Master Budget

UNIT-TWO
THE MASTER BUDGET
Introduction
This chapter is about master budget which is an important management accounting tool
for planning future activities and controlling current operation in the organization.

Budgets are crucial to the ultimate financial success of any organization. Budgets are so
important, mainly because they serve as road map towards achieving organizational
goals. Budgets as a management accounting tool helps management in planning,
controlling and performance evaluation. In this unit you will study how budget is used
in planning the operation of an organization.

2.1. The overall plan and its characteristics

Planning is crucial to operating a profitable business. Expressing business plans in

financial terms is commonly called budgeting. The budgeting process involves
coordinating the financial plans of all areas of the business. For example, the production
department cannot prepare a manufacturing plan until it knows how many units of
product to produce. The number of units to produce depends on the marketing
department’s sales projection. The marketing department cannot project sales volume
until it knows what products the company will sell. Product information comes from
the research and development department. The point should be clear: a company’s
master budget results from combining numerous specific plans prepared by different
departments.

The master budget coordinates all the financial projections in the organization’s
individual budgets in a single organization-wide set of budgets for a given time period.
It embraces the impact of both operating decisions and financing decisions. Operating
decisions are about the acquisition and use of scarce resources. Financing decisions
center on how to obtain the funds to acquire resources.

The term master in ‘master budget’ refers to it being a comprehensive, organization

wide set of budgets. Master budget preparation is normally supervised by a committee.
The budget committee is responsible for settling disputes among various departments
over budget matters. The committee also monitors reports on how various segments are
progressing toward achieving their budget goals. The budgeting committee is not an
accounting committee. It is a high-level committee that normally includes the company
president, vice presidents of marketing, purchasing, production, and finance, and the
controller.

2.2. Advantages of budgeting

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Budgeting is costly and time-consuming. The sacrifices, however, are more than offset
by the benefits. Budgeting promotes planning and coordination; it enhances
performance measurement and corrective action. Developing a budget is a critical step
in planning any economic activity. This is true for business, for government agencies
and for individuals. We must all budget our money to meet day to day expense and
plan for the major expenditure, such as buying a car or paying for college tuition.
Similarly, business of all types and government units at every level must make financial
plans to carry out routine operation, to plan for major expenditure and to help in
making financing decision, a budget is a tool that helps managers in both their planning
and control function. A budget is a formal written summery (statement) of management
plan for a specific future time period expressed in financial terms. It normally
represents primary means of communicating agreed up on objectives throughout the
business organization.

The following are the main advantages of budgeting.

 Planning
Most business managers naturally think ahead about how they will conduct their
business. The primary purpose of a budget is to present and describe the financial
ramifications of plans for the future. It quantifies a plan of action. The budget process
requires individuals to consider possible future courses of action and the resources
needed to accomplish the various activities. Budget formalizes the manager’s plan in a
document that clearly communicates objectives to both superiors and subordinates.
 Coordination, Cooperation and Communication
Planning by individual managers does not ensure an optimum plan for the entire
organization. Therefore, any organization to be effective, each manager throughout the
organization must be aware of the plans made by other managers. In a nutshell, a good
budget process communicates both from the top down and from the bottom up. Top
management makes clear the goals and objectives of the organization in its budgetary
directives to middle and lower level managers, and also to all employees. Employees

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and lower level managers inform top-level managers how they can plan to achieve the
objectives.
 Performance Measurement
Providing a frame of reference, a set of specific expectations against which actual results
can be compared. Budgets are specific, quantitative representations of management’s
objectives. Comparing actual results to budget expectations provides a way to evaluate
performance.
 Corrective Action
Budgeting provides advance notice of potential shortages, bottlenecks, or other
weaknesses in operating plans. For example, a cash budget alerts management to when
the company can expect cash shortages during the coming year. The company can make
borrowing arrangements well before it needs the money. Without knowing ahead of
time, management might be unable to secure necessary financing on short notice, or it
may have to pay excessively high interest rates to obtain funds. Budgeting advises
managers of potential problems in time for them to carefully devise effective solutions.

 Budget in brief is a future plan of action expressed in quantitative terms which

is also an aid to management control and performance evaluation.
2.3. Types of budgets
The type of budget used by different organization differs based upon the nature of their
business and the purpose of the budget; however, the general frame work is the same.
Budgets based on time can be classified into three.

(1) Strategic Plan: it matches organization’s own capabilities with the opportunities
in the marketplace to accomplish its objectives. The most forward looking budget
is the strategic plan, which sets the overall goals and objective of the
organization. Some organization won’t classify the strategic plan as an actual
budget though because it does not deal with a specific time frame and it does not
produce forecasted financial statement. In any case, the strategic plan leads to
long range planning which produce forecasted financial statement for five or ten

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years. The financial statements are estimates of what management would like to
see in the company’s future financial statement. Decisions made in long range
planning include addition or deletion of department, acquisition of a new
equipment or building and other long term commitment.
(2) Capital Budget: Capital budget is a budget that details the planned expenditure
for facilities, equipment, new product, and other long-term investments.

(3) Master budget: A master budget is a short-term, comprehensive plan to achieve

the financial and operational goals of an organization. Master budget comprises
of the organizations overall plan for the given period and the budget for the
various functional areas the make up the organization.

Master Budgets

A Master Budget is a consolidated summary of the various functional budgets. It

coordinates all the financial projections in the organization’s individual budgets in a
single organization wide set of budgets for a set time period. It incorporates the impact
of both operating decisions and financing decisions.

A master budget can be divided into operating and financial budgets. Operating budgets
are concerned with the income generating activities of a firm: sales, production, and
finished goods inventories. The ultimate outcome of the operating budgets is a pro
forma or budgeted income statement. Financial budgets are concerned with the inflows
and outflows of cash and with financial position. Planned cash inflows and outflows are
detailed in a cash budget, and expected financial position at the end of the budget
period is shown in a budgeted, or pro forma, balance sheet.
The master budget is usually prepared for a one-year period corresponding to the
company’s fiscal year. The yearly budgets are broken down into quarterly and monthly
budgets. The use of shorter time periods allows managers to compare actual data with
budgeted data as the year unfolds and to make timely corrections. Because progress can
be checked more frequently with monthly budgets, problems are less likely to become
too serious.

The term “master” in master budget refers to it being a comprehensive, organization-

wide set of budgets. Master budget consists of:-

1. An operating budget that results in a projected income statement, and it consists:

 Sales budget

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 Production budget
 Direct materials purchases budget
 Direct labor budget
 Overhead budget
 Ending finished goods inventory budget
 Cost of goods sold budget
 Operating expenses budget
 Budgeted income statement

2. A financial budget that results in a projected balance sheet and it consists of:

 Capital budget

 Cash budget

 Budgeted balance sheets

 Budgeted statement of cash flows

Preparation of Master Budget (Manufacturing Company)

Gore Company manufactures and sells a product whose peak sales occur in the third
quarter. Management is now preparing detailed budgets for 2020- the coming year and
has assembled the following information to assist in the budget preparation:

1. The company’s product selling price is Br. 20 per unit. The marketing department
has estimated sales as follows for the next six quarters.

2020 Quarters 2021 Quarters

Q1 Q2 Q3 Q4 Q1 Q2
Budgeted sales in units 10,000 30,000 40,000 20,000 15,000 15,000
2. Sales are collected in the following pattern: 70% of sales are collected in the quarter
in which the sales are made and the remaining 30% are collected in the following
quarter. On January1, 2020, the company’s balance sheet showed Br.90, 000 in
account receivable, all of which will be collected in the first quarter of the year. Bad
debts are negligible and can be ignored.

3. The company maintains an ending inventory of finished units equal to 20% of the
next quarter’s sales. The requirement was met on December 31, 2019, in that the
company had 2, 000 units on hand to start the New Year.

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4. Fifteen pounds of raw materials are needed to complete one unit of product. The
company requires an ending inventory of raw materials on hand at the end of each
quarter equal to 10% of the following quarter’s production needs of raw materials.
This requirement was met on December 31, 2019 in that the company had 21, 000
pounds of raw materials to start the New Year.

5. The raw material costs Br.0.20 per pound. Raw material purchases are paid for in the
following pattern: 50% paid in the quarter the purchases are made, and the
remainder is paid in the following quarter. On January 1,2020, the company’s
balance sheet showed Br.25, 800 in accounts payable for raw material purchases, all
of which be paid for in the first quarter of the year.

6. Each unit of Gore’s product requires 0.8 hour of labor time. Estimated direct labor
cost per hour is Br.7.50.

7. Variable overhead is allocated to production using labor hours as the allocation base
as follows:

Indirect materials Br.0.40

Indirect labor 0.75
Fringe benefits 0.25
Payroll taxes 0.10
Utilities 0.15
Maintenance 0.35

Fixed overhead for each quarter was budgeted at Br. 60, 600. Of the fixed overhead
amount, Br. 15, 000 each quarter is depreciation. Overhead expenses are paid as
incurred.

8. The company’s quarterly budgeted fixed selling and administrative expenses are as
follows:

2020 Quarters
1 2 3 4
Advertising Br.20, 000 Br.20, 000 Br.20, 000 Br.20, 000
Executive salaries 55, 000 55, 000 55, 000 55, 000
Insurance - 1, 900 37,750 -
Property taxes - - - 18, 150
Depreciation 10, 000 10, 000 10, 000 10, 000

The only variable selling and administrative expense, sales commission, is budgeted at
Br.1.80 per unit of the budgeted sales. All selling and administrative expenses are paid
during the quarter, in cash, with exception of depreciation. New equipment purchases
will be made during each quarter of the budget year for Br. 50, 000, Br. 40, 000, & Br.20,
000 each for the last two quarter in cash, respectively. The company declares and pays

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dividends of Br.8, 000 cash each quarter. The company’s balance sheet at December 31,
2019 is presented below:

ASSETS
Current assets:
Cash Br. 42, 500
Accounts Receivable 90, 000
Raw Materials Inventory (21, 000 pounds) 4, 200
Finished Goods Inventory (2, 000 units) 26, 000
Total current assets Br.162, 7 00
Plant and Equipment:
Land Br.80, 000
Building and Equipment 700, 000
Accumulated Depreciation (292, 000)
Plant and Equipment, net 488, 000
Total assets Br.650, 700
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable (raw materials) Br.25, 800
Stockholders’ equity:
Common stock, no par Br.175, 000
Retained earnings 449, 900
Total stockholders’ equity 624, 900
Total liabilities and stockholders’ equity Br.650, 700

The company can borrow money from its bank at 10% annual interest. All borrowing
must be done at the beginning of a quarter, and repayments must be made at the end of
a quarter. All borrowings and all repayments are in multiples of Br. 1,000.

The company requires a minimum cash balance of Br.40, 000 at the end of each quarter.
Interest is computed and paid on the principal being repaid only at the time of
repayment of principal. The company wishes to use any excess cash to pay loans off as
rapidly as possible.

Required: Prepare a master budget for the four-quarter period ending December 31.
Include the following detailed budget and schedules:

1) a) A sales budget, by quarter and in total

b) A schedule of budgeted cash collections, by quarter and in total
c) A production budget
d) A direct materials purchase budget
e) A schedule of budgeted cash payments for purchases by quarter and in total
f) A direct labor budget
g) A manufacturing overhead budget

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h) Ending finished goods inventory budget

i) A selling and administrative budget
2). A cash budget, by quarter and in total
3). A budgeted income statement for the four- quarter ending December 31, 2020
4. A budgeted balance sheet as of December 31, 2020.

Preparing Operating Budget

The operating budget is composed of the income statement elements. A manufacturing
business budgets both manufacturing and non-manufacturing activities. Below the
various elements of the operating budget of a manufacturing firm will be discussed.

The sales budget is the first budget to be prepared. It is usually the most important
budget because so many other budgets are directly related to sales and are therefore
largely derived from the sales budget. Inventory budgets, purchases budgets, personnel
budgets, marketing budgets, administrative budgets, and other budget areas are all
affected significantly by the amount of revenue that is expected from sales.

This budget will be developed after the firm made a forecast of the demand for the
company’s product by taking into account. In forecasting sales different companies may
adopt different forecasting techniques, however in most cases sales forecast take into
account the following points:

 The sales volume in recent periods

 General industry and economic condition
 Market research studies
 Pricing polices
 Advertising & sales promotion
 Competition & regulatory policies
A. Sales Budget

The sales budget for Gore Company can be prepared as per the following schedule:

Quarter
1 2 3 4
Expected sales in 10, 000 30, 000 40, 000 20, 000
units
Selling price per unit x Br. 20 x Br. 20 x Br.20 x Br.20
Total sales Br.200, 000 Br.600, 000 Br.800, 000 Br.400, 000

B. Cash Collection Budget

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This budget shows the total cash that a company will collect from various sources during
the accounting period or the budget period.

Schedule of Expected Cash Collections for Gore Company:

Quarter
1 2 3 4 Total
30% of the Br. 90, 000 Br.60, 000 Br.180, 000 Br.240, 000 Br.570, 000
previous quarter
sales
70% of the current 140, 000 420, 000 560, 000 280, 000 1, 400, 000
quarter sales
Total collections Br.230, 000 Br.480, 000 Br.740, 000 Br. 520, 000 Br.1, 970, 000
C. Production Budget

This budget shows the total budgeted production for the budgeted period. Production
Budget for Gore Company: After the sales budget has been prepared, the production
requirements for the forth-coming budget period can be determined and organized in the
form of a production budget. Sufficient goods will have to be available to meet sales and
provide for the desired ending inventory. A portion of these goods will already exist in the
form of a beginning inventory. The remainder will have to be produced. Therefore,
production needs can be determined as follows:

Budgeted sales in units ………………………………………… xxxx

Add desired ending inventory……………….…………………. xxxx
Total needs……………………………………………………… xxxx
Less beginning inventory…………………………………..…….. xxxx
Required production……………………………………………....xxxx

The schedule given below shows the production budget for Great Company. Note that
the desired level of the ending inventory influences production requirements for a
quarter. Inventories should be carefully planned. Excessive inventories tie up funds and
create storage problems. Insufficient inventories can lead to lost sales or crash
production efforts in the following period.

Quarter Total
1 2 3 4
Expected sales(units) 10, 000 30, 000 40, 000 20, 000 100, 000
Add: Desired Ending 6, 000 8, 000 4, 000 3, 000 3, 000
Inventory
Total needs 16, 000 38, 000 44, 000 23, 000 103, 000
Lees: Beginning Inventory 2, 000 6, 000 8, 000 4, 000 2, 000

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Units to be produced 14, 000 32,000 36, 000 19, 000 101, 000

D. Direct Materials Budget

It shows the total quantity that a business needs to buy to meet future direct materials
need. Returning to Gore Company’s budget data, after the production requirements have
been computed, a direct materials budget can be prepared. The direct materials budget
details the raw materials that must be purchased to fulfill the production budget and to
provide for adequate inventories. The required purchases of raw materials are computed
as follows:

Raw materials needed to meet the production schedule…………………….………xxxx

Add desired ending inventory of raw materials……………….…………….……….xxxx
Total raw materials needs…………………………………………………… xxxx
Less beginning inventory of raw materials…………………………..………xxxx
Raw materials to be purchased………………………………………………….xxxx

Quarter Total
1 2 3 4
Production needs(pounds) 210, 000 480, 000 540, 000 285, 000 1, 515, 000
Add: Desired ending 48, 000 54, 000 28, 500 22, 500 22, 500
inventory
Total needs 258, 000 534, 000 568, 500 307, 500 1, 537, 500
Less: Beginning inventory 21, 000 48, 000 54, 000 28, 500 21, 000
Raw materials to be 237, 000 486, 000 514, 500 279, 000 1, 516,500
purchased(pounds)

Raw Materials to be purchased (in Birr)

1 2 3 4 Total
Raw materials to be 237, 000 486, 000 514, 500 279, 000 1, 516, 500
purchased
Raw materials cost x Br.0.20 x Br.0.20 x Br.0.20 x Br.0.20 x Br.0.20
per pound
Total Br.47, 400 Br.97, 200 Br.102, 900 Br.55, 800 Br.303, 300
E. Budgeted cash disbursement for direct material purchase

Businesses make cash payments for various purposes. This budget shows cash
payments that will be made for only purchase of direct materials. For Gore Company
the schedule of expected Cash Disbursements (for Materials Purchase) can be prepared
as follows:

Quarter Total
1 2 3 4

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50% of the previous Br. 25, 800 Br.23, 700 Br.48, 600 Br.51, 450 Br.149, 550
quarter
50% of the current 23, 700 48, 600 51, 450 27, 900 151, 650
quarter
Total cash disbursement Br.49, 500 Br.72, 300 Br.101, 050 Br.79, 350 Br.301, 200

F. Direct Labor Budget

The direct labor budget is developed from the production budget. Direct labor
requirements must be computed so that the company will know whether sufficient
labor time is available to meet production needs. By knowing in advance just what will
be needed in the way of labor time throughout the budget year, the company can
develop plans to adjust the labor force as the situation may require. Firms that neglect
to budget run the risk of facing labor shortage or having to hire and lay off at awkward
times. Erratic labor policies lead to insecurity and inefficiencies on the part of
employees. To compute direct labor requirements, the number of units of finished
product to be produced each produced each period (month, quarter, and so on) is
multiplied by the number of direct labor-hours required to produced a single unit.
Many different types of labor may be involved. If so, then the computation should be by
type of labor needed. The labor requirements can then be translated into expected direct
labor costs. How this is done will depend on the labor policy of the firm. In schedule
given below, the management of Great Company has assumed that the direct labor
force will be adjusted as the work requirement change from quarter to quarter (for
example as units produced changes from l4, 000 units in quarter 1 to 32, 000 units in
quarter 2 for Great Company, the direct labor work force will be fully adjusted to the
workload, i.e., total hours of direct labor time needed). In that case, the total direct labor
cost is computed by simply multiplying the direct labor-hour required by the direct
labor rate hour as was done in the schedule here under:

Quarter Total
1 2 3 4
Direct labor time needed 11, 200 25, 600 28, 800 15, 200 80, 800
Direct labor cost per x Br.7.50 x Br.7.50 x Br.7.50 x Br.7.50 x Br.7.50
hour
Total direct labor cost Br.84, 000 Br.192, 000 Br.216, 000 Br.114, 000 Br.606, 000
G. Manufacturing Overhead (MOH) Budget

The manufacturing overhead budget provides a schedule of all costs of production

other than direct materials and direct labor. These costs should be broken down by cost
behavior for budgeting purposes and a predetermined overhead rate developed. This
rate will be used to apply manufacturing overhead to units of product throughout the
budget period.

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A computation showing budgeted cash disbursement for manufacturing overhead

should be made for use in developing the cash budget. Since some of the overhead
costs do not represent cash outflows, the total budgeted manufacturing overhead costs
must be adjusted to determine the cash disbursement for manufacturing overhead. At
Great Company, the only significant noncash manufacturing overhead cost is
depreciation. Any depreciation charges included in manufacturing overhead must be
deducted from the total in computing expected cash payments, since depreciation is a
noncash charge.

Quarter Total
1 2 3 4
Variable overhead Br.22, 400 Br.51, 200 Br.57, 600 Br.30, 400 Br.161,600
Fixed overhead 60, 600 60, 600 60, 600 60, 600 242,400
Total MOH Br.83, 000 Br.111, 800 Br.118, 200 Br.91, 000 Br.404,000
Less: Depreciation 15, 000 15, 000 15, 000 15, 000 60, 000
Cash disbursements for Br.68, 000 Br.96, 800 Br.103, 200 Br.76, 000 Br.344, 000
MOH
H. Ending Finished Goods Inventory Budget

After completing schedules (a) to (g), the company had all of the data needed to
compute unit product costs. This computation was needed for two reasons: first, to
know how much to charge as cost of goods sold on the budgeted income statement; and
second, to know what amount to put on the balance sheet inventory account for unsold
units. The carrying cost of the unsold units is computed on the ending finished goods
inventory budget as follows:

Budgeted Finished Goods Inventory 3, 000

Unit product cost Br.13
Ending Finished Goods Inventory in birr Br.39, 000

Production cost per unit

Quantity (unit) Cost Total
Direct materials 15 pounds Br.0.20 per pound Br.3
Direct labor 0.8 hours 7.50 per hour 6
Manufacturing overhead 0.8 hours 5.00 per hour 4
Unit product cost Br.13

MOH rate= Total MOH = 404, 000 = Br.5.00

Direct labor hours 80, 800

Budgeted cost of goods sold for Gore Company for the budget period is computed as
follows:
Cost of goods sold=100,000*13=1,300,000

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I. Operating Expense Budget (selling and Administrative Expenses)

The budgeting of operating expenses depends on various factors. Month – to – month

fluctuation in sales volume and other cost-drivers activities directly influence many
operating expenses. Examples of expenses driven by sales volume include sales
commissions and many delivery expenses. Other expenses are not influenced by sales
or other cost-driver activity (such as rent, insurance, depreciation, and salaries) within
appropriate relevant ranges and are regarded as fixed. Selling and Administrative
Expenses Budget for Gore Company for the budget period is given below:

Quarter Total
1 2 3 4
Variable selling Br.18, 000 Br.54, 000 Br.72, 000 Br.36, 000 Br.180, 000
expenses
Fixed selling &
administrative
expenses
Advertising 20, 000 20, 000 20, 000 20, 000 80, 000
Executive salaries 55, 000 55, 000 55, 000 55, 000 220, 000
Insurance - 1, 900 37, 750 - 39, 650
Property taxes - - - 18,150 18,150
Depreciation 10, 000 10, 000 10, 000 10, 000 40, 000
Total budgeted selling Br.103, 000 Br.140, 900 Br.194, 750 Br.139, 150 Br.577, 800
& administrative
expenses

Disbursement for Selling & Administrative Expenses can also be prepared from the
above facts as follows for Gore Company:
Quarter Total
1 2 3 4
Budgeted Selling & Br.103, 000 Br.140, 900 Br.194, 750 Br.139, 150 Br.577, 800
Administrative
Less: Depreciation 10, 000 10, 000 10, 000 10, 000 40, 000
Total Cash Br.93, 000 Br.130, 900 Br.184, 750 Br.129, 150 Br.537, 800
Disbursements

Budgeted Income Statement

The budgeted income statement is the combination of all of the preceding budgets. This
budget shows the expected revenues and expenses from operations during the budget
period. A firm may have budgeted non-operating items such as interest on investments
or gain or loss on the sale of fixed assets. Usually they are relatively small, although in
large firms the birr amounts can be sizable. If non-operating items are expected, they
should be included in the firm’s budgeted income statement. Income taxes are levied on

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actual, not budgeted, net income, but the budget plan should include expected taxes;
therefore, the last figure in the budgeted income statement is budgeted after tax net
income.

Budgeted Income Statement for Gore Company can be prepared as follows:

Gore Company
Budgeted Income Statement
For the Year Ended December31, 2004
Sales [100, 000units at Br.20 Schedule 1(a)] Br.2, 000, 000
Cost of Goods Sold [100, 000 units at Br.13 Schedule1 (h)] 1, 300, 000
Gross profit 700, 000
Selling & Administrative Expenses [Schedule 1 (i)] 577, 800
Net Operating Income 122, 200
Interest Expense [Schedule 2(a)] 14, 000
Net Income Br. 108, 200

Preparing Financial Budget

The second major part of the master budget is the financial budget, which consists of
the capital budget, cash budget, ending balance sheet and the statement of changes in
financial position. Although there are some differences in operating budgets of
manufacturing, merchandising and service firms, very little difference exists among
financial budgets of these entities.
Capital expenditure budget: Capital budgeting is the planning of investments in major
resources like plant and equipment, and other types of long-term projects, such as
employee education programs. The capital expenditure budget or capital budget
describes the capital investment plans for an organization for the budget period. It
contains some of the most critical budgeting decisions of the organizations. This capital
budget will be illustrated in financial management.
Cash budget: The cash budget is a statement of planned cash receipts and
disbursements. The cash budget is composed of four major sections:
i. The receipts section: It consists of a listing of all of the cash inflows, except for
financing, expected during the budget period. Generally the major source of receipts
will be from sales.
ii. The disbursement section: It consists of all cash payments that are planned for the
budget period. These payments will include inventory purchases, wages and salary
payments and so on. In addition, other cash disbursements such as equipment
purchases, dividends, and other cash withdrawals by owners are listed.

iii. The cash excess or deficiency section: The cash excess or deficiency section is
computed as follows:

Cash balance, beginning xxx

Add receipts xxx
Total cash available before financing xxx

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Less disbursements xxx

Excess (deficiency) of cash available over disbursements xxx

If there is a cash deficiency during any budget period, the company will need to borrow
funds. If there is cash excess during any budget period, funds borrowed previous
periods can be repaid or the idle funds can be placed in short-term or other
investments.

iv. The financing section: This section provides a detail account of the borrowing and
repayments projected to take place during the budget period. It also includes a
detail of interest payments that will be due on money borrowed.

Cash Budget for Gore Company for the budget period is prepared as follows:

Quarter Total
1 2 3 4
Cash balance, beginning Br.42, 500 Br.40, 000 Br.40, 000 Br.40, 500 Br.42, 500
Add : Collection from 230, 000 480, 000 740, 000 520, 000 1, 970, 000
customers
Total cash available before 272, 500 520, 000 780, 000 560, 500 2, 012, 500
financing
Less: Disbursements for
Direct materials 49, 500 72, 300 100,050 79, 350 301,200
Direct labor 84, 000 192, 000 216,000 114, 000 606,000
Manufacturing 68, 000 96, 800 103,200 76, 000 344,000
overhead
Selling & 93, 000 130, 900 184,750 129, 150 537,800
Administrative
Equipment purchases 50, 000 40, 000 20,000 20,000 130,000
Dividend 8, 000 8, 000 8, 000 8, 000 32,000
Total disbursements 352, 500 540,000 632,000 426,500 1,951,000
Minimum cash balance 40, 000 40, 000 40, 000 40, 000 40, 000
Total need 392, 500 580, 000 672, 000 466, 500 1, 991,000
Excess (deficiency) of cash (120, 000) (60, 000) 108, 000 94, 000 21, 500
available over total need
Financing:
Borrowing(at 120,000 60, 000 - - 180, 000
beginning)
Repayments( at ending) - - (100, 000) (80,000) (180,000)
Interest(at 10% per - - (7,500) (6,500) (14,000)
annum)
Total financing 120, 000 60, 000 (107,500) (86,500) (14,000)
Cash balance, ending Br.40,000 Br.40, 000 Br.40, 500 Br.47, 500 Br.47, 500

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Budgeted Balance Sheet: The budgeted balance sheet, sometimes called the budgeted
statement of financial position, is derived from the budgeted balance sheet at the
beginning of the budget period and the expected changes in the account balance
reflected in the operating budget, capital budget, and cash budget.

Gore Company
Budgeted Balance Sheet
December31, 2004
ASSETS
Current assets:
Cash [Schedule 2(a)] Br. 47, 500
Accounts Receivable 120, 000
Raw Materials Inventory 4, 500
Finished Goods Inventory 39, 000
Total current assets Br.211, 000
Plant and Equipment:
Land Br.80, 000
Building and Equipment 830, 000
Accumulated Depreciation (392, 000)
Plant and Equipment, net 518, 000
Total assets Br.729, 000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable (raw materials) Br.27, 900
Stockholders’ equity:
Common stock, no par Br.175, 000
Retained earnings 526, 100
Total stockholders’ equity 701, 100
Total liabilities and stockholders’ equity Br.729, 000

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