Garrison12ce PPT Ch09

CHAPTER 9:
Budgeting
Prepared by
Shannon Butler,
CPA, CA
Carleton University
Learning Objectives
1 Explain why organizations budget, and describe the
processes they use to create budgets.
2 Prepare the supporting components of a master budget
and the budgeted financial statements.
3 Prepare a flexible budget, and explain the need for the
flexible budget approach.
4 Prepare a performance report using the flexible budget
approach.
5 (Online Appendix 9A) Compute the optimal inventory
level and order size.
© 2021 McGraw-Hill Limited 9-2

The Basic Framework of Budgeting
• A budget is a detailed quantitative plan for acquiring and

using financial and other resources over a specified
forthcoming time period.
• The act of preparing a budget is called budgeting.
• The use of budgets to control an organization’s activity is
known as budgetary control.
• The master budget summarizes a company’s plans, setting
specific targets for sales, production, distribution,
administrative, and financing activities.

Why Organizations Create Budgets
• Budgets serve as both a planning tool and a control

tool in organizations.
• Planning involves developing objectives and
preparing various budgets to achieve these
objectives.
• Control involves gathering feedback to assess the
extent to which the objectives developed at the
planning stage are being attained.
• An effective budgeting system provides for both
planning and control.
Planning Process
• As part of the planning process, budgets are used to:
1. Encourage managers to think about and plan for
the future.
2. Communicate management’s financial goals
throughout the organization.
3. Allocate resources to those parts of the
organization where they can be used most
effectively.
4. Coordinate the plans and activities of managers
in different departments.

Control System
• As part of a control system, budgets are compared to
actual results during the year to:
1. Improve the efficiency and effectiveness of

operations.
2. Evaluate and reward employees.

Choosing a Budget Period
The annual operating budget
may be divided into quarterly
or monthly budgets.
Operating Budget
2012 2013 2014 2015
A continuous budget is a 12-month budget that rolls

forward one month (or quarter) as the current month
(or quarter) is completed.

How Organizations Create Budgets
Part 1
• Companies usually create budgets by relying on some
combination of top-down budgeting and participative
budgeting.
• A participative budget involves managers from across
the organization in developing budget estimates for
their areas of responsibility.
• With a top-down approach, top-level managers initiate
the budgeting process by issuing overall profit targets.

How Organizations Create Budgets
Part 2
• Many companies choose to use a participative
budgeting approach, involving lower-level managers in
developing the budget because it:
• Shows respect for their experience and opinions.
• Leverages their knowledge and experience to provide
more accurate estimates.
• Increases their motivation to achieve goals they had
input in setting.
• Empowers them to take ownership of the budget and
to be accountable for deviations from it.

Budgetary Slack
• Budget estimates prepared by lower-level managers
cannot simply be accepted without review by higher
levels of management.
• If no review system is present, participative budgets
may contain excessive budgetary slack.
• Slack is the difference between the revenues and
expenses a manager expects can be achieved and the
amounts included in the budget.

Benchmarking
• An input to creating budgets that some companies use is
the performance of competitors, “best-in-class”
companies, or other business units in the same company.
• A best-in-class company is one known for achieving
exceptional levels of performance on some aspect of
their operations such as customer service, distribution,
marketing, and so on.
• The approach of comparing revenue, cost, or process
performance to other high-performing companies, or to
other successful business units in the same company, is
known as benchmarking.

Behavioural Factors in Budgeting Part 1
• Two important purposes of the budget are to motivate

people and coordinate their efforts.
• These purposes can be undermined if the budget is
used in an inflexible manner to control people.
• This relates to the idea of responsibility accounting,
whereby managers are held responsible for those
items—and only those items—that they can actually
influence to a significant extent.

Behavioural Factors in Budgeting Part 2
• Another key issue related to the motivational aspect

of budgets is the difficulty level of the budget targets
for revenues and expenses.
• If budgets are too difficult, employees will eventually
recognize that they are unattainable, and motivation
and morale will likely suffer.
• If the budgets are too easy, inefficiencies or less effort
will result.

The Master Budget: An Overview
Exhibit 9-2

The Sales Budget Defined
• A sales budget is detailed schedule showing the
expected sales for the budget period; typically it is
expressed in both dollars and units of product.
• An accurate sales budget is the key to the entire
budgeting process.
• All of the other parts of the master budget depend
on the sales budget in some way.

The Big Picture 1
• A master budget for a manufacturing company is
designed to answer 10 key questions:
1. How much sales will we earn?
2. How much cash will we collect from customers?
3. How much raw material will we need to purchase?
4. How much manufacturing cost (including direct
materials, direct labour, and manufacturing overhead)
will we incur?
5. How much cash will we pay to our suppliers and our
direct labourers, and how much will we pay for
manufacturing overhead resources?

The Big Picture 2
6. What is the total cost that will be transferred from
finished goods inventory to cost of goods sold?
7. How much selling and administrative expense will
we incur and how much cash will we pay related to
those expenses?
8. How much money will we borrow from or repay to
lenders, including interest?
9. How much operating income will we earn?
10. What will our balance sheet look like at the end of
the budget period?

Budgeting Example
• Royal Company 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.
The Sales Budget
The individual months of April, May, and June are summed

to obtain the total projected sales in units and dollars for
the quarter ended June 30th.

Expected Cash Collections 1
• All sales are on account.
• Royal’s collection pattern is:
• 70% collected in the month of sale,
• 25% collected in the month following sale,
• 5% uncollectible.
• The March 31 accounts receivable balance of

$30,000 will be collected in full.


From the Sales Budget for April.

From the Sales Budget for May.

Quick Check 
What will be the total cash collections for

the quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000

Quick Check 
What will be the total cash collections for

the quarter?
Answer:
d. $905,000


The Production Budget 1
Sales
Budget
ed Production
andlet
p Budget
Expected
om
C
Cash
Collections
Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.

• The management at Royal Company 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.


Budgeted May sales 50,000

Desired ending inventory % 20%
March 31 Desired ending inventory 10,000
ending inventory
Quick Check 
What is the required production for May?
a. 56,000 units
b. 46,000 units
c. 62,000 units
d. 52,000 units

Quick Check 
What is the required production for May?
Answer:
b. 46,000 units


Assumed ending inventory.

The Direct Materials Budget 1
ed
Direct
Production
e t
pl Materials
Budget
m
Co Budget
The direct materials budget details the raw materials that

must be purchased to fulfill the production budget and to
provide for adequate inventories.
• At Royal Company, 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 is $0.40 per pound.
Let’s prepare the direct materials budget.

From production budget


March 31 inventory
10% of following Calculate the materials to

month’s production be purchased in May.
needs. © 2021 McGraw-Hill Limited 9-39
Quick Check 
How much materials should be purchased in

May?
a. 221,500 pounds
b. 240,000 pounds
c. 230,000 pounds
d. 211,500 pounds

Quick Check 
How much materials should be purchased in

May?
Answer:
a. 221,500 pounds


Assumed ending inventory

Expected Cash Disbursement for
Materials 1
• Royal pays $0.40 per pound for its materials.
• One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid in the
following month.
• The March 31 accounts payable balance is
$12,000.
Let’s calculate expected cash disbursements.

Materials 2

Materials 3
Compute the expected cash

disbursements for materials
for the quarter.
140,000 lbs. × $.40/lb. = $56,000

Quick Check 
What are the total cash disbursements for the

quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400

Quick Check 
What are the total cash disbursements for the

quarter?
Answer:
a. $185,000

Materials 4

The Direct Labour Budget 1
Directted Direct
e
pl
Materials Labour
om
Budget
C Budget
The direct labour budget is a detailed plan showing labour

requirements over some specific time period.

• At Royal, each unit of product requires 0.05 hours (3
minutes) of direct labour.
• 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 agree to a
wage rate of $10 per hour regardless of the hours worked
(no overtime pay).
• For the next three months, the direct labour workforce
will be paid for a minimum of 1,500 hours per month.
• Let’s prepare the direct labour budget.

From production budget.


Greater of labour hours required

or labour hours guaranteed.

Quick Check 
What would be the total direct labour cost for
the quarter if the company follows its no lay-
off policy, but pays $15 (time-and-a-half) for
every hour worked in excess of 1,500 hours in
a month?
a. $79,500
b. $64,500
c. $61,000
d. $57,000

Quick Check 
What would be the total direct labour cost for
the quarter if the company follows its no lay-off
policy, but pays $15 (time-and-a-half) for every
hour worked in excess of 1,500 hours in a
month?
Answer:
d. $57,000

The Manufacturing Overhead
Budget
Direct ed Manufacturing
l
Labour et Overhead
p
m
Budget
o Budget
C
The manufacturing overhead budget provides a

schedule of all costs of production other
than direct materials and direct labour.
Manufacturing Overhead Budget 1
• At Royal, manufacturing overhead is applied to units
of product on the basis of direct labour hours.
• The variable manufacturing overhead rate is $20 per
direct labour hour.
• Fixed manufacturing overhead is $50,000 per month
and includes $20,000 of noncash costs (primarily
depreciation of plant assets).
• Let’s prepare the manufacturing OH budget.

Direct Labour Budget.

Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labour hours required 5,050
* rounded

Depreciation is a noncash charge.

The Ending Finished Goods
Inventory Budget
d Ending
e
l et
Manufacturing Finished
p
Overhead Goods
om
CBudget Inventory
Budget
After computing unit product costs, the carrying cost of the

unsold units is computed on the ending finished goods
inventory budget.
Ending Finished Goods Inventory
Budget 1
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labour
Manufacturing overhead
Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory
Direct materials
budget and information.

Budget 2
Direct labour 0.05 hrs. $ 10.00 0.50
Manufacturing overhead

Unit product cost
Ending finished goods inventory
Direct labour budget.

Budget 3
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Unit product cost $ 4.99
Ending finished goods inventory ?
Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labour hours required 5,050

Budget 4
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950
Production Budget.

The Selling and Administrative
Expense Budget
Ending Selling
Finished ed and
l et Administrative
p
Goods
om Expense
Inventory
C
Budget Budget
The selling and administrative expense budget lists the

budgeted expenses for areas other than manufacturing.

Selling and Administrative Expense
Budget 1
• At Royal, the selling and administrative expenses budget is
divided into variable and fixed components.
• The variable selling and administrative expenses are $0.50
per unit sold.
• Fixed selling and administrative expenses are $70,000 per
month.
• The fixed selling and administrative expenses include
$10,000 in costs – primarily depreciation – that are not
cash outflows of the current month.
• Let’s prepare the company’s selling and administrative
expense budget.

Budget 2
Calculate the selling and administrative

cash expenses for the quarter.
Quick Check 
What are the total cash disbursements for

selling and administrative expenses for the
quarter?
a. $180,000
b. $230,000
c. $110,000
d. $ 70,000

Quick Check 
What are the total cash disbursements for

selling and administrative expenses for the
quarter?
Answer:
b. $230,000

Budget 3

The Cash Budget
Selling
and d Cash
t e
e
Administrative
pl Budget
m
Expense
o
CBudget
The cash budget pulls together much of the data

developed in the preceding steps and displays it in four
major sections: receipts, disbursements, cash excess or
deficiency, and financing.
Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts listing all cash inflows excluding
borrowing;
2. Cash disbursements listing all payments excluding
repayments of principal and interest;
3. Cash excess or deficiency; and
4. The financing section listing all borrowings,
repayments and interest.

The Cash Budget 1
Royal:
• Maintains a 16% open line of credit for $75,000
• Maintains a minimum cash balance of $30,000
• Borrows on the first day of the month and repays loans
on the last day of the month
• Pays a cash dividend of $49,000 in April
• Purchases $143,700 of equipment in May and $48,300
in June (both purchases paid in cash)
• Has an April 1 cash balance of $40,000

The Cash Budget 2
Schedule of Expected
Cash Collections.

The Cash Budget 3
Schedule of Expected
Cash Disbursements.
Direct Labour
Budget.
Manufacturing
Overhead Budget.
Selling and Administrative

Expense Budget.
The Cash Budget 4

The Cash Budget 5
Ending cash balance

for April is the
beginning May
balance.

The Cash Budget 6

Quick Check 
What is the excess (deficiency) of cash

available over disbursements for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000

Quick Check 
What is the excess (deficiency) of cash

available over disbursements for June?
Answer:
d. $ 95,000

The Cash Budget 7
$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment on June 30.

The Budgeted Financial Statements
In exam he will not

give you to make
the whole thing but
ed
a part of it Budgeted
Cash t
ple Financial
Budget
m
Co Statements
After we complete the cash budget, we can prepare the

budgeted income statement and budgeted balance sheet for
Royal.
The Budgeted Income Statement

The Budgeted Balance Sheet
• Royal reported the following account balances
prior to preparing its budgeted financial
statements:
• Land – $50,000
• Common shares – $200,000
• Retained earnings – $146,150
• Equipment – $175,000

Royal Company 25% of June
Budgeted Balance Sheet
June 30
sales of
$300,000.
Current assets
Cash $ 43,000
Accounts receivable 75,000 11,500 lbs.
Raw materials inventory 4,600
Finished goods inventory 24,950
at $0.40/lb.
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
Accounts payable $ 28,400

Common shares 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable Beginning
75,000balance $146,150
Add: net income 239,000
Raw materials inventory 4,600
Deduct: dividends (49,000)
Finished goods inventory 24,950
Ending balance $336,150
Total current assets 147,550
Property and equipment
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
Accounts payable $ 28,400

Common shares 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550
Static Budgets
• The budgets we just went over are static budgets.
• A static budget is prepared only for the planned or
budgeted level of activity.
• These budgets are suitable for planning, however they
can be inadequate for control if the actual level of
activity during the period differs significantly from the
budgeted level.
• Therefore an alternative approach is needed to restore
the usefulness of budgets as a control tool.

Flexible Budgets
Flexible budgets:
• Take into account changes in revenues and costs
expected to occur as a consequence of changes
in actual activity.
• Provides estimates of what revenues and costs
should be for any level of activity within a
specified range.
• Improves performance evaluation

Forecasts Part 1
• A planning tool often used by companies is
the forecast.
• Like a budget, a forecast represents management’s
estimates of revenues and expenses likely to occur in
a future period.
• Forecasts are typically prepared after a fiscal period
has started and can cover periods as short as a week
or a month or as long as several years.

Forecasts Part 2
• An advantage of using a forecast as a planning tool
after the fiscal period has started is that it will be
based on current information that may differ from the
information used to prepare the static budget.

Static Budgets and Performance
Reports 1
Static Actual
Budget Results Variances
Machine hours 10,000
Variable costs
Indirect labour $ 40,000
Indirect materials 30,000
Power 5,000
Fixed costs
Depreciation 12,000
Insurance 2,000
Total overhead costs $ 89,000

Reports 2
Static Actual
Machine hours 10,000 8,000
Variable costs
Indirect labour $ 40,000 $ 34,000
Indirect materials 30,000 25,500
Power 5,000 3,800
Fixed costs
Depreciation 12,000 12,000
Insurance 2,000 2,050
Total overhead costs $ 89,000 $ 77,350

Reports 3
Static Actual
Machine hours 10,000 8,000 2,000 U
Variable costs
U = Unfavourable variance Unable
Indirect labour $ 40,000 $ 34,000 $6,000 F
to achieve the30,000
Indirect materials
budgeted level of
25,500 4,500 F
Power activity.
5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F

Reports 4
Static Actual
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
F = Favourable
Fixed costs variance that occurs when
actual costs are less than
Depreciation budgeted12,000
12,000 costs. 0
Insurance 2,000 2,050 50 U

Reports 5
Static Actual
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Since cost variances are favourable, have
Fixed costs
we done a good job controlling
Depreciation 12,000
costs?
12,000 0
Insurance 2,000 2,050 50 U

Reports 6
Question from last slide: Since cost variances are favourable,
have we done a good job controlling costs?
This question can’t be answered using a static budget.

The relevant question should be…
“How much of the favourable cost variance is due to lower
activity, and how much is due to good cost control?
To answer the question, we must flex the budget to the

actual level of activity.

Preparing a Flexible Budget 1
To flex a budget we need to know that:

• Total variable costs change in direct
proportion to changes in activity.
• Total fixed costs remain unchanged within
the relevant range.
• Let’s prepare a flexible budget…

Variable costs are expressed as

a constant amount per hour.
$40,000 ÷ 10,000 hours is
$4.00 per hour.
Fixed costs are
expressed as a
total amount.

$4.00 per hour × 8,000 hours = $32,000



Quick Check 
What should be the total overhead costs for

the Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.

Quick Check 
What should be the total overhead costs for

the Flexible Budget at 12,000 hours?
Answer:
d. $104,000.
Total overhead cost

= $14,000 + $7.50 per hour  12,000 hours
= $14,000 + $90,000 = $104,000


Flexible Budget Performance Report
1

Quick Check 
What is the variance for indirect labour when

the flexible budget for 8,000 hours is
compared to the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F

Quick Check 
What is the variance for indirect labour when

Answer:
a. $2,000 U

2

Quick Check 
What is the variance for indirect material when

the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F

Quick Check 
What is the variance for indirect material when

Answer:
a. $1,500 U

3

Reports
Static Actual
Machine hours 10,000 8,000 2,000 U
Remember
Variable the question from earlier: How much of the
costs
$11,650 favourable
Indirect variance is
labour $ due to lower activity
40,000 $ 34,000 and $6,000 F
howmaterials
Indirect much is due to cost control? 25,500
30,000 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U

4
Overhead Variance Analysis
Static Let’s place Actual
Overhead the flexible Overhead
Budget at at
budget for
10,000 Hours 8,000 Hours
8,000 hours
$ 89,000 here. $ 77,350
Difference between original static budget

and actual overhead = $11,650 F.

5
Overhead Variance Analysis
Static Flexible Actual
Overhead Overhead Overhead
Budget at Budget at at
10,000 Hours 8,000 Hours 8,000 Hours
$ 89,000 $ 74,000 $ 77,350
Activity Cost control
This $15,000F variance is due This $3,350U

to lower activity. variance is due
to poor cost control.
End of Chapter Summary 1
• Budgets play a dual role in organizations (planning and
control) and offer several benefits; including,
communication of management’s plans, allocation of
resources, coordination of activities, and establishment
of goals and objectives that can be used to evaluate
subsequent performance.
• Budgets represent a key element of responsibility
accounting systems, whereby managers are held
responsible for revenue and cost items over which they
have significant influence.

• A master budget involves numerous interrelated
schedules and starts with the sales budget, which is
based on the sales forecast.
• For a manufacturing company, once the sales budget
has been set, the production budget can be prepared
since it depends on how many units are to be sold.
• The production budget determines how many units
are to be produced.
• After the production budget is prepared, the various
manufacturing cost budgets and selling and
administrative budgets can be developed.

• After the detailed budget schedules have been
completed, the cash budget, budgeted income
statement, and budgeted balance sheet can be prepared.
• Flexible budgets can be used to address the limitations
that arise with static budgets when actual activity levels
differ significantly from budgeted levels.
• Flexible budgets also allow companies to prepare
performance reports that show the difference between
actual and static budget into flexible budget variances
and sales volume variances.

NOT NEEDED FOR EXAM
Appendix 9A
Inventory Decisions

Inventory Decisions
• Inventory planning and control decisions are an
important aspect of the management of many
organizations.
• Inventory planning and control play an integral role in
preparing the master budget.
• The major issues that need to be addressed are:
• How does the manger know what inventory level
is appropriate?
• Will the appropriate level vary from organization
to organization?

Costs Associated with Inventory 1
• Inventory Ordering Costs: Costs associated
with the acquisition of inventory, such as clerical
costs and transportation costs.
• Inventory Carrying Costs: Costs associated
with having inventory on hand, such as storage
space, handling costs, property taxes, insurance,
obsolescence losses and interest on capital
invested in inventory.

Costs Associated with Inventory 2
• Costs of not carrying sufficient inventory:

• Costs that result from not having enough
inventory on hand to meet customers’
needs, including; customer dissatisfaction
and lost sales, forgone quantity discounts,
uneven production, inefficient production
runs, and additional transportation charges.

Computing the Economic Order
Quantity
• The economic order quantity is the order size
for materials that minimizes the costs of
ordering and carrying inventory.
• There are two approaches:
1. The Tabular Approach
2. The Formula Approach

Just-in-Time and the Economic
Order Quantity
• The EOQ will decrease under either of these

circumstances:
1. The cost of placing an order decreases.
2. The cost of carrying inventory increases.

Production Lot Size, Reorder
Point and Safety Stock 1
• Economic production Lot Size: The number of units
produced in a production lot that minimizes setup costs
and the costs of carrying inventory.
• Setup costs: Labour and other costs involved in
getting facilities ready to produce a batch of a particular
production item.
• Reorder point: The point in time when an order must
be laced to replenish deplete inventory; it is determined
by multiplying the lead time by the average daily or
weekly usage.
Production Lot Size, Reorder
Point and Safety Stock 2
• Lead time: The interval between the time that an order
is placed and the time that the order is actually received
from the supplier or production is completed.
• Safety stock: The difference between average usage of
materials and maximum usage of materials that can
reasonably be expected during the lead time.

Perishable Products
• Inventory for perishable products or services

pose an interesting problem:
• If too much or too many are ordered, the
cost of the inventory is similar to a carrying
cost, while ordering too few has the cost of
contribution forgone from the lost sale.

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CHAPTER 9:

© 2021 McGraw-Hill Limited 9-2

• A budget is a detailed quantitative plan for acquiring and

© 2021 McGraw-Hill Limited 9-3

• Budgets serve as both a planning tool and a control

© 2021 McGraw-Hill Limited 9-5

1. Improve the efficiency and effectiveness of

© 2021 McGraw-Hill Limited 9-6

2012 2013 2014 2015

A continuous budget is a 12-month budget that rolls

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© 2021 McGraw-Hill Limited 9-8

© 2021 McGraw-Hill Limited 9-9

© 2021 McGraw-Hill Limited 9-10

© 2021 McGraw-Hill Limited 9-11

• Two important purposes of the budget are to motivate

© 2021 McGraw-Hill Limited 9-12

• Another key issue related to the motivational aspect

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© 2021 McGraw-Hill Limited 9-14

© 2021 McGraw-Hill Limited 9-15

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The individual months of April, May, and June are summed

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• The March 31 accounts receivable balance of

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From the Sales Budget for April.

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From the Sales Budget for May.

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What will be the total cash collections for

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What will be the total cash collections for

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Production must be adequate to meet budgeted

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• The management at Royal Company wants

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Budgeted May sales 50,000

What is the required production for May?

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What is the required production for May?

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Assumed ending inventory.

The direct materials budget details the raw materials that

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From production budget

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10% of following Calculate the materials to

How much materials should be purchased in

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How much materials should be purchased in

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Assumed ending inventory

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