Chapter 9: Financial Planning and Analysis (FP&A)

Financial Planning and Analysis (FP&A) - A coordinated set of tools that helps managers assess the
company’s future and know if they are reaching their performance goals; includes subsystems for (1)
planning, (2) measuring and recording results, and (3) evaluating performance.

Learning Objective 9-2

Budget - A detailed plan, expressed in quantitative terms, that specifies how resources will be
acquired and used during a specified period of time.

Primary Purpose:
1. Planning - quantifying a plan of action
2. Facilitating Communication and Coordination - organization must be aware of the plans made
by other managers
3. Allocating Resources -
4. Controlling Profit and Operations
5. Evaluating Performance and Providing Incentives

Developing the Master Budget

Learning Objective 9-5 : Budget schedules that make up the master budget in a non manufacturing
firm, and that exist in the manufacturing budget as well.

Sales Budget
Purchase Budget
Direct labor Budget

Direct Labor Budget Quarter 3

Technical Labor:
Festival Hours* (16hrs x 3 days) 48.00
Technician labor hours needed per festival hour 17.50
Total technician labor hours needed 840.00
Average technician rate per hour 45.00
Total cost for technician labor 37,800.00

Guest- Logistics Staff Labor:

Number of attendees 25,000.00
Festival hours* 48.00
Total attendee hours 1,200,000.00
Staffing ratio (attendee hours per staff hour) 1,000.00
Total guest logistics staff hours needed 1,200.00
Average guest-logistics staff rate per hour 20.00
Total cost for guest-logistics staff labor 24,000.00

Musician Support Staff Labor

Number of bands 27.00
Musician support staff per band 15.00
Total musician-support staff needed 405.00
Average musician-support staff rate per hour 25.00
Total cost for musician-support staff labor 10,125.00
Total direct-labor cost 71,925.00

* Musician performs at the festival from 10:00 am until 2:00 am for three days. Although technicians and guest-support
staff also work before and after the musician performs, the average number of these staff needed is driven by the
festival's music hours and attendee hours respectively.
Production Overhead and SG&A Budget

Production Overhead, Selling, General &

Administrative Expense
Quarter
Direct Production Overhead Cost 1st 2nd 3rd 4th Total
Supervisory Labor 0.00 20,000.00 22,000.00 0.00 42,000.00
Utilities (electricity, portable toilets) 0.00 5,000.00 80,000.00 0.00 85,000.00
Security, maintenance and custodial 0.00 0.00 30,000.00 0.00 30,000.00
Catering 0.00 0.00 50,000.00 0.00 50,000.00
Rental: Audio equipment 0.00 0.00 100,000.00 0.00 100,000.00
Rental : Festival Grounds 0.00 0.00 50,000.00 0.00 50,000.00
Rental: Others 0.00 1,000.00 40,000.00 0.00 41,000.00
Total Direct Production Overhead Cost 0.00 26,000.00 372,000.00 0.00 398,000.00

Allocated Production Overhead cost

Ticket Sold 10,000.00 10,000.00 5,000.00 0.00 25,000.00
Cost per ticket sold 2.50 2.50 2.50 2.50 10.00
Allocated ticketing costs 25,000.00 25,000.00 12,500.00 0.00 62,500.00
Purchasing and general supplies 10,000.00 25,000.00 35,000.00 10,000.00 80,000.00
Liability insurance 10,000.00 10,000.00 10,000.00 10,000.00 40,000.00
Total allocated production overhead cost 45,000.00 60,000.00 57,500.00 20,000.00 182,500.00
Total Production Overhead cost 45,000.00 86,000.00 429,500.00 20,000.00 580,500.00

Selling, G&A Budget

Cash Receipts Budget

How to Budget Cash Flows

Sales on credit or account

Cash disbursement budget

Cash Budget
Budgeted Income Statement
Budgeted statement of cash flow
Production Budget for a Manufacturing Firm
Production Budget

Formula:

Sales in unit + Desired ending inventory = Total Units required - Expected beginning inventory of
finished goods = units to be produced

Sample Problem:
Direct-Materials Budget

Raw materials required for production + Desired ending inventory of raw materials = Total raw
materials required - Expected beginning inventory raw materials = Raw materials to be purchased

Direct Material Budget

Total in a
Chair Fabric 1st 2nd 3rd 4th Year
Char to be produced 6,000.00 15,500.00 19,000.00 9,500.00 50,000.00
Raw material required per unit (sq. ft of
fabric) x 12.00 12.00 12.00 12.00 12.00
Raw materials required for production
(sq.ft) 72,000.00 186,000.00 228,000.00 114,000.00 600,000.00
Desired ending inventory of raw materials
(sq.ft)* + 18,600.00 22,800.00 11,400.00 7,200.00+ 7,200.00
Total raw material required 90,600.00 208,800.00 239,400.00 121,200.00 607,200.00
Expected beginning inventory of raw
materials (sq.ft) - 7,200.00 18,600.00 22,800.00 11,400.00 7,200.00
Raw materials to be purchased 83,400.00 190,200.00 216,600.00 109,800.00 600,000.00
Cost per sq. ft x 9.00 9.00 9.00 9.00 9.00
Total cost of of chair fabric purchases 750,600.00 1,711,800.00 1,949,400.00 988,200.00 5,400,000.00

Chair frames
Chairs to be produced 6,000.00 15,500.00 19,000.00 9,500.00 50,000.00
Chair frames required per chair x 1.00 1.00 1.00 1.00 1.00
Chair frames to be purchased= 6,000.00 15,500.00 19,000.00 9,500.00 50,000.00
Cost per chair frame x 20.00 20.00 20.00 20.00 20.00
Total cost of chair frames 120,000.00 310,000.00 380,000.00 190,000.00 1,000,000.00

Total cost of raw materials purchases 870,600.00 2,021,800.00 2,329,400.00 1,178,200.00 6,400,000.00

*Ten percent of the next quarter’s expected raw materials requirements

+Ten percent of the expected raw material requirements for the 1st quarter of the next year 20x3,
which is assumed to be 72,000 sq. ft. (sales and therefore production, is predicted to be the same in
each quarter of 20x3 as in the corresponding quarter of 20x2)

=Since the chair frames are delivered on a just-in-time basis, there is no need to buffer inventory
stocks. Thus, the number of frames purchased each quarter is the same as the needed each quarter.

Budgeted Schedule of Cost of Goods Manufactured and Sold

Direct Materials
Raw-material inventory, Jan1 64,800.00
Add: Purchases of Raw Material (from direct materials budget) 6,400,000.00
Raw materials available for use 6,464,800.00
Deduct: Raw material inventory, December 31 (desired ending
inventory x cost per sq ft) 64,800.00
Direct Material Used 6,400,000.00
Direct Labor (from direct-labor budget)* 375,000.00
Production Overhead (from production overhead budget)* 1,400,000.00
Total Manufacturing cost 8,175,000.00
Add: Work in process inventory, January 1 0.00
Subtotal 8,175,000.00
Deduct: Work in process inventory, December 31 0.00
Cost of goods manufactured 8,175,000.00
Add: Finished good inventory, January 1 81,750.00 **
Cost of goods available for sale 8,256,750.00
Deduct: Finished goods inventory, December 31 81,750.00 **
Cost of Goods Sold 8,175,000.00

**
Expected beginning inventory of FG 500.00
Absorption Manufacturing Cost x 163.50
Cost of goods manufactured 8,175,000.00 81,750.00
Divide: Total units produced 50,000.00

Expected ending inventory of FG 500.00

Absorption Manufacturing Cost x 163.50
Cost of goods manufactured 8,175,000.00 81,750.00
Divide: Total units produced 50,000.00

Budgeted Balance Sheet

Previous Balance Sheet

Budgeted Balance Sheet

Current assets
Cash (from cash budget)* 831,000.00
Accounts Receivable (net of allowance for uncollectible accounts) 405,000.00 a
Inventory
Raw materials (from budgeted COGM & COGS) 64,800.00
Finished Goods (from budgeted COGM & COGS) 81,750.00
Supplies 42,000.00
Total Inventory 188,550.00
Total Current Assets 1,424,550.00
Long lived Assets:
Building
Equipment 9,200,000.00 b
Less: Accumulated depreciation on building and equipment 2,280,000.00
Building and equipment, net of accumulated depreciation (2,323,550.00) c
Total Assets 9,156,450.00
10,581,000.00
Liabilities and Owner's Equity
Current Liabilities:
Accounts payable 471,280.00 d
Total Current Liabilities 471,280.00
Long-term Liabilities:
Note payable (non-interest-bearing;due on 12/31/20x4 4,100,000.00
Total Liabilities 4,571,280.00
Owner's equity 6,009,720.00 e
Total Liabilities and owner's equity 10,581,000.00

*This budget example from snowcap music festival

a - from cash receipts budget: uncollected portion of 4th quarter sales
b - balance in the building account on 12/31/20x1 balance sheet, plus a $1,000,000.00 building construction project in
20x2 (from the capital budget and cash budget)
c - balance in accumulated depreciation account on december 31, 20x1 balance sheet, plus $ 440,000 in depreciation
during 20x2 (from production overhead budget)
d - from cash disbursement budget; unpaid portion of 4th quarter purchases
e - balance on owner's equity on the December 31, 20x1 balance sheet, plus the 20x2 budget income of $1,381,000 from
budgeted income statement

Chapter 10: Managing Costs

Cost Variance Analysis

Learning Objective 10-3:Compute and interpret the direct material price quantity variances and the
direct labor rate and efficiency variances.

Direct Material Standards

Standard Direct Material Quantity - The total amount of material normally required to produce a
finished product, including allowances for normal waste and inefficiency.

Standard Direct Material Price - The total delivered cost, after subtracting any purchase discounts
taken.

Direct Labor Standard

Standard Direct Labor Quantity - The number of labor hours normally needed to manufacture one unit
of product.

Standard Direct Labor Rate - Total hourly cost of compensation, including fringe benefits.

Direct Material Variances

Direct Material Price Variance Formula

DMPV=AQ(AP-SP)
Direct Material Quantity Variance

Standard Quantity Allowed - The standard quantity per unit of output multiplied by the number of units
of actual output.

DMQV= SP(AQ-SQ)

Direct Material Purchase Variance - The difference between the standard price and the actual price
paid for direct material purchased, multiplied by the actual quantity of material purchased.

DMPV = PQ(AP-SP)
Direct Labor Variances

Direct Labor rate Variances - The difference between actual and standard hourly labor rate multiplied
by the actual hours of direct labor used.

DLRV=AH(AR-SR)

Direct Labor efficiency variance - The difference between actual and standard hours of direct labor
multiplied by the standard hourly labor rate.

DLEV= SR(AH-SH)
Direct Labor Variance

Multiple Types of Direct Material or Direct Labor

Allowing for production loss

Flexible budgets based on input output

Flexible Overhead Budget

Flexible Budget Formula

Budgeted variable overhead cost= Total variable cost/activity level

Variable Overhead

Variable Overhead spending variance

Variable Overhead efficiency variance

Fixed Overhead

Fixed Overhead Budget Variance

Fixed Overhead volume variance