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Introduction toManagement Accounting:
The Master Budget
Chapter 20
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
20 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objectives
1. Distinguish between financial accounting and management accounting, and use management accounting information for decision making.
2. Describe the value chain and classify costs by value-chain function
3. Distinguish direct costs from indirect costs4. Distinguish among full product costs,
inventoriable product costs and period costs
20 - 3Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Objectives
5. Prepare the financial statements of a manufacturing company
6. Identify the benefits of budgeting7. Prepare an operating budget for a
company8. Prepare the components of a financial
budget9. Use sensitivity analysis in budgeting.
20 - 4Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Planning Acting
Feedback
Controlling
The Functions of Management
20 - 5Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Distinguish between financialaccounting and management
accounting, and use management accounting information for decision-
making
Objective 1
20 - 6Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Internal managers of the business
Investors, Creditors,Government authorities (ATO, ASIC etc.)
Primary Users
20 - 7Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Help managers plan andcontrol business operations
Help investors, creditors, and others makeinvestment, credit, and other decisions
Purpose of Information
20 - 8Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Relevance
Reliability, objectivity, and focus on the past
Focus and Time Dimension
20 - 9Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Internal reports not restricted by GAAP
Financial statements restricted by GAAP
Type of Report
20 - 10Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
No independent audit
Annual independent audit
Verification
20 - 11Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Detailed reports onparts of the company
Summary reports primarilyon the company as a whole
Scope of Information
20 - 12Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Management Accounting and Financial Accounting
Concern about how reportswill affect employees behavior
Concern about adequacy of disclosure
Behavioral Implications
20 - 13Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Service, Retail, and Manufacturing Companies
Service Company:provides intangible services,rather than tangible products
Retail Company:resells products previously
bought from suppliers
20 - 14Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Service, Retail, and Manufacturing Companies
Manufacturing Company:uses labour, plant, and equipment to convert
raw materials into finished products
Materials inventoryWork in process inventoryFinished goods inventory
20 - 15Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Describe the value chain
and classify costs byvalue-chain
functions.
Objective 2
20 - 16Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Value Chain
Research andDevelopment Design Production or
Purchases
Marketing Distribution CustomerServices
20 - 17Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Distinguish direct costs
from indirect costs.
Objective 3
20 - 18Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cost Objects, Direct Costs,and Indirect Costs
Cost objects are anything for which a separate measurement of costs is desired.
Cost drivers are any factors that affect cost.
20 - 19Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cost Objects, Direct Costs,and Indirect Costs
What are examples of cost objects?– individual products– alternative marketing strategies– geographic segments of the business– departments
20 - 20Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cost Objects, Direct Costs,and Indirect Costs
What are direct costs? Direct costs are those costs that can be
specifically traced to the cost object. What are indirect costs? Indirect costs are costs that cannot be
specifically traced to the cost object.
20 - 21Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Distinguish among full product
costs, inventoriable product
costs, and period costs.
Objective 4
20 - 22Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Inventoriableproduct
costs
Fullproduct
costs
Product Costs
What are product costs? They are the costs to produce (or
purchase) tangible products intended for sale.
There are two types of product costs:
20 - 23Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
External Reporting
Inventoriableproduct
costs
Periodcosts
20 - 24Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Inventoriable Product Costs
For external reporting, a retailers’ inventoriable product costs includes only costs that are incurred in the purchase of goods.
Inventoriable costs are an asset. Period costs flow as expenses directly
to the statement of financial performance.
20 - 25Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Inventoriable Product Costs
For external reporting, manufacturers’ inventoriable product costs include raw materials plus all other costs incurred in the manufacturing process.
Inventoriable product costs are incurred only in the third element of the value chain.
Costs incurred in other elements of the value chain are period costs.
20 - 26Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
DirectMaterials
DirectLabour
IndirectLabour
IndirectMaterials
Other
Manufacturing Overhead
Inventoriable Product Costs
20 - 27Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Inventoriable Product Costs
DirectMaterials
DirectLabour
Prime Costs = Direct Materials + Direct Labour
20 - 28Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Inventoriable Product Costs
Conversion Costs = Direct Labour + Manufacturing Overhead
DirectLabour
IndirectLabour
IndirectMaterials
Other
20 - 29Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Prepare the financial statements
of a manufacturing company.
Objective 5
20 - 30Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Revenues – Expenses = Net Profits
Financial Statements forService Companies
There is no inventory and thus no inventoriable costs.
The statement of financial performance does not include cost of goods sold.
20 - 31Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Financial Statements for Retail Companies
Purchases ofInventory plus
Freight-In Inventory
Sales Revenue
Cost ofGoods Sold
Statement of Financial Performance
Operating Expenses
InventoriableCosts
Statement of FinancialPosition
equals Net Profit
whensalesoccur
deduct
equals Gross Profitdeduct
PeriodCosts
20 - 32Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Financial Statements forManufacturing Companies
MaterialsInventory
FinishedGoods
Inventory
Sales Revenue
Cost ofGoods Sold
Statement of Financial Performance
Operating Expenses
InventoriableCosts
Statement of FinancialPosition
equals Net Profit
whensalesoccur
deduct
equals Gross Profitdeduct
Work inProcess
Inventory
PeriodCosts
20 - 33Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Kendall Manufacturing Company: Beginning and ending work-in-process
inventories were $20,000 and $18,000. Direct materials used were $70,000. Direct labour was $100,000. Manufacturing overhead incurred was
$150,000.
20 - 34Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
What is the cost of goods manufactured?
Beginning work in process $ 20,000Direct labour $100,000Direct materials 70,000Mfg. overhead 150,000 320,000Ending work in process 18,000Cost of goods manufactured $322,000
20 - 35Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Kendall Manufacturing Company’s beginning finished goods inventory was $60,000 and its ending finished goods inventory was $55,000.
How much is the cost of goods sold?
20 - 36Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Beg. finished goods inventory $ 60,000+ Cost of goods manufactured 322,000= Cost of goods available for sale $382,000– Ending finished goods 55,000= Cost of goods sold $327,000
20 - 37Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Kendall Manufacturing Company had sales of $627,000 for the period.
How much is the gross profit?
Sales $627,000– Cost of goods sold 327,000= Gross profit $300,000
20 - 38Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Kendall Manufacturing Company had operating expenses as follows:
Sales salaries and commissions $ 80,000 Delivery expense 10,000 Administrative expenses 30,000 Total $120,000
What is Kendall’s net profit?
20 - 39Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Manufacturing Company Example
Gross profit $300,000– Operating expenses 120,000= Net Profit $180,000
20 - 40Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Flow of Costs through a Manufacturer’s Accounts
Direct Materials Inventory
Beginning inventory+ Purchases and freight-in
= Direct materials available for use
– Ending inventory= Direct materials used
Work in Process Inventory Beginning inventory+ Direct materials used+ Direct labour+ Manufacturing overhead= Total manufacturing costs
to account for– Ending inventory= Cost of goods manufactured
20 - 41Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Flow of Costs through a Manufacturer’s Accounts
Finished Goods Inventory Beginning inventory+ Cost of goods manufactured= Cost of goods available for sale– Ending inventory= Cost of goods sold
20 - 42Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Identify the benefits of budgeting.
Objective 6
20 - 43Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Benefits of Budgeting
requires managers to plan promotes coordinationand communication
helps managersevaluate performance
motivates employees toachieve company goals
20 - 44Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Components of the Master Budget
PurchasesBudget____ ________ ________ ________ ________ ____
Cost ofGoods SoldBudget____ ________ ________ ________ ____
OperatingExpensesBudget____ ________ ________ ________ ____
BudgetedStatement of FinancialPerformance____ ________ ________ ________ ____
SalesBudget____ ________ ________ ________ ________ ____
InventoryBudget____ ________ ________ ________ ________ ____
Operating Budget
20 - 45Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Components of the Master Budget
BudgetedStatement ofFinancial Position_____ __________ __________ __________ __________ _____
BudgetedStatementof Cash Flows_____ __________ __________ __________ __________ _____
BudgetedStatement ofFinancial Performance_____ __________ __________ __________ __________ _____
CapitalExpendituresBudget_____ __________ __________ __________ __________ _____
CashBudget_____ __________ __________ __________ __________ _____
Financial Budget
20 - 46Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Master Budget
(An expanded example in your textbook pages 838 – 45)
Suppose you manage Whitewater Sporting Goods store No. 18.
Selected parts of the master budget will be prepared for Store No. 18 for October, November, December and January.
20 - 47Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Master Budget
Sales are 60% cash and 40% on credit. Credit sales are collected in the month
following the sale. Accounts receivable on September 30
amounted to $16,000. How much were total sales in Sept.? $16,000 ÷ .40 = $40,000
20 - 48Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Projected SalesOctober……………. $50,000November……….… $80,000December………..… $60,000January……..……… $50,000
Preparing the Master Budget
20 - 49Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Master Budget
Whitewater maintains inventory equal to $20,000 plus 80% of the budgeted cost of goods sold for the following month.
Cost of goods sold averages 70% of sales. What is the ending inventory on Sept. 31? $20,000 + (0.80 × 0.70 × October sales of
$50,000) = $48,000
20 - 50Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Master Budget
What is the beginning inventory in September?$20,000 + (0.80 × 0.70 × $40,000) = $42,400 Opening Inventory $ 42,400 Plus Purchases $ ? Minus Closing Inv. $ 48,000 Equals COGS (70% x $40,000) $ 28,000 ? = $ 33,600
20 - 51Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Master Budget
Whitewater pays for inventory as follows: 50% during the month of purchase and 50% during the next month.
September purchases were $33,600. How much was paid in September for
September’s purchases? $33,600 × 50% = $16,800
20 - 52Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Prepare an operating budgetfor a company.
Objective 7
20 - 53Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Sales Budget (Schedule A)
Sales revenue is the key measure of business activity.
The budgeted total sales revenue for each product is the sales price multiplied by the expected number of units sold.
20 - 54Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Oct. Nov. Dec. Jan.Cash sales 60% $30,000 $48,000 $36,000 $30,000Credit sales 40% 20,000 32,000 24,000 20,000Total $50,000 $80,000 $60,000 $50,000
Total sales Oct through Jan = $240,000
Sales Budget (Schedule A)
20 - 55Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Purchases, Cost of Goods Sold,
and Inventory Budget Cost of goods sold = 70% × sales How much are the cost of goods sold for
November? 70% × $80,000 = $56,000 What is the desired ending inventory for
October? $20,000 + (80% × $56,000) = $64,800
20 - 56Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Beginning inventory + Purchases– Ending inventory = Cost of goods sold
Cost of goods sold + Ending inventory– Beginning inventory = Purchases
Purchases, Cost of Goods Sold,
and Inventory Budget
20 - 57Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Oct. Nov. Dec. Jan.Cost of goods sold (70% × sales) $35,000 $56,000 $42,000 $35,000Desired ending inventory 64,800 53,600 48,000
42,400Total required $99,800 109,600 90,000
77,400Beginning inv. 48,000 64,800 53,600
48,000Purchases $51,800 $44,800 $36,400 $29,400
Schedule B
20 - 58Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Operating Expenses Budget
Assume that Whitewater incurs $5,200 of fixed expenses every month and that commissions and other variable expenses equal 20% of sales.
What is the operating expenses budget (Schedule C)?
20 - 59Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Oct. Nov. Dec Jan.Variable expenses(From Schedule A)20% of sales $ 10,000 $ 16,000 $12,000 $10,000Fixed expenses 5,200 5,200 5,200 5,200
Total $15,200 $21,200 $17,200 $15,200
Total wages and commission: $68,800
Operating Expenses Budget
(Schedule C)
20 - 60Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Budgeted Statement of Financial Performance
Whitewater Sporting Goods Store No. 18Budgeted Statement of Financial Performance
Four Months Ending January 31, 2005 Amount Source
Sales $240,000 Schedule ACost of goods sold 168,000 Schedule BGross profit $ 72,000Operating expense 68,800 Schedule CNet profit $ 3,200
20 - 61Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Prepare the components
of a financial budget.
Objective 8
20 - 62Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cash budgetBudgeted
Statement of Financial Position
Preparing the Financial Budget
The financial budget includes:
20 - 63Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Cash Budget
The cash budget has the following major parts:– cash collections from customers (Schedule D)– cash disbursements for purchases (Schedule E)– cash disbursements for operating expenses
(Schedule F)– capital expenditures (not illustrated in this
chapter)
20 - 64Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cash Collections from Customers
(Schedule D)
Oct. Nov. Dec. Jan.Cash sales $30,000 $48,000 $36,000 $30,000Collections of lastmonth’s credit sales 16,000* 20,000 32,000 24,000Total $46,000 $68,000 $68,000 $54,000
Total collections: $236,000
*16,000 = September 30 accounts receivable
From Schedule A
20 - 65Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Cash Disbursements for Purchases
(Schedule E)
Oct. Nov. Dec. Jan.Payment of lastmonth’s purchases $18,800 $25,900 $22,400 $18,200Payment of thismonth’s purchases 25,900 22,400 18,200 14,700Total $42,700 $48,300 $40,600 $32,900
Total disbursements: $164,500
From Schedule B
20 - 66Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Oct. Nov. Dec. Jan.Payment of lastmonth’s expenses $ 4,250 $ 5,000 $7,250 $ 5,750Payment of thismonth’s expenses 5,000 7,250 5,750 5,000Rent and Misc. 4,500 6,000 5,000 4,500Total $13,750 $18,250 $18,000 $15,250
Total disbursements: $65,250
Cash Disbursements for Operating Expenses (Schedule
F)From Schedule C
20 - 67Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Whitewater Sporting Goods Store No. 18Cash Budget
Four Months Ending January 31, 2005Budgeted cash receipts $236,000Budgeted cash disbursements
Purchases $164,500Operating expenses 65,250 229,750
Budgeted cash increase $ 6,250
Cash Budget
20 - 68Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Preparing the Budgeted Statement of Financial Position
Assets, liabilities, and owners’ equity are projected based upon the previous schedules.
Assume that the cash balance on September 30 was $15,000.
What is the budgeted cash balance on January 31?
$15,000 + $6,250 expected increase = $21,250
20 - 69Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Use sensitivity analysis in budgeting.
Objective 9
20 - 70Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia
Budgeting and Sensitivity Analysis
Sensitivity analysis helps managers plan for different courses of action.
This type of “what if” analysis shows the result of changing an underlying assumption in the budgeting process.
Sensitivity analysis may affect very specific plans.