CHAPTER 7: BUSINESS PLANNING 2.

Tactical planning
➢ Allocation of production, financial and
PROFIT PLANNING
manpower resources.
➢ Most important part of a company’s strategy ➢ Process of the management where it
analysis. When administered wisely it: will direct company’s growth towards
1. Compels strategy planning and its objectives.
implementation plans
INFLUENCES TO PLANNING
2. Provide framework for judging
performance 1. EXTERNAL
3. Motivates managers and employees ➢ Largely beyond company control
4. Promotes coordination’s among subunits ➢ Environment outside the company
2. INTERNAL
STRATEGY
➢ Established by the characteristics of the
➢ Specifies how an organization matches its own company.
capabilities with the opportunities in the ➢ Things that a company can control
marketplace. 3. MANAGEMENT
➢ Reflecting the desires of the owner or
BUSINESS PLANNING management
➢ Forecasting developments for a specific period ➢ Its own overall operation strategy
of time in order to formulate course of action ELEMENTS OF GOOD BUSINESS PLANNING
➢ Business plan – course of action but in
document. THE BUSINESS PLAN

PLANNING BENEFITS ➢ It only covers a shorter period of time

➢ Oriented toward short term business tactics
➢ Guide the organization in a changing ➢ Detailed financial projections than strategy plans
environment and focuses in internal operations.
➢ Achieve results on a broader scale 1. Brief description about the company present
➢ Can help to know where the business id going practices
➢ Small firms – planning have to be flexible 2. List of principal external factors
because of the potential impact to external 3. List of changes expected in present practices
events. 4. Assessment to the strengths and weaknesses
PLANNING PROCESS 5. Forecast of the expected financial result for
the next 2 years
PLANNING 6. Financial analysis identifying anticipated
➢ Can be viewed as the process by which problems
management focuses on influences that can 7. Performance projection under alternate
impact a company. assumptions such as decline in sales
8. Contingency plans
TWO STAGES:
BUSINESS PLAN FOR SMALL BUSINESS
1. Strategic planning phase
➢ Long term goals are established a. Financing requirements
➢ Address major issues such as the b. Marketing plan
market which it will compete c. Technical factors
➢ Long term facilities requirements d. Critical factors
e. Resumes for key personnel
f. Band and investor relationship
g. Past and potential problem areas
 Common Characteristics CONTENTS OF A BUSINESS PLAN

▪ Significant aspect of planning for small 1. Cover Sheet

business involves evaluating and deciding a. Business information
upon such changes to the business capital b. Business goals, potential and outlook
investment, new products, or acquisition c. Capital required
of a computer. d. Proponents
1. Simple 2. Table of Contents
2. Flexible a. Road map of the whole business
3. With supporting information 3. Executive Summary
4. Organized a. Designed to capture and hold the
5. Actions to be taken interest of the person whom the
6. Managers participate in planning business plan is presented.
7. Planning horizon is defined i. Mission
8. Plans are monitored and ii. Selling advantage
communicated iii. Projections in the future
9. Motivated iv. Needs in capital
10. Relates to financial statements v. Procedures and timetable for
repaying investors
Role of the Consultant
vi. Amount of capital requested
▪ Support or validate the current planning 4. Context of the Business
but it is effective if there are no current a. Big picture or the total picture of the
planning process. business; perspective of the industry
▪ Provide input to the existing planning shows the potential result
efforts. i. Growth potential
▪ It enhances the organization planning ii. New products and development
capability iii. Economic trends
▪ Areas that consultant render assistance: iv. Industry outlook and trends
1. Develop methods of planning 5. Profile of the Business
2. Evaluate methods for long range a. Nature of the business
planning because planning b. History
sometimes is only for short term c. Economic trends
3. Instruct members of management d. Organizational detail
about planning e. Patterns in research and development
4. Suggest techniques to be used in f. Relevant contracts and agreements
planning process g. Operational procedures
5. Play the “devil’s advocate” suggests 6. Profile of the Specific Market
additional factors to be considered a. Who are the consumers?
in the development of goals and b. Geographical scope
objectives c. Growth potential of the target market
6. Conduct sessions to determine the d. Company’s ability to satisfy market
cause of variances demands
e. How the business can attract new
SEGMENTS OF A BUSINESS PLAN customer while keeping the current
1. Description of the company customer.
2. Marketing plan
3. Production or operation plan
4. Personnel plan
5. Financial plan
7. Anticipated challenges and planned responses
a. Dealing with the competition
b. Weak areas
c. Legal factors; more on government side
d. Protection issues; patent, copyrights
and trademarks
e. Key man contingencies’ more on
management side
f. Staffing; personnel needs
8. Marketing plan
Four Critical Areas:
a. Publicity
b. Promotion
c. Merchandising
d. Market research
9. Financial Projections
Heart of any business plan; projections should
be prepared on the following:
a. Profit & loss statement
b. Statement of financial position
c. Cash flow statement
10. Implementation Schedule
a. This enables one to coordinate and
manage enterprise in a systematic and
controlled way
11. Statement of Resource Needs
a. Purpose of generating needed
resources from lenders and investors
b. Summarize the needs (amount, terms,
date needed)
12. Appendix
a. Footnotes
b. Supporting documents
c. Articles, clippings, special reports
d. Biographies
e. Bibliographies
f. Graphs and charts
g. Copies of contract and agreements
h. Glossary of items
i. References
 CHAPTER 8: BASIC COST MANAGEMENT CONCEPTS CLASSIFICATION OF COSTS

NATURE OF COST, COST POOLS AND COST DRIVERS A. COST CLASSIFIED BY NATURE OR
MANAGEMENT FUNCTIONS
COST
➢ Direct Materials
➢ Value foregone or sacrifice of resources for the ▪ Raw materials that become an
purpose of some economic benefit integral part of the finished product
➢ Resource used for some purpose ➢ Direct labor
➢ Outlay or expenditure of money ▪ Labor cost related to time spent in
products
COST POOLS ➢ Manufacturing overhead
➢ Cost collected into into meaningful groups. Cost ▪ All cost if manufacturing except direct
pools may be classified: materials and direct labor
a. By type of cost (labor cost in one pool, ▪ Indirect materials – materials that do
material cost in another) not become an integral part of the
b. By sources (dept. 1, dept. 2 and so on) product
c. By responsibility (manager 1, manager 2 ▪ Indirect labor – supervisor, inspector
and so on) and maintenance
➢ Other Manufacturing overhead
COST OBJECT ▪ Overtime premiums and cost of idle
➢ Any product or service or organizational unknit time
to which costs are assigned for some ➢ Nonmanufacturing cost
management purpose. ▪ Marketing cost
▪ General and administrative cost
COST DRIVERS ➢ Production cost in service industry and
nonprofit organizations
➢ any factor that has effect of changing level of
▪ They also have cost but same nature
the total cost.
lang
➢ Management is essential for a firm to compete
the basis of cost leadership.
B. COST CLASSIFIED ACCORDING TO THE TIMING
COST ASSIGNMENT AND CLASSIFICATION OF RECOGNITION OF EXPENSE
➢ Product Cost
COST ASSIGNMENT
▪ All cost involved in acquiring or
- Process of assigning cost to cost pools making a product
- Cost pools to cost objects ➢ Period Cost
▪ Cost that are identified with the
COST ALLOCATION accounting period and not included in
- Assignment of indirect cost to cost pools product cost; selling and admin
expense such as sales commissions,
ALLOCATION BASES rent and transportation
- Cost drivers used to allocate costs
C. COST CLASSIFICATION ON FINANCIAL
STATEMENTS
➢ In merchandising – it only have one
“merchandise inventory”.
➢ Manufacturing
▪ Raw materials
▪ Work in process
▪ Finished goods
D. COST CLASSIFICATION FOR PREDICTING COST G. COST CLASSIFICATION ACCORDING TO
BEHAVIOR MANAGERIAL INFLUENCE
➢ Cost Behavior ➢ Controllable cost
▪ Refers to how a cost will react to ▪ Subject to significant influence by a
changes in the business activity particular manager within the time
✓ Variable cost period of consideration
- Cost that change directly ➢ Noncontrollable cost
in proportion to change in ▪ Does not have a significant influence
activity (volume). Direct
labor and direct materials H. COST TERMINOLOGIES USED FOR PLANNING
are examples AND CONTROL
✓ Fixed Cost ➢ Standard cost
- Cost that remains ▪ Predetermined cost estimate that
unchanged for a given should be attained
period of time regardless ➢ Budgeted cost
of the change in activity ▪ Expected or planned cost for a given
✓ Semi variable cost period
- Contain both fixed and ➢ Absorption costing
variable elements ▪ Costing method that includes all
- Ex.: social security taxes, manufacturing cost or also known as
materials handling, full cost method
personnel service, heat, ➢ Direct costing
light, and power. ▪ Fixed cost are charge to revenue as
incurred
E. COST CLASSIFIED BY TYPES OF INVENTORIES ▪ Not assigned to specific units of
➢ Raw materials inventory product manufactured
▪ Supplies that have been purchase but ▪ Variable costing
not used at the end of the period ➢ Information costs
➢ Work-in-process inventory ▪ Cost of obtaining information
▪ Cost associated with goods partially ➢ Ordering cost
completed at the end of the period ▪ Cost for the numbers of orders placed
➢ Finished goods inventory for inventory
▪ Completer goods but not been sold at ➢ Out-of-pocket costs
the end of the period ▪ Cost that must be met with a current
expenditure or cash outlay or the
F. COST CLASSIFICATION ACCORDING TO amount you spend on something
TRACEABILITY TO COST OBJECTIVE
➢ Direct cost I. COST CLASSIFICATION ACCORDING TO A TIME-
▪ Economically traced to a single cost FRAME PERSPECTIVE
object ➢ Committed cost
➢ Indirect cost ▪ Cost that is inevitable consequence of
▪ Not directly traceable to the cost a previous commitment
object ➢ Discretionary cost (programmed;
managed cost)
▪ Cost for which the size or the time of
incurrence is a matter of choice
 J. COST CLASSIFIED ACCORIDNG TO THE TIME 2. Management function
PERIOD FOR WHICH THE COST IS INCURRED - The cost of the fabric is a manufacturing
➢ Historical cost cost.
▪ Cost that was incurred in a past 3. Accounting treatment
period - Whatever is paid for the fabric will be
➢ Future cost capitalized as a product cost and carried in
▪ Budgeted cost that are expected to inventory until it is sold.
be incurred in a future period. 4. Traceability to product
- The fabric is a direct cost because it
K. COST CLASSIFICATIOS FOR DECISION-MAKING represents a significant portion of the cost
AND OTHER ANALYTICAL PURPOSES of the product and can be traced to a
➢ Relevant cost specific unit of finished product.
▪ Future cost that are different under 5. Cost behavior
one decision alternative than under - Both the P40.00 and P50.00 cost per yard
another decision alternative. are variable costs. As the number of yards
➢ Incremental cost purchased increases, the total fabric cost
▪ Difference in cost between two or increases proportionately.
more alternatives 6. Decision significance
➢ Sunk cost - The P50.00 cost is relevant because it can
▪ Past cost that has been incurred and be compared with the price of other fabrics
are irrelevant to future decision of similar quality to select the best
➢ Opportunity cost alternative.
▪ Value of the best alternative foregone - The P40.00 cost is irrelevant.
as the result of selecting a different 7. Managerial influence
use of resources or by choosing a - The cost of the fabric to be acquired is a
particular strategy. controllable cost since Ms. Cabrera has the
➢ Marginal cost authority to make production decisions.
▪ Cost associated with the next unit or 8. Others
next project - The fabric is an out-of-pocket cost
➢ Value added costs associated until producing additional skirts
▪ Cost that adds value to the product. which will involve cash outlay in its
▪ Activities that are necessary to satisfy acquisition.
the requirements of the consumers.

ILLUSTRATIVE PROBLEMS ON COST CLASSIFICATIONS

Bettina Cabrera is the production manager of a ready-

to-wear manufacturing outfit. A decision needs to be
made about the type of clothing material of fabric to be
used to make a shirt. The fabric that has been used in
the previous Production cost P40 per yard but it is not
available currently. Similar material from another
supplier will cost P50 per yard.

The cost of the fabric can be classified as follows:

1. Time period
- P 40.00 - historical cost
- P 50.00 - future cost
CHAPTER 9: