Master Budget Sales

Sales
Forecast
Forecast

Sales
Sales
Budget
Budget
Ending
Ending
Finished
Finished Goods
Goods
Budget
Budget Selling
Selling and
and
Production
Production Administrative
Administrative
Budget
Budget Budget
Budget

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
Budget
Budget Budget
Budget Budget
Budget

Cash
Cash
Budget
Budget
Capital Budget
Budgeted
Budgeted Financial
Financial Statements
Statements
 The Basic Framework of Budgeting

A budget is a detailed quantitative plan for

acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activity is known as
budgetary control.
 Planning and Control

Planning – Control –
involves developing involves the steps
objectives and taken by
preparing various management that
budgets to achieve attempt to ensure
these objectives. the objectives are
attained.
 Advantages of Budgeting

Define goal
and objectives
Communicate Think about and
plans plan for the future

Advantages
Coordinate Means of allocating
activities resources

Uncover potential
bottlenecks
 Responsibility Accounting

Managers should be held responsible for those

items — and only those items — that
the manager can actually control
to a significant extent.
 Choosing the Budget Period

Operating Budget

2013 2014 2015 2016

The annual operating budget A continuous budget is a 12-

may be divided into quarterly month budget that rolls forward
or monthly budgets. one month (or quarter) as the
current month (or quarter) is
completed.
 Human Factors in Budgeting

The success of budgeting depends upon three

important factors:
1. Top management must be enthusiastic and
committed to the budget process.
2. Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3. Highly achievable budget targets are usually
preferred when managers are rewarded based
on meeting budget targets.
Master Budget Sales
Sales
Forecast
Forecast

Sales
Sales
Budget
Budget
Ending
Ending
Finished
Finished Goods
Goods
Budget
Budget Selling
Selling and
and
Production
Production Administrative
Administrative
Budget
Budget Budget
Budget

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
Budget
Budget Budget
Budget Budget
Budget

Cash
Cash
Budget
Budget
Capital Budget
Budgeted
Budgeted Financial
Financial Statements
Statements
Operating
Sales
Sales Sales
Sales Financial
Financial Budget
Budget
Budget
Forecast
Forecast Forecast
Forecast

Sales
Sales
Budget
Budget
Ending
Ending
Finished
Finished Goods
Goods
Budget
Budget Selling
Selling and
and
Production
Production Administrative
Administrative
Budget
Budget Budget
Budget

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead
Budget
Budget Budget
Budget Budget
Budget

Cash
Cash
Budget
Budget
Capital
Capitol
Capitol Budget
Capital Budget
Budgeted
Budgeted Financial
Financial Statements
Statements
 Budgeting Example

 Royal Company is preparing budgets for the

quarter ending June 30.
 Budgeted sales for the next five months are:
 April 20,000 units
 May 50,000 units
 June 30,000 units
 July 25,000 units
 August 15,000 units.
 The selling price is $10 per unit.
 The Sales Budget

The individual months of April, May, and June are

summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th
 Expected Cash Collections

•• All
All sales
sales are
are on
on account.
account.
•• Royal’s
Royal’s collection
collection pattern
pattern is:
is:
 70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
 25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
 5%
5% uncollectible.
uncollectible.
•• The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of
of
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
Expected Cash Collections
Expected Cash Collections

From the Sales Budget for April.

Expected Cash Collections

From the Sales Budget for May.

Expected Cash Collections
 The Production Budget

Sales Production
Budget Budget
ed
andl et
p
Expected
om
C
Cash
Collections

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
 The Production Budget

• The management at Royal Company wants

ending inventory to be equal to 20% of the
following month’s budgeted sales in units.

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

The Production Budget
 The Production Budget

Budgeted May sales 50,000

Desired ending inventory % 20%
March 31 Desired ending inventory 10,000
ending inventory
The Production Budget
The Production Budget

Assumed ending inventory.

 The Direct Materials Budget

•• At
At Royal
Royal Company,
Company, five
five pounds
pounds of of material
material
are
are required
required per
per unit
unit of
of product.
product.
•• Management
Management wants
wants materials
materials on on hand
hand at
at
the
the end
end of
of each
each month
month equal
equal toto 10%
10% ofof 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 is
is $0.40
$0.40 per
per
pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
 The Direct Materials Budget

From production budget

The Direct Materials Budget
 The Direct Materials Budget

March 31 inventory

10% of following months Calculate the materials to

production needs. by purchased in May.
The Direct Materials Budget
The Direct Materials Budget

Assumed ending inventory

 Expected Cash Disbursement for Materials

•• Royal
Royal pays
pays $0.40
$0.40 per
per pound
pound for
for its
its materials.
materials.
•• One-half
One-half ofof aa month’s
month’s purchases
purchases is is paid
paid for
for in
in
the
the month
month of
of purchase;
purchase; the
the other
other half
half is
is paid
paid
in
in the
the following
following month.
month.
•• The
The March
March 31 31 accounts
accounts payable
payable balance
balance is is
$12,000.
$12,000.
Expected Cash Disbursement for Materials
 Expected Cash Disbursement for Materials

140,000 lbs. × $.40/lb. = $56,000

Expected Cash Disbursement for Materials
 The Direct Labor Budget

•• At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours (3
(3
minutes)
minutes) ofof direct
direct labor.
labor.
•• The
The Company
Company has has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours ofof work
work each
each week.
week.
•• In
In exchange
exchange for for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agree
agree to
to aa
wage
wage rate
rate of
of $10
$10 per
per hour
hour regardless
regardless of of the
the hours
hours
worked
worked (No(No overtime
overtime pay).
pay).
•• For
For the
the next
next three
three months,
months, thethe direct
direct labor
labor workforce
workforce will
will
be
be paid
paid for
for aa minimum
minimum of of 1,500
1,500 hours
hours per
per month.
month.
The Direct Labor Budget

From production budget

The Direct Labor Budget
The Direct Labor Budget

Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
The Direct Labor Budget
 Manufacturing Overhead Budget

• At Royal manufacturing overhead is applied

to units of product on the basis of direct labor
hours.
• The variable manufacturing overhead rate is
$20 per direct labor hour.
• Fixed manufacturing overhead is $50,000 per
month and includes $20,000 of noncash costs
(primarily depreciation of plant assets).
Manufacturing Overhead Budget

Direct Labor Budget

Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050

*rounded
Manufacturing Overhead Budget

Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct materials
budget and information
Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct labor budget

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units
Unit product cost $ 4.99
Ending finished goods inventory ?

Total mfg. OH for quarter $251,000

= $49.70 per hour*
Total labor hours required 5,050
Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead 0.05 hrs. $49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $24,950

Production Budget
 Selling and Administrative Expense Budget

•• At
At Royal,
Royal, the
the selling
selling and
and administrative
administrative expenses
expenses
budget
budget isis divided
divided into
into variable
variable and
and fixed
fixed
components.
components.
•• The
The variable
variable selling
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 perper month.
month.
•• The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses
include
include $10,000
$10,000 inin costs
costs –– primarily
primarily depreciation
depreciation ––
that
that are
are not
not cash
cash outflows
outflows of of the
the current
current month.
month.
Selling and Administrative Expense Budget
Selling and Administrative Expense Budget
 Format of the Cash Budget

The cash budget is divided into four sections:

1. Cash receipts listing all cash inflows excluding
borrowing
2. Cash disbursements listing all payments
excluding repayments of principal and interest
3. Cash excess or deficiency
4. The financing section listing all borrowings,
repayments and interest
 The Cash Budget

Royal:
Maintains
 Maintains aa 16%
16% open
open line
line ofof credit
credit for
for $75,000
$75,000
Maintains
 Maintains aa minimum
minimum cashcash balance
balance of of $30,000
$30,000
Borrows
 Borrows on
on the
the first
first day
day ofof the
the month
month andand repays
repays
loans
loans on
on the
the last
last day
day of
of the
the month
month
Pays
 Pays aa cash
cash dividend
dividend ofof $49,000
$49,000 in in April
April
Purchases
 Purchases $143,700
$143,700 of of equipment
equipment in in May
May and
and
$48,300
$48,300 in
in June
June paid
paid in
in cash
cash
Has
 Has an
an April
April 11 cash
cash balance
balance of of $40,000
$40,000
The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections
Collections
The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements
Disbursements

Direct Labor
Budget

Manufacturing
Overhead Budget

Selling and Administrative

Expense Budget
The Cash Budget

Because Royal maintains

a cash balance of $30,000,
the company must borrow
$50,000 on it line-of-credit.
The Cash Budget

Ending cash balance for April

is the beginning May balance.
The Cash Budget
 The Cash Budget

$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment on June 30.
The Budgeted Income Statement

Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C

After we complete the cash budget,

we can prepare the budgeted income
statement for Royal.
 The Budgeted Income Statement

Sales
Sales Budget
Budget
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory
Inventory
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget
Budget
Net income $ 239,000

Cash
Cash Budget
Budget
 The Budgeted Balance Sheet

Royal
Royal reported
reported the
the following
following account
account
balances
balances prior
prior to
to preparing
preparing its
its budgeted
budgeted
financial
financial statements:
statements:
 Land
Land -- $50,000
$50,000
 Common
Common stock
stock -- $200,000
$200,000
 Retained
Retained earnings
earnings -- $146,150
$146,150
 Equipment
Equipment -- $175,000
$175,000
 Royal Company
Budgeted Balance Sheet 25%
25% of
of June
June
June 30 sales
sales of
of
Current assets $300,000
$300,000
Cash $ 43,000
Accounts receivable 75,000 11,500
11,500 lbs.
lbs.
Raw materials inventory 4,600 at
at $0.40/lb.
$0.40/lb.
Finished goods inventory 24,950
Total current assets 147,550 5,000
5,000 units
units
Property and equipment at
at $4.99
$4.99 each
each
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
50%
50% of of June
June
Accounts payable $ 28,400
purchases
purchases
Common stock 200,000
of
of $56,800
$56,800
Retained earnings 336,150
Total liabilities and equities $ 564,550
 Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable Beginning balance
75,000 $146,150
Add: net income 239,000
Raw materials inventory 4,600
Deduct: dividends (49,000)
Finished goods inventory 24,950
Ending balance $336,150
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550

Accounts payable $ 28,400

Common stock 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550