Master Budget and

Responsibility Accounting
The Sales Budget

Goes to Budgeted
Income Statement
 Sales Budget: Example
• Royal Company is preparing budgets for the quarter ending June 30th.
• 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.
• Assume 60% of the sales are in cash, rest in receivables which will be recovered in next month.
 The Production Budget

Starting point for Direct Materials Purchases Budget

Starting point for Direct Labor Budget
 Production Budget: Example
• The management at Royal Company wants ending inventory to equal 20%
of the following month’s budgeted sales in units.
• On March 31st, 4,000 units were on hand.
• 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
 Direct Materials Budget
• The direct materials budget shows the budgeted costs for the direct
materials that will need to be purchased to satisfy the estimated
production for the period.
• Budgeted cost of direct materials to be purchased = required units of
direct materials x anticipated cost per unit.
Direct Materials Budget
 Direct Materials Budget: Example
• 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.
• The material cost is $0.40 per pound.
 The Direct Labor Budget
• The direct labor budget shows the budgeted costs for the direct labor
needed to satisfy the estimated production for the period.
 The Direct Labor Budget
• At Royal, each unit of product requires 0.05 hours (3 minutes) of direct
labor. The labor can be unskilled because the production process is
relatively simple and formal training is not required.
• Royal pays its workers at the rate of $10 per hour.
• Prepare a direct material budger for qtr ending June 30.
Cost of Goods sold Budget
 Cost of Goods Sold
• Direct Material used – 503,500 @ .4
• Direct Labor used 50,500
• Manufacturing overheads (based on Labor hrs) 251,500
• Manufacturing cost – 503,400
• Beginning Finished goods 4000 @ 5.14
• Ending Inventory 5000 @ 4.99
• Cost of Goods Sold- 499,000
 Cash budget
• Cash budget is a schedule to record cash inflows and outflows over a
period with a view to locating the timing and magnitude of cash surplus
and shortage.
• Cash budget is a useful tool in the cash management of organizations as it
reveals potential cash shortages and periods of excess cash.
• It ensures that sufficient cash is available when required.
 The Cash Budget
• The cash budget is divided into four sections:
• Cash receipts section lists all cash inflows excluding cash received from
financing;
• Cash disbursements section consists of all cash payments excluding repayments
of principal and interest;
• Cash excess or deficiency section determines if the company will need to borrow
money or if it will be able to repay funds previously borrowed; and
• Financing section details the borrowings and repayments projected to take place
during the budget period.
 Cash Budget: Example
• Littleton Electronics’ ending cash Month Collections Payments
balance as of Dec 31, 2010 (the Jan 16,000.00 18,500.00
end of its fiscal year 2010) was
$20,000. Its expected cash Feb 17,500.00 19,700.00
collections and payments for the March 22,500.00 24,200.00
next six months are given in the
April 26,000.00 25,900.00
following table.
May 32,000.00 26,700.00
June 37,500.00 28,400.00
• Assuming that the firm must maintain an ending cash balance of at least
$20,000, how much must they borrow during each month?
• If the firm must pay 7% annual interest on its short-term borrowing, how
does this affect your ending cash balance calculations?
• How would your ending cash balance change if the firm uses any cash in
excess of the minimum to pay off its short-term borrowing in each month?
 Cash Budget: Example
• Loblaw Manufacturing has asked you to create a cash budget to determine
its borrowing needs over June to October period.
Month Other
Sales
Payments
Jan
160,000.00 80,000.00
Feb
130,000.00 65,000.00
March
95,000.00 60,000.00
 Additional Information
• Last year November and Dec sales were $125,000 and $140,000, respectively.
• The firm collects 30% of its monthly sales, 60% the following month, and 10% two months
after the sale.
• Each month it purchases inventory equal to 65% of the next month’s expected sales. The
company pays for 40% of its inventory purchases in the same month and 60% in the following
month.
• A minimum cash balance of $25,000 must be maintained each month, and the firm pays 8%
annually for short-term borrowing from its bank.
• Create a cash budget for Jan to June 2010. The cash budget should account for short-term
borrowing and payback of outstanding loans. The firm ended Dec with a $30,000 cash balance.
 Cash Budget: Example
• A newly started company Quick Co. Ltd., wishes to prepare cash budget from January.
Prepare a cash budget for the first six months from the following estimated revenue and
expenditure:
Production Selling &
Month Sales Material Wages
Overheads Administrative OH

Jan 20,000.00 20,000.00 4,000.00 3,200.00 800.00

Feb 22,000.00 14,000.00 4,400.00 3,300.00 900.00
March 24,000.00 14,000.00 4,600.00 3,300.00 800.00
April 26,000.00 12,000.00 4,600.00 3,400.00 900.00
May 28,000.00 12,000.00 4,800.00 3,500.00 900.00
June 30,000.00 16,000.00 4,800.00 3,600.00 1,000.00
 Additional Information
• Cash balance on 1st January 1999 was Rs. 10,000. A new machine is to be installed at
Rs. 30,000 on credit, to be repaid by two equal instalments in March and April.
• Sales commission @ 5% on total sales is to be paid within the month following actual
sales. Rs. 10,000 Share capital may be received in March. Share premium amounting to
Rs.2, 000 is also obtainable with it.
• Period of credit allowed by suppliers 2 months
• Period of credit allowed to customers 1 month
• Delay in payment of overheads 1 month
• Delay in payment of wages 1/2 month
• Assume cash sales to be 50% of total sales.