Chapter 9

Financial Planning
and Analysis: The
Master Budget

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 9-1 – Explain the relationship
between financial planning and analysis and the
master budget.

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 Financial Planning and
Analysis (FP&A) Systems
A financial planning and
analysis (FP&A) 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.

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Learning Objective 9-2 – List and explain five
purposes of budgeting.

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

Materials
Budget
Detail

Production
Budget
Master
Budget
Covering all Sales
phases of
a company’s
operations.

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 Types of Budgets
Income
Statement

Budgeted
Financial
Statements

Balance Statement of
Sheet Cash Flows
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 Types of Budgets
Capital budgets with acquisitions
that normally cover several years.

Financial budgets with financial

resource acquisitions.
Long Range Budgets

Continuous or
Rolling Budget
2014 2015 2016 2017

This budget is usually a twelve-month

budget that rolls forward one month
as the current month is completed.

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Learning Objective 9-3 – Describe the similarities and differences in
the operational budgets prepared by manufacturers, service-industry
firms, merchandisers, and non-profit organizations.

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 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
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 Financing Budgets

Cash Receipts
Budget

Provides information about cash

inflows. Considers things such as
the timing of sales and collections,
collection patterns, and sales that
will never be collected.
 Financing Budgets

Cash Disbursements
Budget

Portrays spending plans based

other budgets prepared
Learning Objective 9-4 – Explain the concept of
activity-based budgeting and the logic it brings to
the budgeting process.

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 Activity-Based Costing versus Activity-
Based Activity Based Budgeting (ABB)

Resources Resources
Activity-Based
Costing (ABC)

Activities Activities

Activity-Based
Cost objects: Budgeting (ABB)
Forecast of products
products and services and services to be
produced, and produced and
customers served. customers served.
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Learning Objectives 9-5 & 9-6– Prepare each of the budget schedules
that make up the master budget in a non-manufacturing firm, and that exist in
manufacturing budgets as well (LO 9-5) . Prepare the additional master budget
schedules required by a manufacturing firm (LO 9-6).

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 Sales Budget
Breakers, Inc. 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.

9-16
 Sales Budget
April May June Quarter

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

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 Production Budget

The management of Breakers, Inc. 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.

 Let’s prepare the production budget.

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

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

 Let’s prepare the direct materials budget.

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 From our
production Direct-Material Budget
budget

10% of the following March 31

month’s production inventory
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 Direct-Material Budget
July Production
Sales in units 25,000
Add: desired ending inventory 3,000
Total units needed 28,000
Less: beginning inventory 5,000
Production in units 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

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 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.

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 Direct-Labor Budget

From our This is the greater of

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

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Selling and Administrative Expense Budget

At Breakers, variable selling and administrative

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

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Selling and Administrative Expense Budget

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

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Cash Receipts Budget

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

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Cash Disbursement Budget

140,000 lbs. × $.40/lb. = $56,000

9-31
 Cash Disbursement Budget
Breakers:
Maintains a 12% open line of credit for $75,000.
Maintains a minimum cash balance of $30,000.
Borrows and repays loans on the last day of the
month.
Pays a cash dividend of $25,000 in April.
Purchases $143,700 of equipment in May and
$48,300 in June paid in cash.
Has an April 1 cash balance of $40,000.
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 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.

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 Cash Budget
(Collections and Disbursements)

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

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 Cash Budget
(Collections and Disbursements)

At the end of June, Breakers

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

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 Cash Budget
(Collections and Disbursements)

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

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 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

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 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

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 Budgeted Income Statement
Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30

Revenue (100,000 × $10) $ 1,000,000

Cost of goods sold 460,000
Gross margin 540,000
Operating expenses:
Selling and admin. expenses $ 260,000
Interest expense 838
Total operating expenses 260,838
Net income $ 279,162

9-40
 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
9-41
 Budgeted Balance Sheet
Breakers reports the following account balances
on March 31 prior to preparing its budgeted
financial statements for June 30:
• Land - $50,000
• Building (net) - $148,000
• Common stock - $217,000
• Retained earnings - $46,400

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 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

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Learning Objective 9-7 – Discuss the role of
assumptions and predictions in budgeting.

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 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
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Learning Objective 9-8 – Describe a typical
organization’s process of budget administration .

9-46
 Budget Administration

The Budget Committee is a standing

committee responsible for . . .
 overall policy matters relating to the budget.
 coordinating the preparation of the budget.

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International Aspects of Budgeting

Firms with international operations face special

problems when preparing a budget.
1. Fluctuations in foreign currency exchange rates.
2. High inflation rates in some foreign countries.
3. Differences in local economic conditions.

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Learning Objective 9-9 – Discuss the behavioral
issues in budgeting.

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 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.”

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 Participative Budgeting

Top M anagem ent

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

S upervisor S upervisor S upervisor S upervisor

Flow of Budget Data

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End Chapter 9

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