Week 1 - Lecture Notes-Part C

Monash University Malaysia is jointly owned by Monash University and the Jeffrey Cheah Foundation
MASTER BUDGET &

RESPONSIBILITY ACCOUNTING
CHAPTER 6
Learning Objectives
§This slide outlines our learning objectives for this chapter.
1. 1. Describe the master budget and explain its benefits

2. 2. Describe the purpose of budgeting
3. 3.Describe responsibility centers and responsibility
accounting
4. 4. Recognize the human aspects of budgeting
5. 5.Prepare the operating budget and its supporting
schedules
Preparation of budget
Part 2: Preparation of financial budget
Prepare the following budgets for the six months
ending 31 March 2016:
1. Cash budget
2. Budgeted Income Statement
3. Budgeted Balance Sheet 6 months ending
31 March:
October 2015 –
31 March 2015
Example 2: Woo Ming has worked for some years as a sales
representative, but has recently been redundant. He intends to
start up business on his own account, using $15,000 which he
currently has invested with mutual funds.
He plans to approach his bank for the necessary additional
finance. Woo Ming asks you for advice and provides the
following additional information:
Balances at the
beginning:
§Arrangements have been made to
purchase fixed assets costing $8,000. Cash bal
= $15k - $8k =7k
These will be paid for at the end of FA bal: $8K
September and are expected to have a Capital Bal: $15k
five-year life at the end of which they Dep = $8k/5 =
$1.6k p.a.
will possess a nil residual value.
§Inventory costing $5,000 will be Opening
acquired on 28 September and Inventory:
payment pattern
subsequent monthly purchases will
be at a level sufficient to replace
forecast sales for the month. Purchases is
made to replace
the monthly sales
§Forecast monthly sales are Forecast Sales:
$3,000 for October, $6,000 for Effect on Cash Flows:
November and December and Depend on the timing
of the payment.
$10,500 from January 2016
onwards.
Profit = 50% on costs
§Selling price is fixed at the Equivalents to
cost of inventory plus 50%. Profit = 50/150 = 1/3 of
sales
Month Sales COGS Profit

(150%) (100%) (50%)
Oct 3,000 2,000 1,000
Nov & Dec 6,000 4,000 2,000
Jan onwards 10,500 7,000 3,500
§Two months’ credit will be allowed to customers but only
one month’s credit will be received from suppliers of
inventory.
Month Sales Money COGS = Money

received Purch paid
Sep 5,000 Oct
Oct 3,000 Dec 2,000 Nov
Nov 6,000 Jan 4,000 Dec
Dec 6,000 Feb 4,000 Jan
Jan onwards 10,500 March 7,000 Feb - Mar
§Running expenses, including
rent but excluding depreciation
of fixed assets are estimated Cash outflows per
at $1,600 per month. month
§Woo Ming intends to make

monthly cash drawings of
$1,000.
1.Cash Budget for the six months ending
31 March 2006
Oct Nov Dec Jan Feb Mar
$ $ $ $ $ $
Payments
Suppliers 5,000 2,000 4,000 4,000 7,000 7,000
Running 1,600 1,600 1,600 1,600 1,600 1,600
expenses
Drawings 1,000 1,000 1,000 1,000 1,000 1,000
T o t a l 7,600 4,600 6,600 6,600 9,600 9,600
Payments
Cont…Cash Budget for the six months
ending 31 March 2006
Receipts
Trade - - 3,000 6,000 6,000 10,500
received
T o t a l - - 3,000 6,000 6,000 10,500
Receipts
Surplus/ (7,600) (4,600) (3,600) (600) (3,600) 900
(shortfal
l)
Opening 7,000 (600) (5,200) (8,800) (9,400) (13,000)
balance
C l o s i n g (600) (5,200) (8,800) (9,400) (13,000) (12,100)
balance
2.Budgeted Income Statement for the six
months ending 31 March 2006
$ $
Sales Revenue (3,000 + (2x 6,000) + (3 x 10,500) 46,500
Cost of goods sold (100/150 x 46,500) 31,000
Gross Profit 15,500
Expenses:
Running expenses (6 x 1,600) 9,600
Depreciation (8,000 /5 x 6/12) 800 10,400
Net Income 5,100
3.Budgeted Balance Sheet at 31 March 2006
$ $
Fixed Assets ($8k – dep 800) 7,200
Current Assets
Inventory (closing inventory ) 5,000
Trade receivables (2 x 10,500) 2 mths credit 21,000
26,000
Current Liabilities
Bank Overdraft from cash budget 12,100
Trade payables (March purchases) 1 mths 7,000
credit
19,100
W1 Inventory
Net Current Assets Opening $5000
Purchased $31,000
6,900
Less COGS ($31,000)
Closing $5000
14,100
Budgeted Balance Sheet at 31 March 2006
Owner’s Equity
Capital 15,000
Net Profit from budgeted I/S 5,100
Less: Drawings (6 mths x $1,000) (6,000)
14,100
Example 3:
Prepare the following budgets for the three months ending
31 March 2016:
(a) Sales budget
(b) Purchases budget
(c) Selling & administrative budget
(d) Budgeted Income Statement
(e) Cash budget
Example 3:
§ Monthly sales for Woo Long are forecast as follows:
Month Units
January 2,700
February 3,100
Forecast
March 2,425
Sales =
• Sales in December last year were SP X SQ
2,570 units and forecasted sales for
April are 3,000 units. The unit selling
price is $400 each.
a) Sales Budget
Month Forecasted Unit Selling Total Sales

Sales (Volume) Price
January 2,700 $400 $1,080,000
February 3,100 $400 $1,240,000
March 2,425 $400 $970,000
Total revenue from sales $3,290,000
§At the end of each month, Woo Long decides to have on
hand inventory at minimum of 70% of the expected cost of
goods sold for the following month. The cost of goods sold
averages 50% of sales.
Month Total Sales COGS= 0.5 C/S = 0.7 x COGS
x Sales following month
December $1,028,000 $514,000 $540k*0.7 = $378k
January $1,080,000 $540,000 $620k*0.7 = $434k
February $1,240,000 $620,000 $485k*0.7 = $339.5k
March $970,000 $485,000 $600k x 0.7 = $420k
April $1,200,000 $600,000
SP = Cost + Profit
100% = 50% + 50%
b) Purchases Budget
Jan Feb March Total

$000 $000 $000 $000
Cost of goods sold 540 620 485 1,645
Plus Desired ending
inventory 434 339.5 *420 420
Total inventory needed 974 959.5 905 2,065
Less Beginning inventory #378 434 339.5 378
Total Purchases 596 525.5 565.5 1,687
§Woo Long pays salaries and commissions once a month.
The monthly fixed salaries of $20,000 are paid at the
end of every month and the commission equal to 15%
of sales is paid early of the following month after they
are earned. Other monthly expenses are as follows:
Advertising 2% of sales, paid as incurred
Other Selling expenses $10,000 per month, paid as
incurred
Rent $2,000 expiration per month
Depreciation for fixed $6,000 per month
assets
Miscellaneous expenses 1% sales, paid as incurred
c) Selling & Administrative Expenses Budget
Jan Feb March Total

$ $ $ $
Administrative expenses:
Salaries 20,000 20,000 20,000 60,000
Rental 2,000 2,000 2,000 6,000
Depreciation 6,000 6,000 6,000 18,000
Miscellaneous Expenses 10,800 12,400 9,700 32,900
Total Administrative expenses 38,800 40,400 37,700 116,900
Selling expenses:
Commission 162,000 186,000 145,500 493,500

Advertising 21,600 24,800 19,400 65,800
Others 10,000 10,000 10,000 30,000
Total Selling 193,600 220,800 174,900 589,300
expenses
Total Selling & 232,400 261,200 212,600 706,200
administrative
expenses
d) Budgeted Income Statement for the
three months ending March 31, 2006
$ $
Sales Revenue (Sales Budget) (a) 3,290,000
Cost of goods sold (Cost of goods (1,645,000)
sold budget) (50% x $3290,000)
Gross Profit 1,645,000
Selling & administrative expenses:
Selling expenses (c) 589,300
Administrative expenses (c) 116,900
(706,200)
Net Income 938,800
§Syarikat Woo Long expects to sell 10% of its merchandise
for cash. Of the remaining 90% of the sales on account,
60% are expected to be collected in the month of the sale
and the remainder in the next month.
§Syarikat Woo Long expects to pay 75% of the purchases in
the month in which they are incurred and the balance in
the following month.
§The opening Cash Balance in January is $190,000.
Working 1: Sales Receipts
Month Sales Cash Credit 60% x 40% x

$000 (10%) (90%) Credit credit
In the mth Following
mth
DEC 1,028 102.8 925.2 555.12 370.08
Dec Jan
JAN 1,080 108 972 583.2 388.8
Jan Feb
FEB 1,240 124 1116 669.6 446.4
Feb Mar
MAR 970 97 873 523.8 349.2
Mar April
Working 2: Payment to suppliers _December
$
Cost of goods sold
(50% x Sales 2570 x $400) 514,000
Plus Desired ending inventory
(70% x next month COS) (70% X 540,000- Jan) 378,000
Total inventory needed 892,000
Less Beginning inventory(70% x current mth COS $514K) #359,800
Total Purchases 532,200

Dec Jan Feb Mar
$000 $000 $000 $000
Total Purchases 532.2 596 525.5 565.5
75%: Current mth 372.54 447 394.125 424.125
25%: following mth 133.05 149 131.375 141.375
Jan Feb March APRIL
e) Cash Budget for the three months
ending 31 March 2016
Jan Feb March
Payment $’000 $’000 $’000
Merchandise purchase:
(75% x current month’s 447 394.125 424.125
purchases)
(25% x prior month’s 133.05 149 131.375
purchase)
Total Merchandise 580.05 543.125 555.5
purchase
Selling & admin exp:
Salaries 20 20 20
Miscellaneous Expenses 10.8 12.4 9.7
Commission(previous 154.2 162 186
month’s)
Advertising 21.6 24.8 19.4
Others 10 10 10
Total Selling & adm exp 216.6 229.2 245.1
Total Payments 796.65 772.325 800.6
15% x Dec- sales ($1028)

Paid early next month
Working
Month Sales Commission: Month of
$000 15% sales payment
DEC 1,028 154.2 JAN
JAN 1,080 162 FEB
FEB 1,240 186 MARCH
MAR 970 145.5 APRIL
Receipts
Cash receipts from sales:
- Cash sales
(10% x current month’s sales) 108 124 97
- Prior month’s credit sales (40%

X Prior month’s credit sales) 370.08 388.8 446.4
- Current month’s credit sales

(60% X Current month’s credit 583.2 669.6 523.8
sales)
Total Cash receipts from sales 1061.28 1,182.4 1067.2
Total Receipts 1061.28 1,182.4 1067.2
Surplus (shortfall) of cash 264.63 410.075 266.6
Beginning cash balance 190 454.63 864.705
Ending Cash balance 454.63 864.705 1131.305
Given
§ The contents of this presentation was adapted from:
PowerPoint Slides
Srikant M. Datar and Madhav V. Rajan.

Horngren's Cost Accounting: A Managerial Emphasis,
Global Edition, 16th Edition.ISBN, 9781292211541
31

Week 1 - Lecture Notes-Part C

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Week 1 - Lecture Notes-Part C

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Monash University Malaysia is jointly owned by Monash University and the Jeffrey Cheah Foundation

MASTER BUDGET &

1. 1. Describe the master budget and explain its benefits

Month Sales COGS Profit

Month Sales Money COGS = Money

Jan onwards 10,500 March 7,000 Feb - Mar

§Woo Ming intends to make

Month Forecasted Unit Selling Total Sales

Jan Feb March Total

Jan Feb March Total

Commission 162,000 186,000 145,500 493,500

Month Sales Cash Credit 60% x 40% x

Total Purchases 532,200

15% x Dec- sales ($1028)

- Prior month’s credit sales (40%

- Current month’s credit sales

Srikant M. Datar and Madhav V. Rajan.

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