Chapter 4: Master Budget

Financial and Managerial

Accounting (Master
Budget with Best
Illustration)

Dr. Andualem U.

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 Master Budget
What is master budget?
Master budget is the overall budget of the company.
It consists of operating budgets and financial
budgets. Operating budgets consists of: sales
budget, cash collection budget, purchase budget,
disbursement for purchases, operating expenses
budget disbursement for operating expenses budget
Financial budgets consists of: cash budget, budgeted
Balance sheet and budgeted income statement.
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 Preparing Master Budget: Example

Example 1: Blue Nile Company’s newly hired

accountant has persuaded management to prepare
a master budget to aid financial and operating
decisions. The planning horizon is only three months,
January to March. Sales in December (20x3) were Br.
40, 000. Monthly sales for the first four months of the
next year (20x4) are forecasted as follows:
January Br. 50, 000
February 80, 000
March 60, 000
April 50, 000
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 Cont’d…
 Normally 60% of sales are on cash and the remainders
are credit sales. All credit sales are collected in the
month following the sales. Uncollectible accounts are
negligible and are to be ignored.
 
 Because deliveries from suppliers and customer
demand are uncertain, at the end of any month Blue
Nile wants to have a basic inventory of Br. 20, 000
plus 80% of the expected cost of goods to be sold in
the following month. The cost of merchandise sold
averages 70%of sales. The purchase terms available to
the company are net 30 days.
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 Cont’d..

Each month’s purchase are paid as follows:

50% during the month of purchase and,
50% during the month following the purchases.
Monthly expenses are:
Wages and commissions…Br. 2, 500 + 15%of sales,
paid as incurred.
Rent expense…………..Br. 2, 000 paid as incurred.
Insurance expense…Br.200 expiration per month.
Depreciation including truck...Br.500 per month
Miscellaneous expense………….5% of sales, paid
as incurred.
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 Cont’d..

In January, a used truck will be purchased for

Br. 3, 000 cash. The company wants a minimum
cash balance of Br. 10, 000 at the end of each
month. Blue Nile can borrow cash or repay loans
in multiples of Br. 1, 000. Management plans to
borrow cash more than necessary and to repay
as promptly as possible. Assume that the
borrowing takes place at the beginning, and
repayment at the end of the months in
6 question.
 Cont’d..

Interest is paid when the related loan is repaid.

The interest rate is 18% per annum. (loan of
19,000 on January (out of which interest and
principal paid on Br.11,000 on March and on Br
8,000 it is accrued and on February loan of
Br.1000 interest is accrued).
The closing balance sheet for the fiscal year just
ended at December 31, 20x3,is:
 

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 Blue Nile Company
Balance Sheet
December 31, 20x3

ASSETS
Current assets:
Cash Br. 10, 000
Account receivable 16,000
Merchandise inventory 48, 000
Unexpired insurance 1, 800 Br.75, 800
Plant assets:
Equipment, fixture and other 37, 000
Accumulated depreciation 12, 800 24, 200
Total assets Br .100, 000

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 Balance sheet..

LIABILITIES AND OWNERS’ EQUITY

Liabilities:
Accounts payable Br.16, 800
Wages & comm. payable 4, 250 Br.21, 050
Capital:
Owners’ equity 78, 950
Total liabilities & O.Equity Br.100, 000
 
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 Required:

1) Using the data given above, prepare the

following detailed schedules for the first quarter
of the year:
a. Sales budget
b. Cash collection budget
c. Purchase budget
d. Disbursement for purchases
e. Operating expenses budget
f. Disbursement for operating expenses
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 Required…

2) Using the budget data given above and the

schedules you have prepared, construct the
following pro forma financial statements.
a) Income statement for the first quarter of the year.
b) Cash budget including receipts, payments, and
effect of financing
c) Balance sheet at March 31, 20x4.

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 Solution

1. a) Sales budget
  December* January February March Jan.-Mar.
Total
Cash sales (40%) Br.24, 000 Br.30, 000 Br.48, 000 36, 000 Br.114,
000
Credit sales (60%) 16, 000 20, 000 32, 000 24,000 76,
000
Totals Br.40, 000 Br.50, 000 Br.80, 000 60, 000 Br.190,
000
*December sales are included in the schedule (a) because they affect
cash collected in January.

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 Cont’d..

1. b) Cash collection Budget

  January February March

Cash sales of the month Br.30, 000 Br.48, 000 Br.36, 000
Credit sales of last month 16, 000 20, 000 32, 000
Total cash collected Br.46, 000 Br.68, 000 Br.68, 000

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 Cont’d..

c) Purchase budget
  January February March Jan.-Mar
Required ending inventory Br.64, 800 Br.53, 600 Br.48, 000  
Cost of gods sold 35, 000 56, 000 42, 000 133, 000
Total needed Br.99, 800 Br.109, 600 Br.90, 000  
Beginning inventory 48, 000 64, 800 53, 600  
Purchases budget Br.51, 800 Br.44, 800 Br.36, 400  

Note: remember given.

Purchase = Required Ending Inv. + CGS - Beg. Inven.
Desired EI= Br.20,000 + 80% of CGS of ff.
CGS= 70% of Sales.
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 Cont’d..

d) Disbursement for purchases

  January February March
50% of last month’s purchase Br.16, 800 Br.25, 900 Br.22, 400
50% of current month’s purchase 25, 900 22, 400 18, 200
Total disbursement for purchase Br.42, 700 Br.48, 300 Br.40, 600

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 Cont’d..

e) Operating expense budget

  January February March Jan.-Mar.
Wages and commissions Br.10, 000 Br.14, 500 Br.11, 500 Br.36, 000
Rent expense 2, 000 2, 000 2, 000 6, 000
Insurance expense 200 200 200 600
Depreciation expense 500 500 500 1, 500
Miscellaneous expense 2, 500 4, 000 3, 000 9, 500
Total Br.15, 200 Br.21, 200 Br.17, 200 Br.53, 600

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 Cont’d..

f) Disbursement for operating expenses

budget
  January February March
Wages and commissions Br.14, 250 Br.14, 500 Br.11, 500
Rent expense 2, 000 2, 000 2,
000
Miscellaneous expense 2, 500 4, 000 3,
000
Total Br.18, 750 Br.20, 500 Br.16, 500

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 2. a) Budget income statement

Blue Nile Company

Budget Income Statement
For the Quarter Ended, March 31, 20x4
Sales (schedule 1(a))   Br.190, 000
Cost of goods sold (schedule 1(c))    Br. 133,000
Gross profit     57,000
Operating expenses    
Wages and commissions Br.36, 000  
Rent expense 6, 000  
Insurance expense 1, 500  
Depreciation expense 600  
Miscellaneous expense 9, 500 53, 600
Operating income   3, 400
Interest expense*   885
Net income   2, 515
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 Note: Borrowing details & Interests.

I=PXRXT
*Interest expense computation
Paid interest = 11, 00018/100x3/12= 495
Accrued amount:
On the first batch borrowing:
8, 0000.183/12= 360
On the second batch borrowing:
1, 0000.182/12= 30
Total interest expense incurred Br.885

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 b) Cash budget including receipts,
payments and effects of financing

  January February March

Beginning balance Br.10, 000 Br.10, 550 Br.10, 750
Collections (Schedule1 (b)) 46, 000 68, 000 68, 000
Cash available for the use (x) Br.56, 000 Br.78, 550 Br.78, 750
Cash disbursements for:      
Purchases (Schedule 1(d)) 42, 700 48, 300 40, 600
Operating expenses (Schedule1 (f)) 18, 750 20, 500 16, 500
Truck purchases 3, 000 - -
Total disbursement (y) Br.64, 450 Br.68, 800 Br.57, 100
Minimum cash balance required 10, 000 10, 000 10, 000
Total cash needed Br.74, 450 Br.78, 800 Br.67, 100
Cash excess (deficiency) Br.(18, 450) Br.( 250) Br.11, 650
Effects of financing      
Borrowing 19, 000 1, 000 -
Payment of the principal - - (11, 000)
Payment of interest - - (495)
Net effect of financing (z) Br.19, 000 Br.1, 000 Br.(11, 495)
20 End cash balance (x+z-y) Br.10, 550 Br.10, 750 Br.10, 155
 Blue Nile Company
Budgeted Balance Sheet
March 31, 20x4
 
ASSETS
Current assets
Cash Br. 10, 155
Accounts receivable 24, 000
Merchandise inventory 48, 000
Unexpired insurance 1, 200 Br. 83, 355
Plant assets,
assets Equipment, Fixture and others 40, 000
Accumulated depreciation 14, 300 25, 700
Total assets Br. 109, 055
 
LIABILITIES AND OWNER’S EQUITY
Liabilities
Accounts payable Br.18, 200
Loan payable 9, 000
Interest payable 390
Total liabilities Br.27, 590
Capital:
Beginning owners’ equity Br.78, 950
Net income 2, 515
21 Ending capital balance 81, 465
 Standard Costing and variance
Concepts

 Standards are the budgeted amount of

material, labor and overhead costs that are
predetermined by the company cost
accountant,
 Variance is the difference between standard
and actual amount.
 If the actual amount is greater than standard
favorable variance in case of revenue, but
unfavorable variance in the case of expenses.
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 End of the chapter
Thank You!

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