McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Profit PlanningProfit Planning“…“…a series of prescribed steps to be a series of prescribed steps to be taken to ensure that a desired profit taken to ensure that a desired profit

will be made.”will be made.”

Profit planning must precede other Profit planning must precede other activities.activities.

RevenueRevenue

CashCash

Accounts Accounts ReceivableReceivable

Types of ExpensesTypes of Expenses

FixedFixed

VariableVariable

ExpensesExpensesMaterialsMaterialsSalariesSalariesUtilitiesUtilitiesDepreciationDepreciationRentRentBuilding ServicesBuilding ServicesInsuranceInsuranceInterestInterest

Office & SuppliesOffice & SuppliesSales PromotionSales PromotionTaxes & LicensesTaxes & LicensesMaintenanceMaintenanceDeliveryDeliveryMiscellaneousMiscellaneous

Profit (Income)Profit (Income)

“…“…the difference between the difference between revenue earned and expenses revenue earned and expenses

incurred.”incurred.”

Initial StepsInitial StepsIn Profit PlanningIn Profit Planning

1)1) Establish GoalEstablish Goal2)2) Determine Expected Sales Determine Expected Sales

VolumeVolume1)1) Estimate ExpensesEstimate Expenses2)2) Determine Estimated ProfitDetermine Estimated Profit3)3) Compare Estimate With GoalCompare Estimate With Goal

Action StepsAction StepsIn Profit PlanningIn Profit Planning

6)6) List alternativesList alternativesto improve profitsto improve profits

7)7) Determine how Determine how expenses & profitsexpenses & profitsvary with volumevary with volume

8)8) Analyze alternatives vis-à-vis profitAnalyze alternatives vis-à-vis profit

9)9) Select an alternative & implementSelect an alternative & implement

Action Steps In Profit PlanAction Steps In Profit Plan

7.7. How Do Expenses Vary With VolumeHow Do Expenses Vary With Volume SalesSales ExpensesExpenses

a.a. $364,000$364,000 $364,000 $364,000b.b. $530,000$530,000 $490,000 $490,000c.c. $700,000$700,000 $618,700 $618,700

8.8. VolumeVolume ProfitProfita.a. $364,000$364,000 $ -0- $ -0-b.b. $530,000$530,000 $ 40,000 $ 40,000c.c. $700,000$700,000 $ 81,300 $ 81,300

9.9. Analyze AlternativesAnalyze Alternatives10.10. Select/Implement PlanSelect/Implement Plan

Planning For ProfitPlanning For Profit1.1. Establish Profit GoalEstablish Profit Goal $ 52,000$ 52,0002.2. Determine Sales VolumeDetermine Sales Volume 530,000 530,0003.3. Estimate ExpensesEstimate Expenses 490,000490,0004.4. Determine Profit EstimateDetermine Profit Estimate 40,000 40,0005.5. Compare Profit To GoalCompare Profit To Goal -$12,000 -$12,0006.6. List AlternativesList Alternatives

a.a. Change Sales VolumeChange Sales Volumeb.b. Decrease ExpensesDecrease Expensesc.c. Add Products/ServicesAdd Products/Servicesd.d. SubcontractSubcontract

Breakeven ChartBreakeven Chart

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

ControlControl

“…“…the process of ensuring the process of ensuring that organizational goals are that organizational goals are

achieved.”achieved.”

Control ProcessControl Process1. Setup Standards1. Setup Standards

2. Measure Performance2. Measure Performance

3. Actual vs. Planned3. Actual vs. Planned

4. Deviations Excessive?4. Deviations Excessive?

5. Take Corrective Action5. Take Corrective Action

Set StandardsSet Standards

• Units Consumer/ProducedUnits Consumer/Produced– Standard Hours Per UnitStandard Hours Per Unit– Miles Per GallonMiles Per Gallon

• Price Paid/Charged- Price Per UnitPrice Paid/Charged- Price Per Unit• RequiresRequires

– IntuitionIntuition– Past PerformancePast Performance– MeasurementMeasurement– ComparisonComparison– CommunicationCommunication

Keith Brofsky/Getty Images

Effective ControlsEffective ControlsTimelyTimelyCost EffectiveCost EffectiveAccurateAccurateMeasurableMeasurableIndicate Cause/EffectIndicate Cause/EffectResponsibility of oneResponsibility of oneAcceptableAcceptable

PhotoDisc Imaging/Getty Images