Chapter 23

MASTER BUDGETS AND PLANNING

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved

 23 - 2

C1 Enhances coordination so that

activities of all units contribute to
meeting the company’s overall goals.

Provides a benchmark Promotes analysis

for evaluating and a focus on
performance. the future.
Budget
Converts long-term Process Communicates
strategic plans into management plans
short-term financial throughout the
plans. organization.
Motivates employees through
participation in the budgeting process
and the establishment of attainable goals.
 23 - 3

C1
BUDGET COMMITTEE

Consists of managers from all departments

of the organization.
Provides central guidance to insure that individual
budgets submitted from all departments are
realistic and coordinated.
 23 - 4

C1
BUDGET COMMITTEE

Top Management

Middle Middle
Management Management

Supervisor Supervisor Supervisor Supervisor

Flow of budget data is a bottom-up process.

 23 - 5

C1
BUDGET TIMING
Operating Budget

2009 2010 2011 2012

The annual operating budget
may be divided into quarterly
or monthly budgets.

A continuous or rolling budget is a twelve-month

budget that rolls forward one month as the
current month is completed.
 23 - 6

C2
MASTER BUDGET COMPONENTS

Sales Merchandise
budget purchases

Prepare Prepare
financial Prepare
selling and
budgets: capital
Cash general
expenditure
Income statement administrative
Balance sheet budget
budgets
 23 - 7

P1
SALES BUDGET

Sales
Budget

Estimated Estimated
Unit Sales Unit Price

Analysis of economic and market conditions

+
Forecasts of customer needs from marketing personnel
 23 - 8

P1
SALES BUDGET

In September 2011, Hockey Den sold

700 hockey sticks at $100 each.
Hockey Den prepared the following
sales budget for the next four months:
 23 - 9

P1
SALES BUDGET

HOCKEY DEN
Monthly Sales Budget
October 2011 – January 2012
Budgeted Budgeted Budgeted
Unit Sales Unit Price Total Sales
September 2011 (actual) 700 $ 100 $ 70,000

October 2011 1,000 $ 100 $ 100,000

November 2011 800 100 80,000
December 2011 1,400 100 140,000
Total 3,200 $ 100 $ 320,000

January 2012 900 $ 100 $ 90,000

 23 - 10

P1
MERCHANDISE PURCHASES BUDGET

The quantity purchased will be affected by:

Just-in-time inventory systems that

enable purchases of smaller, frequently
delivered quantities.

Safety stock inventory systems that

provide protection against lost sales
caused by delays in supplier shipments.
 23 - 11

P1
MERCHANDISE PURCHASES BUDGET

Inventory Budgeted Budgeted Budgeted

to be = ending + cost of sales – beginning
purchased inventory for the period inventory

Hockey Den buys hockey sticks for $60 each and

maintains an ending inventory equal to 90 percent of
the next month’s budgeted sales. On September 30,
900 hockey sticks are on hand.

Let’s prepare the purchases budget for Hockey Den.

 23 - 12

P1
MERCHANDISE PURCHASES BUDGET
HOCKEY DEN
Merchandise Purchases Budget
October 2011 – December 2011
October November December
Next month's unit sales 800 1,400 900
Ending inventory percentage × 90% × 90% × 90%
Budgeted ending inventory units 720 1,260 810
Add current month's unit sales 1,000 800 1,400
Total units needed 1,720 2,060 2,210
Deduct beginning inventory units 900 720 1,260
Number of units to be purchased 820 1,340 950
Budgeted cost per unit × $ 60 × $ 60 × $ 60
Budgeted cost of purchases $ 49,200 $ 80,400 $ 57,000

Beginning inventory is last month's ending inventory.

 23 - 13

P1
SELLING EXPENSE BUDGET

▪ Hockey Den pays sales

commissions equal to
10 percent of total sales.
▪ Hockey Den pays a
monthly salary of $2,000
to its sales manager.

Let’s prepare the selling expense budget for Hockey Den.

 23 - 14

P1
SELLING EXPENSE BUDGET

HOCKEY DEN
Selling Expense Budget
October 2011 – December 2011
October November December Total
Budgeted sales $ 100,000 $ 80,000 $ 140,000 $ 320,000
Sales commission % × 10% × 10% × 10% × 10%
Sales commission $ 10,000 $ 8,000 $ 14,000 $ 32,000
Sales manager's salary 2,000 2,000 2,000 6,000
Total selling expenses $ 12,000 $ 10,000 $ 16,000 $ 38,000

From Hockey Den’s sales budget

 23 - 15

P1 GENERAL AND ADMINISTRATIVE

EXPENSE BUDGET

▪ General and
administrative salaries
are $4,500 per month.
▪ Depreciation of
equipment is $1,500 per
month.

Let’s prepare the general and administrative

expense budget for Hockey Den.
 23 - 16

P1 GENERAL AND ADMINISTRATIVE

EXPENSE BUDGET

HOCKEY DEN
General and Administrative Expense Budget
October 2011 – December 2011
October November December Total
Administrative salaries $ 4,500 $ 4,500 $ 4,500 $ 13,500
Equipment depreciation 1,500 1,500 1,500 4,500
Total $ 6,000 $ 6,000 $ 6,000 $ 18,000
 23 - 17

P1
CAPITAL EXPENDITURES BUDGET

▪ Hockey Den does not anticipate

disposal of any plant assets
through December 2011, but
management is planning to
acquire additional equipment for
$25,000 cash in December 2011.
▪ Since this is the only budgeted
capital expenditure for the
quarter, no separate budget is
shown.
 23 - 18

P2
FINANCIAL BUDGETS

Cash
Budget Budgeted Budgeted
Expected Income Balance
Receipts Statement Sheet
and
Disbursements
 23 - 19

P2
BUDGETED CASH RECEIPTS

▪ Forty percent of Hockey

Den’s sales are for cash.
▪ The remaining 60 percent
are credit sales that are
collected in full in the
month following the sale.

Let’s prepare the cash receipts budget for Hockey Den.

 23 - 20

P2
BUDGETED CASH RECEIPTS
60 percent of September sales are collected in October

HOCKEY DEN
Cash Receipts Budget
October 2011 – December 2011
September October November December
Budgeted sales $ 70,000 $ 100,000 $ 80,000 $ 140,000
Accounts receivable $ 42,000 $ 60,000 $ 48,000 $ 84,000
Cash receipts from:
Cash sales $ 40,000 $ 32,000 $ 56,000
Collection of receivables 42,000 60,000 48,000
Total cash receipts $ 82,000 $ 92,000 $ 104,000

From Hockey Den’s sales budget

60% of sales 40% of sales
 23 - 21

P2 CASH DISBURSEMENTS
FOR PURCHASES
▪ Hockey Den’s purchases
of merchandise are
entirely on account.
▪ Full payment is made in
the month following the
purchase.
▪ The September 30
balance of Accounts
Payable is $58,200.
Let’s look at cash disbursements
for purchases for Hockey Den.
 23 - 22

P2 CASH DISBURSEMENTS
FOR PURCHASES

HOCKEY DEN
Cash Disbursements for Purchases
October 2011 - December 2011
October payments (September 30 balance) $ 58,200
November payments (October purchases) 49,200
December payments (November purchases) 80,400

From merchandise purchases budget

 23 - 23

P2
CASH BUDGET

Beginning Budgeted Preliminary

Cash + Budgeted
Cash Receipts – Cash = Cash
Balance Disbursements Balance

▪ If adequate, repay loans or buy securities.

▪ If inadequate, increase short-term loans.

Hockey Den:
▪ Has a September 30 cash balance of $20,000.
Continue
▪ Will pay a cash dividend of $3,000 in November.
 23 - 24

P2
CASH BUDGET
Hockey Den:
▪ Has an income tax liability of $20,000 from the previous quarter
that will be paid in October.
▪ Will purchase $25,000 of equipment in December.
▪ Has an agreement with its bank for loans at the end of each
month to enable a minimum cash balance of $20,000.
▪ Pays interest each month equal to one percent of the prior
month’s ending loan balance.
▪ Repays loans when the ending cash balance exceeds $20,000.
▪ Owes $10,000 on this loan arrangement on September 30.
▪ Has 40 percent income tax rate.
▪ Will pay taxes for current quarter next year.
 23 - 25
P2

HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000
Receipts from customers 82,000
Because Hockey104,000
92,000
Den
Total cash available $ 102,000maintains a minimum
Disbursements cash balance of $20,000,
Payments for merchandise $ 58,200 the$company
49,200 must
$ 80,400
Sales commissions 10,000 borrow8,000 14,000
$12,800.
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000
Dividends
From Cash Disbursements
.01 × $10,000 From
Fromfor
Cash General Budget
Receipts
Purchases and
Interest From Selling
100 Expense Budget
Equipment purchase
Administrative Expense Budget
Total disbursements Depreciation is a
$ 94,800
Preliminary balance $ non-cash
7,200 expense.
 23 - 26

P2
CASH BUDGET CONTINUED

HOCKEY DEN
Cash Budget
October 2011 - December 2011

October November December

Preliminary balance $ 7,200
Additional borrowing 12,800
Loan repayment
Ending cash balance $ 20,000
Ending loan balance $ 22,800

Ending cash balance for October

is the beginning November balance.
 23 - 27
P2

HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000 $ 20,000
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000 $ 112,000
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000 Cash balance
Dividends .01 × $22,800 3,000 is sufficient
Interest 100 228 to repay the
Equipment purchase $22,800 loan.
Total disbursements $ 94,800 $ 66,928
Preliminary balance $ 7,200 $ 45,072
 23 - 28

P2
CASH BUDGET CONTINUED

HOCKEY DEN
Cash Budget
October 2011 - December 2011

October November December

Preliminary balance $ 7,200 $ 45,072
Additional borrowing 12,800
Loan repayment (22,800)
Ending cash balance $ 20,000 $ 22,272
Ending loan balance $ 22,800 $ 0

Ending cash balance for November

is the beginning December balance.
 23 - 29
P2

HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000 $ 20,000 $ 22,272
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000 $ 112,000 $ 126,272
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000
Dividends 3,000
Interest 100 228
Equipment purchase 25,000
Total disbursements $ 94,800 $ 66,928 $ 125,900
Preliminary balance $ 7,200 $ 45,072 $ 372
 23 - 30

P2
CASH BUDGET CONTINUED

HOCKEY DEN
Cash Budget
October 2011 - December 2011

October November December

Preliminary balance $ 7,200 $ 45,072 $ 372
Additional borrowing 12,800 19,628
Loan repayment (22,800)
Ending cash balance $ 20,000 $ 22,272 $ 20,000
Ending loan balance $ 22,800 $ 0 $ 19,628
 23 - 31

P2
BUDGETED INCOME STATEMENT

Cash Budgeted
Budget Income
Statement

Let’s prepare the budgeted income

statement for Hockey Den.
 23 - 32

P2
From the Sales Budget

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
From the Merchandise
Sales commissions $ 32,000
Purchases Budget
Sales salaries 6,000
Administrative salaries 13,500
Equipment depreciation 4,500
Interest expense 328 56,328
From the General and Administrative
Net income before taxes From the Selling $ 71,672
Income tax expense
Expense Budget 28,669
Depreciation $71,672
is a × .40
Expense Budget
non-cash expense.
Net income $ 43,003
 23 - 33

P2
BUDGETED BALANCE SHEET

Budgeted Budgeted
Income Balance
Statement Sheet

Let’s prepare the budgeted balance

sheet for Hockey Den.
 23 - 34

P2 PREPARING A BUDGETED
BALANCE SHEET
Hockey Den reports the following account
balances on September 30 prior to preparing
its budgeted financial statements:
▪ Equipment $200,000
▪ Accumulated depreciation $ 36,000
▪ Common stock $150,000
▪ Retained earnings $ 41,800

Let’s prepare the budgeted balance

sheet for Hockey Den.
 23 - 35
P2

HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
From theSeptember
$200,000 Merchandise Purchases
30 balance plus
Assets
Cash
the Budget
$25,000 (810
From units
the Cash
December @ $60)
Budget
acquisition $ 20,000
Accounts receivable 84,000
InventoryFrom the Cash Receipts Budget 48,600
Equipment $ 225,000
Less accumulated depreciation 40,500 184,500
Total assets $ 337,100

Liabilities and Equity

$36,000 September 30 balance plus
Liabilities
Accounts payable the $4,500 from $ the General and
57,000
Administrative Expense
Income taxes payable 28,669 Budget
Bank loan payable 19,628 $ 105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $ 337,100
 23 - 36
P2

HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash $ 20,000
Accounts receivable 84,000
Inventory 48,600
EquipmentFrom the Merchandise $ 225,000
From
Less accumulated the Budgeted
Purchases Budget
depreciation 40,500 184,500
Total assets Income Statement $ 337,100
Beginning retained earnings $ 41,800
From the Cash Budget
Add net incomeLiabilities and Equity 43,003
Liabilities
Deduct dividends (3,000)
Accounts
Endingpayable
retained earnings $ 57,000
$ 81,803
Income taxes payable 28,669
Bank loan payable 19,628 $ 105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $ 337,100
 23 - 37

A1
ACTIVITY-BASED BUDGETING

Activity-based budgeting is based on

activities rather than traditional items such
as salaries, supplies, depreciation, and
utilities.
 23 - 38

P3 APPENDIX 23A: PRODUCTION AND

MANUFACTURING BUDGETS

Toronto Sticks Company

Production Budget
October 2011 – December 2011
October November December
Next month's budgeted unit sales 800 1,400 900
Ratio of inventory to future sales × 90% × 90% × 90%
Budgeted ending inventory units 720 1,260 810
Add budgeted sales for the month 1,000 800 1,400
Required units of available production 1,720 2,060 2,210
Deduct beginning inventory units 900 720 1,260
Number of units to be produced 820 1,340 950
 23 - 39

P3 APPENDIX 23A: PRODUCTION AND

MANUFACTURING BUDGETS

Toronto Sticks Company

Direct Materials Budget
October 2011 – December 2011
October November December
Budgeted unit production 820 1,340 950
Materials requirement per unit × 0.5 × 0.5 × 0.5
Materials needed for production (units) 410 670 475
Add budgeted ending inventory (units) 335 237.5 225
Total materials requirements (units) 745 907.5 700
Deduct beginning inventory (units) 205 335 237.5
Materials to be purchased (units) 540 572.5 462.5
Materials price per unit $ 20 $ 20 $ 20
Total cost of direct materials purchases $ 10,800 $ 11,450 $ 9,250
 23 - 40

P3 APPENDIX 23A: PRODUCTION AND

MANUFACTURING BUDGETS

Toronto Sticks Company

Direct Labor Budget
October 2011 – December 2011

October November December

Budgeted unit production 820 1,340 950
Labor requirements per hour (hours) × 0.25 × 0.25 × 0.25
Total labor hours needed 205 335 237.5
Labor rate per hour $ 12 $ 12 $ 12
Total cost of labor $ 2,460 $ 4,020 $ 2,850
 23 - 41

P3 APPENDIX 23A: PRODUCTION AND

MANUFACTURING BUDGETS

Toronto Sticks Company

Factory Overhead Budget
October 2011 – December 2011

October November December

Budgeted unit production 820 1,340 950
Variable factory overhead rate × $2.50 × $2.50 × $2.50
Budgeted variable overhead $ 2,050 $ 3,350 $ 2,375
Budgeted fixed overhead 1,500 1,500 1,500
Total cost of overhead $ 3,550 $ 4,850 $ 3,875
 23 - 42

END OF CHAPTER 23