Manac II

Term II PGP 18 Batch

Pankaj Baag
Faculty Block 01, Room No 21
Mob: 8943716269
Ph (O): 0495-2809121
Ext. 121
Email: baagpankaj@iimk.ac.in

Transfer Pricing
Chapter 22

Three Transfer Pricing Methods

Market-based Transfer Prices
Cost-based Transfer Prices
Negotiated Transfer Prices

General Transfer-Pricing Rule

Transfer Price

Additional outlay cost per

=
unit incurred because
goods are transferred

Opportunity cost per unit

to the organization
+
because of the transfer

Budgetary control & Flexible budget

Chapter 6,7,8

Purposes of Budgeting Systems

Budget
a detailed plan,
expressed in
quantitative terms, that
specifies how resources
will be acquired and
used during a specified
period of time.

Budgeting systems
have five primary
purposes:

1. Planning
2. Facilitating Communication
and Coordination
3. Allocating Resources
4. Controlling Profit and
Operations
5. Evaluating Performance
and Providing Incentives
The procedures used to develop a
budget constitute a budgeting
system.

9-5

Types of Budgets
Different types of budgets serve
different purposes.
A master budget, or profit plan, is
a comprehensive set of detailed
budgets covering all phases of an
organizations operations for a
specified period of time.

Covering all
phases of
a companys
operations.

Production

Master
Budget

Detail
Budget

Detail
Budget

Detail
Budget

9-6

Types of Budgets

Budgeted financial
statements, often called
pro forma financial
statements, show how
the organizations
financial statements will
appear at a specified
time if operations
proceed according to
plan.

Income
Statement

Budgeted financial
statements include a
budgeted income
statement, a budgeted
balance sheet, and a
budgeted statement of
cash flows

Budgeted
Financial
Statements

Balance Sheet

Statement of
Cash Flows
9-7

A capital budget is a plan for the

acquisition of capital assets, such as
buildings and equipment.
A financial budget is a plan that shows
how the organization will acquire its
financial resources, such as through the
issuance of stock or incurrence of debt.

Types of Budgets
Capital budgets with acquisitions
that normally cover several years.
Financial budgets with financial
resource acquisitions.

Long Range Budgets

Continuous or
1999 Rolling Budget 2000
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
Budgets are developed for specific time periods.
Short-range budgets cover a year, a quarter, or a
month, whereas long-range budgets cover
periods longer than a year.

2001

2002

Rolling budgets are continually

updated by periodically adding a
new incremental time period, such
as a quarter, and dropping the period
just completed.
Rolling budgets are also called
revolving budgets or continuous
budgets
9-8

The master
budget
comprises many
separate
budgets, or
schedules, that
are
interdependent.

Sales of Services or Goods

Ending
Inventory
Budget

Production
Budget

Work in Process
and Finished
Goods

Ending
Inventory
Budget

Direct
Materials
Budget

Direct
Labor
Budget

Overhead
Budget

Direct Materials

Cash Budget

Selling and
Administrative
Budget

Budgeted Income
Statement

Budgeted Balance
Sheet
Budgeted Statement of
Cash Flows
9-9

Based on the sales budget, a company develops a set of operational budgets that specify
how its operations will be carried out to meet the demand for its goods or services.
A manufacturing company develops a production budget, which shows the number of
product units to be manufactured and ending inventory budgets.
From the production budget, a manufacturer develops budgets for the direct materials,
direct labor, and overhead that will be required in the production process.
A budget for selling and administrative expenses also is prepared.
The operational portion of the master budget is similar in a merchandising firm, but
instead of a production budget for goods, a merchandiser develops a budget for
merchandise purchases.
A merchandising firm will not have a budget for direct materials.
Based on the sales budget for its services, a service industry firm develops a set of budgets
that show how the demand for those services will be met.
Every business prepares a cash budget.
This budget shows expected cash receipts, as a result of selling goods or services, and
planned cash disbursements, to pay the bills incurred by the firm.
The final portion of the master budget includes a budgeted income statement, a budgeted
balance sheet, and a budgeted statement of cash flows.

Activity-Based Costing versus ActivityBased Budgeting

Resources

Resources
Activity-Based
Costing (ABC)

Activities

Cost objects:
products and services
produced, and
customers served.

Activities

Activity-Based
Budgeting (ABB)

Forecast of products
and services to be
produced and
customers served.
9-11

 Applying ABC concepts to the budgeting process yields activitybased budgeting or ABB.
Under ABB, the first step is to specify the products or services to be
produced and the customers to be served.
Then the activities that are necessary to produce these products
and services are determined.
Finally, the resources necessary to perform the specified activities
are quantified.
Conceptually, ABB takes the ABC model and reverses the flow of the
analysis.
ABC assigns resource costs to activities, and then it assigns activity
costs to products and services produced and customers served.
ABB, on the other hand, begins by forecasting the demand for
products and services as well as the customers to be served.
These forecasts then are used to plan the activities for the budget
period and budget the resources necessary to carry out the
activities.

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.
9-13

 Breakers, Inc. is preparing budgets for the

quarter ending June 30.
The unit sales are projected for the months of
April through August.
The selling price per unit is budgeted at $10.

Sales Budget
April
Budgeted
sales (units)
20,000
Selling price
per unit
$
10
Total
Revenue
$ 200,000

May

June

50,000
$

10

$ 500,000

Quarter

30,000
$

10

$ 300,000

100,000
$

10

$ 1,000,000

The projected units are multiplied by $10 for each month to determine the
budgeted revenue for the months of April, May, June and the quarter.

9-15

 Now that the sales budget is complete, the production

budget can be prepared.
The purpose of the production budget is to ensure
that production meets budgeted sales and provides
sufficient ending inventory.
Production must be adequate to meet budgeted sales
and provide for sufficient ending inventory.
Management has determined that the ending
inventory should be equal to 20% of the sales for the
following month.
At the end of March, there were 4,000 units on hand

Production Budget
The management of Breakers, Inc. wants ending
inventory to be equal to 20% of the following
months budgeted sales in units.
On March 31, 4,000 units were on hand.
Lets prepare the production budget.

9-17

 The number of units projected to be sold in the first month is obtained

from the sales budget.
The desired ending inventory is calculated by multiplying the projected
sales for the next month, May, by 20%.
This is added to the projected sales to determine the units needed for
April.
The ending inventory for the previous month, March, is deducted from the
amount needed to determine the number of units that must be produced.
The ending inventory for the first month, April, becomes the beginning
inventory for the second month.
The May and June production budget are prepared in the same manner as
April.
Sales in units for the quarter is the sum of April, May and June sales.
Since the end of June is also the end of the quarter, the ending inventory
for the quarter is the same as the ending inventory for June.
Since the beginning of April is also the beginning of the quarter, the
beginning inventory for the quarter is the same as Aprils beginning
inventory.
Total units needed for the quarter is the sum of the sales units and the
ending inventory.
The beginning inventory is subtracted from the total units needed to
arrive at the units to be produced for the quarter.

Production Budget

May sales
Desired percent
Desired inventory

From
sales
budget

Sales in units
Add: desired
end. inventory
Total needed
Less: beg.
inventory
Units to be
produced

50,000 units
20%
10,000 units

April
20,000

May
50,000

June
30,000

Quarter
100,000

10,000
30,000

6,000
56,000

5,000
35,000

5,000
105,000

4,000

10,000

6,000

4,000

26,000

46,000

29,000

101,000

March 31
ending inventory

Ending inventory becomes beginning

inventory the next month
9-19

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 months
production.
On March 31, 13,000 pounds of material are on hand.
Material cost $.40 per pound.
Lets prepare the direct materials budget.
9-20

 The first row in the direct materials budget is the units to be

produced each month and for the quarter.
This information is obtained from the production budget.
For each month, the units to be produced needs to be
multiplied by 5 pounds to determine the amount of direct
materials needed in each month.
The ending inventory for April is 10% of Mays direct material
needs.
The desired ending inventory for April is added to the
production needs for April
The beginning inventory is subtracted from the total direct
material needed for the month to arrive at the materials to be
purchased.
The calculations are the same for each month.
As in the production budget, the ending inventory for the
quarter is the same as the ending inventory for June and the
beginning inventory for the quarter is the same as the
beginning inventory in April.

From our
production
budget

Direct-Material Budget

Production in units
Materials per unit
Production needs
Add: desired
ending inventory
Total needed
Less: beginning
inventory
Materials to be
purchased

April
26,000
5
130,000

May
46,000
5
230,000

June
29,000
5
145,000

Quarter
101,000
5
505,000

23,000
153,000

14,500
244,500

11,500
156,500

11,500
516,500

13,000

23,000

14,500

13,000

140,000

221,500

142,000

503,500

10% of the following

months production

March 31
inventory
9-22

 Remember:
The ending direct material inventory for June
requires a bit more explanation.
The projections for July must be expanded
upon to determine the production budget for
July, which will provide the information
necessary to calculate the materials needed
for Junes ending inventory.

Direct-Material Budget
July Production

April 25,000 May

Sales in units
Add: Production
desired ending
inventory26,000 3,000 46,000
in units
TotalMaterials
units needed
per unit
528,000
5
Less:Production
beginning inventory
needs
130,000 5,000 230,000
Production in units
23,000

June
29,000
5
145,000

Add: desired
ending inventory
23,000
14,500
11,500
Total needed
153,000
244,500
156,500
Less: beginning
June
Ending Inventory
inventory
13,000
23,000
14,500
July
in units
23,000
Materials
toproduction
be
Materials per unit
5142,000
purchased
140,000
221,500
Total units needed
115,000
Inventory percentage
10%
June desired ending inventory
11,500

Quarter
101,000
5
505,000
11,500
516,500
13,000
503,500

9-24

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.

Lets prepare the direct labor budget.

9-25

 Each unit can be produced in one tenth of an

hour.
Breakers pays employees for 40 hours each
week.
The wage rate is $8 per hour and there is no
overtime pay.
Management has projected that direct
laborers will be paid for a minimum of 3,000
hours per month for the next three month.

Direct-Labor Budget
April
26,000
0.10
2,600

Production in units
Direct labor hours
Labor hours required
Guaranteed labor
hours
3,000
Labor hours paid
3,000
Wage rate
$
8
Total direct labot cost $ 24,000

From our
production
budget

May
46,000
0.10
4,600

June
29,000
0.10
2,900

Quarter
101,000
0.10
10,100

3,000
4,600
$
8
$ 36,800

3,000
3,000
$
8
$ 24,000

10,600
$
8
$ 84,800

This is the greater of

labor hours required or
labor hours guaranteed.
9-27

 The direct labor budget starts with the units to be

produced from the production budget.
The production for each month and the quarter is
multiplied by one tenth of an hour to determine
the labor hours required.
The labor hours required is compared to the
guaranteed of labor hours.
The labor hours to be paid is the greater of the two
for each month.
The labor hours to be paid for the quarter is the
sum of the labor hours paid for the three months
The labor hours paid is multiplied by the $8 wage
rate to determine the total direct labor cost.

Overhead Budget
Here is Breakers Overhead Budget for the quarter.
April
Indirect labor
Indirect material
Utilities
Rent
Insurance
Maintenance

17,500
7,000
4,200
13,300
5,800
8,200
56,000

May
$

26,500
12,600
8,400
13,300
5,800
9,400
76,000

June
$

17,900
8,600
5,200
13,300
5,800
8,200
59,000

Quarter
$

61,900
28,200
17,800
39,900
17,400
25,800
$ 191,000

The manufacturing-overhead budget shows the cost of overhead expected to be incurred in

the production process during the budget period.
Breakers manufacturing overhead budget lists the expected cost of each overhead item by
month.
9-29
At the bottom of the schedule, the total budgeted overhead for each month is shown.

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
outflows for the month.

9-30

 $10,000 of the fixed expenses is for

depreciation, which does not require a cash
outflow.
This information will be important when the
cash disbursements budget is prepared.

Selling and Administrative Expense

Budget
Sales in units
Variable S&A rate
Variable expense
Fixed S&A
expense
Total expense
Less: noncash
expenses
Cash
disbursements

April
20,000
$ 0.50
$ 10,000

May
50,000
$ 0.50
$ 25,000

June
30,000
$ 0.50
$ 15,000

Quarter
100,000
$
0.50
$ 50,000

70,000
80,000

70,000
95,000

70,000
85,000

210,000
260,000

10,000

10,000

10,000

30,000

$ 70,000

$ 85,000

$ 75,000

$ 230,000

From our
Sales budget
9-32

 Once again, we start with the units sales for each

month and the quarter from the sales budget.
The sales for each month and the quarter are
multiplied by the variable selling and administrative
cost rate of 50 cents to determine the variable S&A
costs.
This is added to the fixed S&A costs of $70,000 for each
month to arrive at the total S&A expenses for each
month.
Dont forget that the fixed S&A expenses for the
quarter is the sum of fixed S&A expenses for the three
months.
The noncash expenses are deducted from the total
expenses to determine the amount of cash
disbursements required for each month and the
quarter for selling and administrative expenses.

Cash Receipts Budget

At Breakers, all sales are on account.
The companys collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% is uncollected.
The March 31 accounts receivable balance of $30,000
will be collected in full.

9-34

Cash Receipts Budget

Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections

April
$ 30,000

May

June

140,000

140,000
50,000

$ 50,000
350,000

$ 170,000

$ 400,000

Quarter
$ 30,000

$ 125,000

350,000
125,000

210,000
$ 335,000

210,000
$ 905,000

What will be the receivables balance for each

month?
9-35

 During April, the remained of Marchs sales will be

collected, which is the $30,000 accounts receivable
balance on March 31.
70% of Aprils sales are also expected to be
collected in April.
Therefore, the total collections expected in April is
$170,000
Mays collections will be 25% of Aprils sales and
70% of Mays sales.
Junes collections will be 25% of Mays sales and
70% of Junes sales.
The collections for the quarter is the sum of the
collections for the three months

Cash Disbursement Budget

Breakers pays $0.40 per pound for its materials.
One-half of a months 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.

9-37

Cash Disbursement Budget

Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash payments
for materials

April
$ 12,000

May

June

28,000

28,000
28,000

$ 28,000
44,300

$ 40,000

$ 72,300

Quarter
$ 12,000

$ 44,300

44,300
44,300

28,400

28,400

$ 72,700

$ 185,000

140,000 lbs. $.40/lb. = $56,000

9-38

 The purchases for each month is multiplied by 40

cents to determine the cost of materials
purchased for the month.
This cost is then multiplied by 50%. 50% of Aprils
materials purchases will be paid for in April, the
remaining 50% will be paid in May.
This pattern is followed in May and June to
determine the cash disbursements for materials
for each month.
The cash disbursements for each month are
added together to determine the cash
disbursements for the quarter.

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.
9-40

 Breakers will also make cash disbursements

for payments on an open line of credit, loans,
a cash dividend, and equipment purchases.
All borrowings and repayments occur on the
last day of each month.

From our Cash

Receipts Budget

Cash Budget
(Collections and Disbursements)

April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May

June

Quarter

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.
9-42

 The cash budget is a combination of the cash receipts budget, the

cash disbursements for materials budget and other cash
disbursements required, such as for direct materials, overhead, etc.
The cash budget starts with the beginning cash balance for April.
This is also the beginning cash balance for the quarter.
The cash collections for the month are found on the cash receipts
budget and added to the beginning cash balance to arrive at the
total cash available.
The cash outflow for materials is found on the cash disbursements
budget.
The cash outflow for wages can be found on the direct labor
budget.
Cash outflow requirements for manufacturing overhead can be
found on the overhead budget.
Cash outflow for S&A costs can be found on the selling and
administrative expense budget.
There are no equipment purchases made in April, but there are
dividends paid.
The disbursements are totalled and them subtracted from the total
cash available for the month.
In April, there is a cash deficit.

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000
72,300
36,800
76,000
85,000
143,700
413,800

June

Quarter

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

$ 16,200
9-44

 Cash collections and disbursements are

determined in the same manner for the
month of May.
Although there is not a cash deficit at the end
of May, the $16,200 available is still below the
$30,000 minimum balance requirement by
$13,800

Cash Budget
(Collections and Disbursements)
April
May
Beginning
balance
$ 40,000 has$ 30,000
At the cash
end of
June, Breakers
Add: cash
collections
400,000
enough
cash to170,000
repay
Total cash available
210,000
430,000
the $48,800 loan plus interest at
Less: disbursements
12%. 40,000
Materials
72,300
Direct labor
24,000
36,800
Mfg. overhead
56,000
76,000
Selling and admin.
70,000
85,000
Equipment purchase
143,700
Dividends
25,000
Total disbursements
215,000
413,800
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
$ 16,200

June
$ 30,000
335,000
365,000

Quarter

72,700
24,000
59,000
75,000
48,300
279,000

$ 86,000
9-46

 Junes collections and disbursements budget

follows the same format.
There will be enough cash at the end of June
to repay the amounts borrowed in April and
May plus the 12% interest.

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000

June
$ 30,000
335,000
365,000

Quarter
$ 40,000
905,000
945,000

72,300
36,800
76,000
85,000
143,700
413,800

72,700
24,000
59,000
75,000
48,300
279,000

185,000
84,800
191,000
230,000
192,000
25,000
907,800

$ 16,200

$ 86,000

$ 37,200
9-48

 The beginning cash balance for the quarter is

Aprils beginning cash balance.
The cash collections for the quarter are added to
determine the total cash available for the quarter.
Each items cash disbursements are totalled for
the quarter and then added together to
determined the total cash disbursements for the
quarter.
The disbursements for the quarter are then
deducted from the collections for the quarter.
There is a $37,200 cash surplus for the quarter.

Ending cash balance

for April
is the beginning May
balance.

Cash Budget
(Financing and Repayment)

Excess (deficiency) of
Cash available over
disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance

Borrowing
$
35,000
13,800

April

May

June

Quarter

$ (5,000)

$ 16,200

$ 86,000

$ 37,200

35,000
35,000
$ 30,000

13,800
13,800
$ 30,000

(48,800)
(838)
(49,638)
$ 36,362

48,800
(48,800)
(838)
(838)
$ 36,362

Rate
12% =
12% =

Annual
Interest
$
4,200
1,656

Months
Outstanding

2 mths
=

1 mth.
=

Interest
Expense
$
700
138
$
838
9-50

 Now lets discuss the financing and repayment needs.

Because there is a cash deficit in April, Breakers must borrow $35,000 to
maintain the $30,000 minimum balance required.
The ending cash balance for April becomes the beginning cash balance for
May.
Cash collections and disbursements are determined in the same manner for
the month of May.
Although there is not a cash deficit at the end of May, the $16,200 available
is still below the $30,000 minimum balance requirement by $13,800.
Therefore, Breakers must borrow an additional $13,800 at the end of May to
have a $30,000 cash balance for the beginning of June.
The $35,000 borrowed at the end of April requires a $700 interest payment
and the $13,800 borrowed at the end of May requires an interest payment of
$138.
The total to be repaid for principle and interest is $49,638.
The ending cash balance for June is also the ending cash balance for the
quarter.
The borrowings for the quarter is the sum of the borrowings in April and
May.
The repayments and interest for the quarter occurred in June.
The ending cash balance for the quarter is the ending cash balance for June
since the end of June is also the end of the quarter.

Cost of Goods Manufactured

April
Direct material:
Beg.material inventory
$ 5,200
Add: Materials purchases
56,000
Material available for use
61,200
Deduct: End. material inventory
9,200
Direct material used
52,000
Direct labor
24,000
Manufacturing overhead
56,000
Total manufacturing costs
132,000
Add: Beg. Work-in-process inventory
3,800
Subtotal
135,800
Deduct: End.Work-in-process inventory
16,200
Cost of goods manufactured
$ 119,600

May
$

9,200
88,600
97,800
5,800
92,000
36,800
76,000
204,800
16,200
221,000
9,400
$ 211,600

June
$

5,800
56,800
62,600
4,600
58,000
24,000
59,000
141,000
9,400
150,400
17,000
$ 133,400

Quarter
$

5,200
201,400
206,600
4,600
202,000
84,800
191,000
477,800
3,800
481,600
17,000
$ 464,600

9-52

 The cost of goods manufactured schedule is

prepared from the direct materials budget, the
direct labor budget and the overhead budget.
The ending work-in-process inventory amounts
are estimates provided by management.
The amounts for direct materials are in dollars,
not units.
The direct materials beginning inventory,
purchases and ending inventory amounts were
taken from the direct materials budget.
These amounts were multiplied by the cost of 40
cents (mentioned earlier) per pound to arrive at
the dollar amounts.

Cost of Goods Sold

Cost of goods manufactured
Add: Beg. finished-goods inventory
Cost of goods available for sale
Deduct: End. finished-goods inventory
Cost of goods sold

April
May
$ 119,600 $ 211,600 $
18,400
46,000
138,000
257,600
46,000
27,600
$ 92,000 $ 230,000 $

June
Quarter
133,400 $ 464,600
27,600
18,400
161,000
483,000
23,000
23,000
138,000 $ 460,000

The cost of goods sold schedule starts where the cost of goods manufactured left off.
The cost of goods manufactured at the beginning of April can be divided by the units
manufactured, 26,000, to arrive at a unit cost of $4.60.
The 4,000 units in finished goods inventory at the beginning of April is multiplied by the
unit cost to determine the beginning inventory cost.
The ending inventory for each month is also multiplied by $4.60 to determine the cost of
the ending inventory.
Remember, the ending inventory for one month becomes the beginning inventory for the
following month.
The beginning inventory for the quarter is the same as the beginning inventory for April
and the ending inventory for the quarter is the same as the ending inventory for June.
9-54

Budgeted Income Statement

Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
Revenue (100,000 $10)
Cost of goods sold
Gross margin
Operating expenses:
Selling and admin. expenses
Interest expense
Total operating expenses
Net income

$ 1,000,000
460,000
540,000
$ 260,000
838
$

260,838
279,162

9-55

 Now that the cost of goods manufactured and cost of

goods sold schedules are complete, the budgeted
income statement can be prepared.
A budgeted income statement for the quarter ending
June 30 can now be prepared for Breakers.
Revenue is taken from the sales budget.
Cost of goods sold is taken from the cost of goods sold
schedule.
Gross margin is revenue less cost of goods sold.
The operating expenses is taken from the selling and
administrative expense budget and the cash budget.
Net income is gross margin less total operating
expenses.

The information for the budgeted statement of cash flows can be taken from the cash
budget

Budgeted Statement of Cash Flows

April

Cash flows from operating activities:

Cash receipts from customers
Cash payments:
To suppliers of raw material
For direct labor
For manufacturing-overhead expenditures
For selling and administrative expenses
For interest

May

$ 170,000 $

Total cash payments

Net cash flow from operating activities
Cash flows from investing activities:
Purchase of equipment

Net cash used by investing activities

Cash flows from financing activities:
Payment of dividends
Principle of bank loan
Repayment of bank loan

Net cash provided by financing activities

Net increase in cash

Balance in cash, beginning
Balance in cash. end of month

June

Quarter

400,000 $

335,000 $

(40,000)
(24,000)
(56,000)
(70,000)
-

(72,300)
(36,800)
(76,000)
(85,000)
-

(72,700)
(24,000)
(59,000)
(75,000)
(838)

(185,000)
(84,800)
(191,000)
(230,000)
(838)

(190,000)

(270,100)

(231,538)

(691,638)

(20,000) $
-

129,900 $
(143,700)

- $ (143,700) $
(25,000)
35,000
-

103,462 $

905,000

213,362

(48,300)

(192,000)

(48,300) $

(192,000)

13,800
-

(48,800)

(25,000)
48,800
(48,800)

10,000 $

13,800 $

(48,800) $

(10,000) $
40,000

- $
30,000

6,362 $
30,000

(3,638)
40,000

30,000 $

30,000 $

36,362 $

36,362

9-57

Budgeted Balance Sheet

Breakers reports the following account balances on
June 30 prior to preparing its budgeted financial
statements:
Land - $50,000
Building (net) - $148,000
Common stock - $217,000
Retained earnings - $46,400
Account balances for property, plant and equipment and stockholders equity
accounts are needed before preparing the budgeted balance sheet.
9-58

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
Beginning balance
Add: net income
Deduct: dividends
Ending balance

Breakers, Inc.
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets

$ 46,400
279,162 Accounts payable
(25,000) Common stock
Retained earnings
$300,562

Total liabilities and equities

$
$

36,362
75,000
4,600
17,000
23,000
155,962
50,000
148,000
192,000
390,000
545,962
28,400
217,000
300,562
545,962
9-59

 The budgeted balance sheet is prepared for the date June 30.
Cash is taken from the cash budget or the budgeted
statement of cash flows.
Accounts receivable is 25% of June sales.
(Recall the collections pattern from the cash collections
schedule.)
The raw materials, work-in-process and finished goods
inventory amounts can be taken from the cost of goods
manufactured and costs of goods sold schedules.
The amount for equipment can be taken from the cash
disbursements budget or the budgeted statement of cash
flows.
The accounts payable balance is 50% of Junes purchases for
direct materials.
(Recall the cash disbursements pattern for direct materials.)
The ending retained balance is the beginning balance plus net
income less dividends paid

Sales of Services or Goods

Ending
Inventory
Budget

Production
Budget

Work in Process
and Finished
Goods

When the interactions of the elements of

Ending
Direct
the masterDirect
budget are
expressed
as a setSelling
of and
Overhead
Inventory
Materials
Labor
Administrative
mathematical
relations,
it
becomes
a Budget
Budget
Budget
Budget
Budget
Direct Materials
financial planning model that can be used to
answer what if questions about unknown
Cash Budget
variables.
Budgeted Income
Statement

Budgeted Balance
Sheet
Budgeted Statement of
Cash Flows
9-61