Chapter 9

Financial Planning
and Analysis: The
Master Budget

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Financial Planning and
Analysis (FP&A) Systems
A financial
financial planning
planning and
and
analysis
analysis (FP&A)
(FP&A) system
system The planning component
helps managers assess the of the FP&A system is
company’s future and know if called the master budget.
they are reaching their It is intended to help
performance goals. A ensure that plans are
complete FP&A system consistent and yield a
includes subsystems for (1) result that makes sense
planning, (2) measuring and for the organization.
recording results, and (3)
evaluating performance.

9-2
Purposes of Budgeting Systems
Budget
Budget
1. Planning
a detailed plan, expressed in
quantitative terms, that 2. Facilitating
specifies how resources will Communication and
be acquired and used during a Coordination
specified period of time. 3. Allocating Resources
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives
9-3
 Sales of Services or Goods

Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods

Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials

Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-4
Activity-Based Costing versus Activity-
Based Budgeting
Resources
Resources Resources
Resources
Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
Activities
Activities Activities
Activities

Activity-Based
Activity-Based
Cost Budgeting
Budgeting (ABB)
(ABB)
Cost objects:
objects: Forecast
Forecast of
of products
products
products
products and
and services
services and
and services
services to
to be
be
produced,
produced, and
and produced
produced andand
customers
customers served.
served. customers
customers served.
served.

9-5
Sales Budget
Breakers,
 Breakers, Inc.
Inc. is
is preparing
preparing budgets
budgets for
for the
the quarter
quarter ending
ending
June
June 30.
30.
Budgeted
 Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
 April
April 20,000
20,000 units
units
 May
May 50,000
50,000 units
units
 June
June 30,000
30,000 units
units
 July
July 25,000
25,000 units
units
 August
August 15,000
15,000 units.
units.
The
 The selling
selling price
price is
is $10
$10 per
per unit.
unit.

9-6
 Sales Budget
April
April May
May June
June Quarter
Quarter

Budgeted
Budgeted
sales
sales (units)
(units) 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Selling
Selling price
price
per
per unit
unit $$ 10
10 $$ 10
10 $$ 10
10 $$ 10
10
Total
Total
Revenue
Revenue $$200,000
200,000 $$500,000
500,000 $$300,000
300,000 $$1,000,000
1,000,000

9-7
Production Budget

The
The management
management of of Breakers,
Breakers, Inc.
Inc. wants
wants ending
ending
inventory
inventory to
to be
be equal
equal to
to 20%
20% of
of the
the following
following
month’s
month’s budgeted
budgeted sales
sales in
in units.
units.

On
On March
March 31,
31, 4,000
4,000 units
units were
were on
on hand.
hand.

 Let’s
Let’s prepare
prepare the
the production
production budget.
budget.

9-8
 Production Budget
From
sales
budget
April
April May
May June
June Quarter
Quarter
Sales
Sales ininunits
units 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Add:
Add: desired
desired Ending inventory becomes
end.
end. inventory
inventory 10,000
10,000 6,000beginning 5,000
6,000 5,000
inventory 5,000
5,000
the next
Total
Total needed
needed 30,000
30,000 56,000
56,000 35,000
month
35,000 105,000
105,000
Less:
Less: beg.
beg.
inventory
inventory 4,000
4,000 10,000
10,000 6,000
6,000 4,000
4,000
Units
Units to
tobe
be
produced
produced 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000

March 31
ending inventory
9-9
Direct-Material Budget
At
 At Breakers,
Breakers, five
five pounds
pounds of
of material
material are
are required
required per
per
unit
unit of
of product.
product.
Management
 Management wantswants materials
materials onon hand
hand at
at the
the end
end of
of each
each
month
month equal
equal to
to 10%
10% of
of the
the following
following month’s
month’s
production.
production.
On
 On March
March 31,
31, 13,000
13,000 pounds
pounds of of material
material are
are on
on hand.
hand.
Material
Material cost
cost $.40
$.40 per
per pound.
pound.

 Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.

9-10
 Direct-Material Budget
From our
production
budget

10% of the following March 31

month’s production inventory
9-11
 Direct-Material Budget
July
July Production
Production
Sales
Salesinin units
units 25,000
25,000
Add:
Add:desired
desired ending
ending inventory
inventory 3,000
3,000
Total
Total units
unitsneeded
needed 28,000
28,000
Less:
Less: beginning
beginning inventory
inventory 5,000
5,000
Production
Production inin units
units 23,000
23,000

June Ending Inventory

July production in units 23,000
Materials per unit 5
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500

9-12
 Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hours of
direct labor.
The Company has a “no layoff” policy so all employees
will be paid for 40 hours of work each week.
In exchange for the “no layoff” policy, workers agreed to a
wage rate of $8 per hour regardless of the hours worked
(No overtime pay).
For the next three months, the direct labor workforce will
be paid for a minimum of 3,000 hours per month.
 Let’s prepare the direct labor budget.

9-13
Direct-Labor Budget

From our This is the greater of

production labor hours required or
budget labor hours guaranteed.
9-14
Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.

9-15
Selling and Administrative Expense Budget

At
 At Breakers,
Breakers, variable
variableselling
selling and
and administrative
administrative
expenses
expenses are
are $0.50
$0.50 per
per unit
unit sold.
sold.
Fixed
 Fixed selling
selling and
and administrative
administrative expenses
expenses are
are $70,000
$70,000
per
per month.
month.
The
 The $70,000
$70,000 fixed
fixed expenses
expenses include
include$10,000
$10,000 in in
depreciation
depreciation expense
expense that
that does
does not
not require
require aa cash
cash
outflow
outflow for
for the
the month.
month.

9-16
Selling and Administrative Expense Budget

From our
Sales budget
9-17
Cash Receipts Budget
At
 At Breakers,
Breakers, all
all sales
sales are
are on
on account.
account.
The
 The company’s
company’s collection
collection pattern
pattern is:
is:
 70% collected in the month of sale,
70% collected in the month of sale,
 25% collected in the month following the sale,
25% collected in the month following the sale,
 5% is uncollected.
5% is uncollected.
The
 The March
March 31 31 accounts
accounts receivable
receivable balance
balance ofof $30,000
$30,000
will
will be
be collected
collected in
in full.
full.

9-18
Cash Receipts Budget

9-19
Cash Disbursement Budget

Breakers
 Breakers pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
One-half
 One-half of
of aa month’s
month’s purchases
purchasesare
are paid
paid for
for in
in the
the
month
month of
of purchase;
purchase; the
the other
other half
half isis paid
paid in
in the
the following
following
month.
month.
No
 No discounts
discounts are
are available.
available.
The
 The March
March 31
31 accounts
accounts payable
payable balance
balance isis $12,000.
$12,000.

9-20
Cash Disbursement Budget

140,000 lbs. × $.40/lb. = $56,000

9-21
Cash Disbursement Budget
Breakers:
Breakers:
Maintains

Maintainsaa12%
12%open
openline
lineof
ofcredit
creditfor
for$75,000.
$75,000.
Maintains

Maintainsaaminimum
minimumcash
cashbalance
balanceof
of$30,000.
$30,000.
Borrows

Borrowsand
andrepays
repaysloans
loanson
onthe
thelast
lastday
dayof
ofthe
themonth.
month.
Pays

Paysaacash
cashdividend
dividendof
of$25,000
$25,000in
inApril.
April.
Purchases

Purchases$143,700
$143,700of
ofequipment
equipmentin
inMay
Mayand
and$48,300
$48,300in
inJune
June
paid
paidin
incash.
cash.
Has

HasananApril
April11cash
cashbalance
balanceof
of$40,000.
$40,000.

9-22
 From our Cash
Receipts Budget
Cash Budget
(Collections and Disbursements)

From our Cash Disbursements

Budget

From our Direct Labor

Budget
From our Overhead Budget
From our Selling and
Administrative Expense
Budget
To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
9-23
Cash Budget
(Collections and Disbursements)

Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.

9-24
Cash Budget
(Collections and Disbursements)

At the end of June, Breakers

has enough cash to repay
the $48,800 loan plus interest
at 12%.

9-25
Cash Budget
(Collections and Disbursements)

9-26
 Ending cash
Cash Budget balance for April
(Financing and Repayment) is the beginning
May balance.

9-27
 Cost of Goods Manufactured
April May June Quarter
Direct material:
Beg.material inventory $ 5,200 $ 9,200 $ 5,800 $ 5,200
Add: Materials purchases 56,000 88,600 56,800 201,400
Material available for use 61,200 97,800 62,600 206,600
Deduct: End. material inventory 9,200 5,800 4,600 4,600
Direct material used 52,000 92,000 58,000 202,000
Direct labor 24,000 36,800 24,000 84,800
Manufacturing overhead 56,000 76,000 59,000 191,000
Total manufacturing costs 132,000 204,800 141,000 477,800
Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800
Subtotal 135,800 221,000 150,400 481,600
Deduct: End.Work-in-process inventory 16,200 9,400 17,000 17,000
Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600

9-28
 Cost of Goods Sold

April May June Quarter

Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600
Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400
Cost of goods available for sale 138,000 257,600 161,000 483,000
Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000
Cost of goods sold $ 92,000 $ 230,000 $ 138,000 $ 460,000

9-29
Budgeted Income Statement
Breakers,
Breakers, Inc.
Inc.
Budgeted
BudgetedIncome
Income Statement
Statement
For
Forthe
the Three
Three Months
MonthsEnded
EndedJune
June 30
30
Revenue
Revenue (100,000
(100,000×× $10)
$10) $$ 1,000,000
1,000,000
Cost
Costofofgoods
goodssold
sold 460,000
460,000
Gross
Grossmargin
margin 540,000
540,000
Operating
Operatingexpenses:
expenses:
Selling
Sellingand
andadmin.
admin. expenses
expenses $$ 260,000
260,000
Interest
Interestexpense
expense 838
838
Total
Total operating
operatingexpenses
expenses 260,838
260,838
Net
Netincome
income $$ 279,162
279,162

9-30
Budgeted Statement of Cash Flows
April May June Quarter
Cash flows from operating activities:
Cash receipts from customers $ 170,000 $ 400,000 $ 335,000 $ 905,000
Cash payments:
To suppliers of raw material (40,000) (72,300) (72,700) (185,000)
For direct labor (24,000) (36,800) (24,000) (84,800)
For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000)
For selling and administrative expenses (70,000) (85,000) (75,000) (230,000)
For interest - - (838) (838)
Total cash payments (190,000) (270,100) (231,538) (691,638)
Net cash flow from operating activities $ (20,000) $ 129,900 $ 103,462 $ 213,362
Cash flows from investing activities:
Purchase of equipment - (143,700) (48,300) (192,000)
Net cash used by investing activities $ - $ (143,700) $ (48,300) $ (192,000)
Cash flows from financing activities:
Payment of dividends (25,000) - - (25,000)
Principle of bank loan 35,000 13,800 - 48,800
Repayment of bank loan - - (48,800) (48,800)
Net cash provided by financing activities $ 10,000 $ 13,800 $ (48,800) $ (25,000)
Net increase in cash $ (10,000) $ - $ 6,362 $ (3,638)
Balance in cash, beginning 40,000 30,000 30,000 40,000
Balance in cash. end of month $ 30,000 $ 30,000 $ 36,362 $ 36,362
9-31
Budgeted Balance Sheet

Breakers
Breakers reports
reports thethe following
following account
account balances
balances on
on
March
March 31
31 prior
prior to
to preparing
preparing its
its budgeted
budgeted financial
financial
statements
statements for
for June
June 30:
30:
•• Land
Land -- $50,000
$50,000
•• Building
Building (net)
(net) -- $148,000
$148,000
•• Common
Common stock
stock -- $217,000
$217,000
•• Retained
Retained earnings
earnings -- $46,400
$46,400

9-32
 25%of June
sales of
$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at
$4.60 per unit.

50% of June
purchases
of $56,800

9-33
 Sales of Services or Goods

Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
When the interactions of the elements
of the master
Ending Direct budget
Directare expressedSelling
Overhead as and
Inventory Materials Labor Administrative
Budget a set of mathematical
Budget Budget relations,
Budget it Budget
becomes a financial planning model
Direct Materials

that can be used to answer “what if”

Cash Budget
questions about unknown variables. Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-34
Budget Administration
The Budget Committee is a standing
committee responsible for . . .

 overall
overall policy
policy matters
matters relating
relating to
to the
the budget.
budget.
 coordinating

coordinating the
the preparation
preparation of
of the
the budget.
budget.

9-35
Behavioral Impact of Budgets
Budgetary Slack: Padding the Budget
People often perceive that their performance will look better in
their superiors’ eyes if they can “beat the budget.”

9-36
Participative Budgeting

Top M anagem ent

M id d le M id d le
M anagem ent M anagem ent

S u p e rv is o r S u p e rv is o r S u p e rv is o r S u p e rv is o r

Flow of Budget Data

9-37