEFUL FOR CONTROL PURPOSES.
STATIC BUDGET VS. FLEXIBLE BUDGET
• PLANNING, CONTROL , AND BUDGETS (WHAT’S THE CONNECTION?)
• STATIC BUDGET (MASTER BUDGET) IS BASED ON ESTIMATED SALES AND PRODUCTION VOLUME AND IS
PREPARED BEFORE THE BUDGET PERIOD BEGINS.
• FLEXIBLE BUDGET IS BASED ON ACTUAL SALES AND PRODUCTION VOLUME AND IS PREPARED AFTER THE
BUDGET PERIOD ENDS.
• BUDGET SLACKS – ASK FOR RESOURCES BEYOND…; CLAIMING INEFFICIENCY OR INEFFECTIVENESS IF

WHAT THEY DO.
THE FINANCIAL MODEL OF BUDGETING
SALES BUDGET
WAYS OF ESTIMATING SALES BUDGET:

1. STATISTICAL FORECASTING
2.INTERNAL ESTIMATE
3.ANALYSIS OF OTHER FACTORS
• BUDGETED PRODUCTION: • BUDGETED MATERIALS PURCHASES:
BUDGETED SALES XX BUDGETED PRODUCTION XX
ADD: DESIRED ENDING F.G. INVTY. XX X QTY. OF MATERIALS PURCHASED
TOTAL XX PER UNIT OF PRODUCT XX
LESS: EXP. F.G. INVENTORY XX TOTAL MATERIALS TO BE USED XX
BUDGETED PRODUCTION XX ADD: DESIRED END INV. XX
TOTAL XX
LESS: EXP. BEG. INVTY XX
BUDGETED MATERIALS PURCHASES XX
• DIRECT LABOR BUDGET • FACTORY OVERHEAD BUDGET
BUDGETED DIRECT LABOR HOURS P XX * BUDGETED VARIABLE OVERHEAD P XX *
X DL RATE PER HOUR XX BUDGETED FIXED OVERHEAD XX**
BUDGETED DIRECT LABOR COST P XX BUDGETED TOTAL OVERHEAD P XX
* BUDGETED PRODUCTION X STD. DLH PER UNIT *BUDGETED PRODUCTION X STD. VAR OH PER UNIT
**NORMAL CAPACITY X STD FX OH RATE PER UNIT
CASH BUDGET (WORKING CAPITAL MANAGEMENT MODEL)
CASH BALANCE, BEGINNING XX
ADD: RECEIPTS XX
TOTAL CASH AVAILABLE BEFORE CURRENT FINANCING XX
LESS: DISBURSEMENTS XX
EXCESS (DEFICIENCY) OF CASH AVAILABLE OVER DISBURSEMENTS XX
FINANCING XX
CASH BALANCE, ENDING XX
CASH BUDGET (ACCOUNTING MODEL)
CASH FROM OPERATING ACTIVITIES P XX
CASH FROM INVESTING ACTIVITIES XX
CASH FROM FINANCING ACTIVITIES XX
NET CHANGE IN CASH AND CASH EQUIVALENTS P XX
• SCHEDULE OF ACCOUNTS RECEIVABLE COLLECTION
• SCHEDULE OF ACCOUNTS PAYABLE PAYMENTS
• ACCRUAL AND PREPAYMENTS
OPERATING EXPENSES INCURRED P XX
ADD: ACCRUED EXP, BEG P XX
PREPAID EXP, END XX XX
TOTAL P XX
LESS: ACCRUED EXP, END P XX
PREPAID EXP, BEG XX XX
OPERATING EXPENSES PAID P XX
INCOME EARNED P XX
ADD: ACCRUED INCOME, BEG. P XX
UNEARNED INCOME, END XX XX
TOTAL P XX
LESS: ACCRUED INCOME, END P XX
UNEARNED INCOME, BEG. XX XX
INCOME RECEIVED P XX
• OPERATING EXPENSES SCHEDULE

• RESEARCH AND DEVELOPMENT
BUDGETING MODELS
• FLEXIBLE BUDGETING – SEPARATE VARIABLE TO FIXED COST; MULTIPLE ACTIVITY LEVELS
• FIXED OR STATIC BUDGETING – DOES NOT SEGREGATE VARIABLE TO FIXED; SINGLE ACTIVITY LEVEL
• CONTINUOUS OR ROLLING BUDGETING – REVISED ON A REGULAR (CONTINUOUS BASIS)
• ZERO-BASED BUDGETING – PREPARED EVERY PERIOD FROM A BASE OF ZERO
• LIFE CYCLE BUDGETING – REVENUE AND EXPENSES ARE ESTIMATED BASED ON THE LIFE CYCLE OF THE PRODUCT
• ACTIVITY BASED BUDGETING – BUDGETED COST FOR EACH COST POOL.
• KAIZEN BUDGETING – BASED ON THE CHANGES TO BE MADE
• GOVERNMENTAL BUDGETING – BASED ON PUBLIC POLICY AND THE FORCE OF LAW
ADDITIONAL FUNDS NEEDED (AFN)
REFERENCES:

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P R O F IT P LA N N IN G A N D

• IS THE PROCESS OF ANTICIPATING PROFIT UNDER VARYING

•BASIC COST – VOLUME PROFIT ANALYSIS

•SYSTEMATIC EXAMINATION OF THE RELATIONSHIPS

Unit sales price Constant Changes

Unit variable cost Constant Changes

Total Fixed Cost Constant Changes

Sales mix Constant Changes

• WITHOUT PROFIT OR KNOWN AS BREAK – EVEN POINT (BEP) (SINGLE PRODUCT)

•TWO OR MORE PRODUCTS ARE INVOLVED; ASSUMPTIONS

•USES: (1) COMMUNICATION; (2) MOTIVATION; (3) STANDARDS;

• BUDGETARY PROCESS (EACH PART OF THE COMPANY IS INTERRELATED)

•BUDGETS – ARE PLANS EXPRESSED IN QUANTITATIVE FORM,

• BUDGET SLACKS – ASK FOR RESOURCES BEYOND…; CLAIMING INEFFICIENCY OR INEFFECTIVENESS IF

WAYS OF ESTIMATING SALES BUDGET:

• OPERATING EXPENSES SCHEDULE

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