Accounting For Dummies®, 4th Edition

10.3. Watching Budgeting in Action

Suppose you're the general manager of one of a large company's several divisions, which is a major profit center of the business. (I discuss profit centers in Chapter 9.) You have broad authority to run this division, as well as the responsibility for meeting the financial expectations for your division. To be more specific, your profit responsibility is to produce a satisfactory annual operating profit, which is the amount of earnings before interest and income tax (EBIT). (Interest and income tax expenses are handled at the headquarters level in the organization.)

The CEO has made clear to you that she expects your division to increase EBIT during the coming year by about 10 percent, or $256,000 to be exact. In fact, she has asked you to prepare a budgeted profit report showing your plan of action for increasing your division's EBIT by this target amount. She also has asked you to prepare a summary for the budgeted cash flow from operating activities based on your profit plan for the coming year.

Figure 10-1 presents the P&L report of your division for the year just ended. The format of this accounting report follows the profit report template explained in Chapter 9, which is designed to mark a clear path for understanding profit behavior and how to increase profit. Note that fixed operating expenses are separated from the two variable operating expenses. (Your actual reports may include more detailed information about sales and expenses.) ...