Master Budget 1

8/8/2019 Master Budget 1

1/29

6 - 1

Dr. Charles Tang, Assoc. Professor of Accounting

Master Budget andResponsibility Accounting

Chapter 9

Detailed quantitative plan on howresources be obtained and used for a

specific period of time.

What are the Advantages

of Budgets?

What are the Advantages

of Budgets?

Compels strategic planning#1

for judging performance#2

Motivates employeesand mana ers#3

Promotes coordinationand communication#4


2/29

6 - 2

Budgeting CycleBudgeting Cycle

Planning

Investigating variations

Corrective action

ann ng aga n

Participative Budget SystemTop Management

Middle

Management

Middle

Management

Flow of Budget DataFlow of Budget Data

Supervisor Supervisor Supervisor Supervisor


3/29

6 - 3

Strategy, Planning, and BudgetsStrategy, Planning, and Budgets

Long-runPlannin

Capital BudgetMarketing BudgetR&D Budget

StrategyAnalysis

Short-run

Masterann ng u get

The Master BudgetThe Master BudgetMaster Budget

Operating Budget

a es u ge sProduction BudgetsDM Purchase BudgetsDL BudgetsOverhead Bud ets

Cash BudgetIncome StatementCapital ExpenditureBud eted Balance Sheet

Sales & Admin BudgetsFG Inv and CGS BudgetsCash Receipt / Payment Budget


4/29

6 - 4

The Master Budget

Production Selling andAdministrative

a esBudget

u ge

DL BudgetManufacturing

OverheadBudget

DMBudget

CashBudget

Budgeted Financial StatementsBudgeted Financial Statements

Budgeting DataRoyal Company is preparing budgets for theRoyal Company is preparing budgets for thequarter ending June 30.quarter ending June 30.Bud eted sales for the next five months are:Bud eted sales for the next five months are:

AprilApril 20,000 units20,000 units

MayMay 50,000 units50,000 unitsJuneJune 30,000 units30,000 units

,,AugustAugust 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.


5/29

6 - 5

The Sales BudgetApril May June Quarter

Budgetedsales (units) 20,000 50,000 30,000 100,000

Selling priceper unit 10$ 10$ 10$ 10$

Total sales 200,000$ 500,000$ 300,000$ 1,000,000$

Budgeted Sales = Sale Unit x Price

The Production BudgetThe management at Royal Company wants endingThe management at Royal Company wants endinginventory to be equal to 20% of the followinginventory to be equal to 20% of the followingmonths budgeted sales in units.months budgeted sales in units.

On March 31, 4,000 units were on hand.On March 31, 4,000 units were on hand.

Lets re are the roduction bud et.Lets re are the roduction bud et.


6/29

6 - 6

The Production BudgetApril May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000

Add desired endinginventory 10,000

o a nee e , Less beginning

inventory 4,000

Required production 26,000 u ge e sa es ,

Desired percent 20%Desired inventory 10,000


Budgeted sales 20,000 50,000 30,000 100,000

Add desired endinginventory 10,000

, Less beginning

inventory 4,000

Required production 26,000 ?

March 31March 31ending inventoryending inventory


7/29

6 - 7


Budgeted sales 20,000 50,000 30,000 100,000

Add desired endinginventory 10,000 6,000

, ,

Less beginninginventory 4,000 10,000

Required production 26,000 46,000


Budgeted sales 20,000 50,000 30,000 100,000

Add desired endinginventory 10,000 6,000 5,000 5,000

, , , ,Less beginning

inventory 4,000 10,000 6,000 4,000

Required production 26,000 46,000 29,000 101,000

Assumed ending inventory.Assumed ending inventory.


8/29

6 - 8


Budgeted sales 20,000 50,000 30,000 100,000

Add desired endinginventory 10,000 6,000 5,000 5,000

Total needed 30,000 56,000 35,000 105,000 ess eg nn ng

inventory 4,000 10,000 6,000 4,000

Required production 26,000 46,000 29,000 101,000

P. Unit = S. Unit + EFG Inv BFG Inv

The Direct Materials BudgetAt Royal Company, five pounds of material areAt Royal Company, five pounds of material arerequired per unit of product.required per unit of product.

end of each month equal to 10% of theend of each month equal to 10% of thefollowing months production.following months production.On March 31, 13,000 ounds of material are onOn March 31, 13,000 ounds of material are on

hand. Material cost is $0.40 per pound.hand. Material cost is $0.40 per pound.Lets prepare the direct materials budget.Lets prepare the direct materials budget.


9/29

6 - 9

The Direct Materials BudgetApril May June Quarter

Production 26,000 46,000 29,000 101,000Materials per unitProduction needs

ending inventoryTotal neededLess beginning

inventoryMaterials to be

purchased

From productionFrom productionbudgetbudget


Production 26,000 46,000 29,000 101,000Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000

ending inventoryTotal neededLess beginning


purchased


10/29

6 - 10


Production 26,000 46,000 29,000 101,000Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000

ending inventory 23,000 Total needed 153,000Less beginning


purchased

10% of the following10% of the followingmonths productionmonths production


Production 26,000 46,000 29,000 101,000 Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000

ending inventory 23,000 Total needed 153,000 Less beginning

inventory 13,000 Materia ls to be

purc ase ,

March 31March 31inventoryinventory


11/29

6 - 11



ending inventory 23,000 14,500 11,500 11,500 Total needed 153,000 244,500 156,500 516,500 Less beginning

inventory 13,000 23,000 14,500 13,000 Materials to be

purc ase , , , ,

Assumed ending inventoryAssumed ending inventory



Add desiredending inventory 23,000 14,500 11,500 11,500

Total needed 153,000 244,500 156,500 516,500

Less beginninginventory 13,000 23,000 14,500 13,000 Materials to be

purchased (lbs) 140,000 221,500 142,000 503,500

DM Price $0.40 $0.40 $0.40 $0.40

DM Purchase $ $56,000 $88,600 $56,800 $201,400

DM Purchase = P. Unit x DM Per Unit + EDM Inv BDM Inv.


12/29

6 - 12

The Direct Labor BudgetApril May June Quarter

Production 26,000 46,000 29,000 101,000 Direct labor hours

Guaranteed labor hoursLabor hours paidWage rateTotal direct labor cost

From production budgetFrom production budget

The Direct Labor BudgetApril May June Quarter

Production 26,00046,000 29,000 101,000 Direct labor hours 0.050.05 0.05 0.05 Labor hours required 1,3002,300 1,450 5,050 Wage rate 10$ 10$ 10$ 10$Total direct labor cost 13,000$ 23,000$ 14,500$ 50,500$

DLH is 0.05 per unit. Laborsare paid $10 per hour.


13/29

6 - 13

The Direct Labor Budget

April May June QuarterProduction 26,00046,000 29,000 101,000 Direct labor hours 0.050.05 0.05 0.05

Labor hours required 1,3002,300 1,450 5,050 Wage rate 10$ 10$ 10$ 10$Total direct labor cost 13,000$ 23,000$ 14,500$ 50,500$

DLC = P. Unit x DLH per Unit x Pay Rate

Manufacturing Overhead BudgetRoyal Company uses a variable manufacturingoverhead rate of $1 per unit producedproduced .

Fixed manufacturin overhead is 50 000 ermonth and includes $20,000 of noncash costs

(primarily depreciation of plant assets).

budget.budget.


14/29

6 - 14

Manufacturing Overhead BudgetApril May June Quarter

Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$Fixed mfg. OH costs

ota m g. costs

From production budgetFrom production budget

Manufacturing Overhead BudgetApril May June Quarter

Production in units 26,000 46,000 29,000 101,000 Variable mfg. OH rate 1$ 1$ 1$ 1$Variable mfg. OH costs 26,000$ 46,000$ 29,000$ 101,000$Fixed mfg. OH costs 50,000 50,000 50,000 150,000 Total mfg. OH costs 76,000 96,000 79,000 251,000

MO = P. Unit x VMO Rate + FMO


15/29

6 - 15

Ending Finished Goods and Cost of Goods Sold BudgetProduction costs per unit Quantity Cost Total

Direct materials 5.00 lbs. 0.40$ 2.00$Direct laborManufacturing overhead

Budgeted finished goods inventoryEnding inventory in unitsUnit product costEnding finished goods inventory

Direct materialsDirect materialsbudget and informationbudget and information

Ending Finished Goods and Cost of Goods Sold Budget

Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhead

Budgeted finished goods inventoryEnding inventory in unitsUnit product costEnding finished goods inventory

Direct labor budgetDirect labor budget


16/29

6 - 16


Direct materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing ove rhead 0.05 hrs. 49.70$ 2.49

4.99$Budgeted finished goods inventory

Ending inventory in unitsUnit product cost 4.99$Ending finished goods inventory ?

Total mfg. OH for quarter $251,000Total labor hours required 5,050 hrs.

= $49.70 per hr.*

*rounded

Ending Finished Goods and Cost of Goods Sold Budget

Production costs per unit Quantity Cost TotalDirect materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhea 0.05 hrs. 49.70$ 2.49

4.99$Budgeted finished goods inventory

Ending inventory in units 5,000 Unit product cost 4.99$Ending finished goods inventory 24,925 $

Production BudgetProduction Budget


17/29

6 - 17


Direct materials 5.00 lbs. 0.40$ 2.00$Direct labor 0.05 hrs. 10.00$ 0.50 Manufacturing overhea 0.05 hrs. 49.70$ 2.49

.

Budgeted finished goods inventoryEnding inventory in units 5,000 Unit product cost 4.99$Ending finished goods inventory 24,950$

Cost of Goods SoldQuarterly Sales Units 100,000 Unit product cost 4.99$Cost of Goods Sold for the Quarter 499,000$

Selling and Administrative ExpenseBudget

At Royal, variable selling and administrative expenses are $0.50per unit sold.

Fixed selling and administrative expenses are $70,000 per month.

e xe se ng an a m n strat ve expenses nc u e , ncosts primarily depreciation that are not cash outflows of the

current month.

Lets prepare the companys selling and administrativeexpense u ge .


18/29

6 - 18

Selling and Administrative ExpenseBudgetApril May June Quarter

Budgeted sales 20,000 Variable selling

and admin. rate 0.50$,

Fixed selling andadmin. expense 70,000

Total expense 80,000

Selling and Administrative ExpenseBudget

April May June QuarterBudgeted sales 20,000 50,000 30,000 100,000 Variable selling

and admin. rate 0.50$ 0.50$ 0.50$ 0.50$, , , ,

Fixed selling and

admin. expense 70,000 70,000 70,000 210,000 Total expense 80,000 95,000 85,000 260,000

S&A Exp. = S. Unit x VS&A Exp Rate + FS&A Exp.


19/29

6 - 19

Financial Planning ModelsFinancial Planning Models

Financial planning models aremathematical representations of the

interrelationships among operatingactivities, financial activities, and otherfactors that affect the master budget.

Financial Planning ModelsFinancial Planning ModelsBudgeted Sales = Sale Unit x Price

P. Unit = Sale Unit + EFG Inv BFG Inv

DM Purchase = P. Unit x DM Per Unit

+ EDM Inv BDM Inv.

DLC = P. Unit x DLH er Unit x Pa Rate

S&A Exp. = S. Unit x VS&A Exp Rate + FS&A Exp.

MO = P. Unit x VMO Rate + FMO


20/29

6 - 20

Cash Receipt Budget

Data used:Data used:All sales are on account.All sales are on account.

70% collected in the month of sale,70% collected in the month of sale,25% collected in the month following sale,25% collected in the month following sale,5% is uncollectible.5% is uncollectible.

The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.

Cash Receipt BudgetApril May June Quarter

Accounts rec. - 3/31 30,000$ 30,000$Total sales 200,000$ 500,000 300,000 1,000,000$

Total cash collections

From the Sales Budget for April.From the Sales Budget for April.


21/29

6 - 21

Cash Receipt BudgetAccounts rec. - 3/31 30,000$ 30,000$Total sales $200,000 $500,000 $300,000 $1,000,000April sales

70% x $200,000 $140,000 $140,000

25% x $200,000 $50,000 $50,000

Total cash collection $170,000 $50,000 $0 $220,000

Cash Receipt BudgetApril May June Quarter

Accounts rec. - 3/31 30,000$ 30,000$Total sales $200,000 $500,000 $300,000 $1,000,000April sales

x , , ,25% x $200,000 $50,000 $50,000

May sales70% x $500,000 $350,000 $350,00025% x $500,000 $125,000 $125,000une sa es70% x $300,000 $210,000 $210,000

Total cash collection $170,000 $400,000 $335,000 $905,000


22/29

6 - 22

Cash Disbursement Budget

Cash Payment for Purchase:Cash Payment for Purchase:OneOne--half of a months purchases are paid for in the month of purchase; the other half half of a months purchases are paid for in the month of purchase; the other half is paid in the following month.is paid in the following month.

The March 31 accounts a able balance is 12 000.The March 31 accounts a able balance is 12 000.

Lets calculate expected cash disbursements.Lets calculate expected cash disbursements.Cash Payment for Direct Labor CostCash Payment for Direct Labor CostCash Payment for MO CostCash Payment for MO CostCase Payment for S&A ExpenseCase Payment for S&A Expense

Purchases $143,700 of equipment in May and $48,300 in June paid in cash.Purchases $143,700 of equipment in May and $48,300 in June paid in cash.Cash Payment for Interest and DividendsCash Payment for Interest and Dividends

Pays a cash dividend of $49,000 in April.Pays a cash dividend of $49,000 in April.

Cash Disbursement BudgetApril May June Quarter

Accounts pay. 3/31 12,000$ 12,000$DM Purchase $ 56,000$ 88,600 56,800 201,400$April purchases

50% x $56,000 28,000 28,000

50% x $56,000 28,000$ 28,000 May purchases

June purchases

Total cashdisbursements 40,000$ ?


23/29

6 - 23

Cash Disbursement BudgetApril May June Quarter

Accounts pay. 3/31 12,000$ 12,000$DM Purchase $ 56,000$ 88,600 56,800 201,400$April purchases

50% x $56,000 28,000 28,000

50% x $56,000 28,000$ 28,000 May purchases

50% x $88,600 44,300 44,300 50% x $88,600 44,300$ 44,300

June purchases

50% x $56,800 28,400 28,400 Total cashdisbursements 40,000$ 72,300$ 72,700$ 185,000$

Cash Payment forRM Purchase $40,000 $72,300 $72,700 $185,000

Cash Payment for

Cash Disbursement Budget

direct labor cost $13,000 $23,000 $14,500 $50,500

Total mfg. OH costs $76,000 $96,000 $79,000 $251,000Less noncash costs $20,000 $20,000 $20,000 $60,000Cash Paid for MO $56,000 $76,000 $59,000 $191,000

Total S&A Expense $80,000 $95,000 $85,000 $260,000Less noncash costs $10,000 $10,000 $10,000 $30,000Cash for S&A Exp. $70,000 $85,000 $75,000 $230,000

Cash PPE Purchase $0 $143,700 $48,300 $192,000

Cash for Dividend $49,000 $0 $0 $49,000

Total Cash Payment $228,000 $400,000 $269,500 $897,500


24/29

6 - 24

The Cash Budget

The cash budget is a summary of cash receipt and cash payments.The cash budget is a summary of cash receipt and cash payments.The purpose is to balance the receipt with payment.The purpose is to balance the receipt with payment.

Additional dataAdditional data ::

The cash budget is a summary of cash receipt and cash payments.The cash budget is a summary of cash receipt and cash payments.The purpose is to balance the receipt with payment.The purpose is to balance the receipt with payment.

Additional dataAdditional data ::Bank charge 16% on the loan.Bank charge 16% on the loan.

Maintains a minimum cash balance of $30,000.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.Borrows on the first day of the month and repays loans on the last day of the month.Has an April 1 cash balance of $40,000.Has an April 1 cash balance of $40,000.

Bank charge 16% on the loan.Bank charge 16% on the loan.

Maintains a minimum cash balance of $30,000.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.Borrows on the first day of the month and repays loans on the last day of the month.Has an April 1 cash balance of $40,000.Has an April 1 cash balance of $40,000.

-- --

The Cash BudgetApril May June Quarter

Beginning cash balance 40,000$Add cash collections 170,000 Total cash available 210,000 Less disbursements

Materials 40,000 Direct labor 13,000

Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000

Schedule of ExpectedSchedule of Expected

Cash CollectionsCash Collections

Total disbursements 228,000 Excess (deficiency) of

cash available overdisbursements

Schedule of ExpectedSchedule of ExpectedCash DisbursementsCash Disbursements


25/29

6 - 25

The Cash BudgetBeginning cash balance 40,000$Add cash collections 170,000 Total cash available 210,000 Less disbursements

Materials 40,000

Because Royal maintainsBecause Royal maintainsa cash balance of $30,000,a cash balance of $30,000,

the company mustthe company mustDirect labor 13,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 49,000

lineline--ofof--creditcredit

,Excess (deficiency) of

cash available overdisbursements (18,000)$

Finance 50,000$

EB Cash 32,000$

The Cash Budget

Because the ending cash balance is $32,000Because the ending cash balance is $32,000in May, very close to required minimum balance,in May, very close to required minimum balance,

the company will not repay the loan this month.the company will not repay the loan this month.

Beginning cash balance 40,000$ 32,000$Add cash collections 170,000 400,000 Total cash available 210,000 432,000 Less disbursements

Materials 40,000 72,300 Direct labor 13,000 23,000 Mfg. overhead 56,000 76,000

Selling and admin. 70,000 85,000 Equipment purchase - 143,700 Dividends 49,000 -

, , Excess (deficiency) of

cash available overdisbursements (18,000)$ 32,000$

Finance 50,000$EB 32,000$ 32,000$


26/29

6 - 26


Beginning cash balance 40,000$ 32,000$ 32,000$ 40,000$Add cash collections 170,000 400,000 335,000 905,000 Total cash available 210,000 432,000 367,000 945,000 Less disbursements

Materials 40,000 72,300 72,700 185,000

At the end of June, Royal has enough cashAt the end of June, Royal has enough cashrec a or , , , ,

Mfg. overhead 56,000 76,000 59,000 191,000 Selling and admin. 70,000 85,000 75,000 230,000 Equipment purchase - 143,700 48,300 192,000 Dividends 49,000 - - 49,000

Total disbursements 228 000 400 000 269 500 897 500

$50,000$50,000 16%16% 3/12 = $2,0003/12 = $2,000Borrowings on April 1 andBorrowings on April 1 and

repayment of June 30.repayment of June 30.

Excess (deficiency) ofcash available overdisbursements (18,000)$ 32,000$ 97,500$ 47,500$

Finance 50,000$ -$ (52,000)$ (2,000)$

EB 32,000$ 32,000$ 45,500$ 45,500$


Beginning cash balance 40,000$ 32,000$ 32,000$ 40,000$Add cash collections 170,000 400,000 335,000 905,000 Total cash available 210,000 432,000 367,000 945,000 Less disbursements

Materials 40,000 72,300 72,700 185,000 rec a or , , , ,

Mfg. overhead 56,000 76,000 59,000 191,000

Selling and admin. 70,000 85,000 75,000 230,000 Equipment purchase - 143,700 48,300 192,000 Dividends 49,000 - - 49,000

Total disbursements 228 000 400 000 269 500 897 500

Excess (deficiency) ofcash available overdisbursements (18,000)$ 32,000$ 97,500$ 47,500$

Finance 50,000$ -$ (52,000)$ (2,000)$EB 32,000$ 32,000$ 45,500$ 45,500$


27/29

6 - 27

The Budgeted Income Statement

CashBudget

BudgetedIncome

Statement

we can prepare the budgeted incomewe can prepare the budgeted income

statement.statement.

The Budgeted Income StatementRoyal Company

Budgeted Income StatementFor the Three Months Ended June 30

a es , un s , , Cost of goods sold (100,000 @ $4.99) 499,000 Gross margin 501,000 Selling and administrative expenses 260,000 Operating income 241,000

Interest expense 2,000 Net income 239,000$


28/29

6 - 28

The Budgeted Balance Sheet

Royal reported the following account balancesprior to preparing its budgeted financial

statements:Land - $50,000Common stock - $202500Retained earnings - $146,150E ui ment - $175 000

Royal CompanyBudgeted Balance Sheet

June 30

Current assets

25% of June25% of Junesales ofsales of$300,000$300,000

as , Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950

Total current assets 150,050

11,500 lbs.11,500 lbs.at $0.40/lb.at $0.40/lb.

5,000 units5,000 units

Land 50,000 Equipment 367,000

Total property and equipment 417,000 Total assets 567,050$

..

Accounts payable 28,400$Common stock 202,500 Retained earnings 336,150 Total liabilities and equities 567,050$

purchasespurchasesof $56,800of $56,800


29/29

Royal CompanyBudgeted Balance Sheet

June 30Current assets

as 43,000 Accounts receivable 75,000 Raw materials inventory 4,600 Finished goods inventory 24,950

Total current assets 147,550

Beginning balance 146,150$Add: net income 239,000 Deduct: dividends (49,000) Ending balance 336,150$

Land 50,000 Equipment 367,000 Tota l prope rty and equipment 417,000

Total assets 564,550$

Accounts payable 28,400$Common stock 200,000 Retained earnings 336,150 Total liabilities and equities 564,550$

Documents

Master Budget 1