Chapter 9

Financial Planning
and Analysis: The
Master Budget

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-1
Learning Objective 9-1 – Explain the relationship
between financial planning and analysis and the
master budget.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-2
9-2
CONSENT OF MCGRAW HILL LLC.
 Financial Planning and
Analysis (FP&A) Systems

A complete FP&A
The planning
system includes
subsystems for (1) component of the
planning, (2) measuring FP&A system is
and recording results, called the master
and (3) evaluating budget.
performance.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-3
Learning Objective 9-2 – List and explain five
purposes of budgeting.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-4
9-4
CONSENT OF MCGRAW HILL LLC.
 Purposes of Budgeting Systems

Budget 1. Planning
2. Facilitating
A detailed plan, Communication and
expressed in Coordination
quantitative terms, 3. Allocating Resources
that specifies how 4. Controlling Profit and
resources will be Operations
acquired and used 5. Evaluating
during a specified Performance and
period of time. Providing Incentives
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-5
 Types of Budgets

Detail
Budget
Detail

Materials
Budget
Detail

Production
Budget
Master
Budget
Covering all Sales
phases of
a company’s
operations.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-6
 Pro-forma Financial
Statements
Income
Statement

Budgeted
Financial
Statements

Balance Statement of
Sheet Cash Flows
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-7
 Long Range Budgets
Capital budgets with acquisitions
that normally cover several years.

Financial budgets with financial

resource acquisitions.
Long Range Budgets

Continuous or
Rolling Budget
2017 2018 2019 2020

This budget is usually a twelve-month

budget that rolls forward one month
as the current month is completed.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-8
Learning Objective 9-3 – Describe the similarities
and differences in the operational budgets prepared by
manufacturers, service-industry firms, merchandisers,
and nonprofit organizations.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-9
9-9
CONSENT OF MCGRAW HILL LLC.
 Components of a Master Budget
Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods

Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials

Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-10
 Financing Budgets 1/2

Cash Receipts
Budget

Provides information about cash

inflows. Considers things such as
the timing of sales and collections,
collection patterns, and sales that
will never be collected.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-11
 Financing Budgets 2/2

Cash
Disbursements
Budget
Portrays spending plans based on
other budgets prepared

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-12
Learning Objective 9-4 – Explain the concept of
activity-based budgeting and the logic it brings
to the budgeting process.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-13
Activity-Based Costing (ABC)
versus Activity-Based
Budgeting (ABB)
Resources Resources
Activity-Based
Costing (ABC)

Activities Activities

Activity-Based
Cost objects: Budgeting (ABB)
Forecast of products
products and services and services to be
produced, and produced and
customers served. customers served.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-14
Learning Objectives 9-5 & 9-6 – Prepare each of the
budget schedules that make up the master budget in a
nonmanufacturing firm, and that exist in manufacturing budgets as
well (LO 9-5) . Prepare the additional master budget schedules
required by a manufacturing firm (LO 9-6).

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-15
9-15
 Sales Budget 1/2


Breakers,
Breakers, Inc.
Inc. is
is preparing
preparing budgets
budgets for
for the
the
quarter
quarter ending
ending June
June 30.
30.

Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
 April
April 20,000
20,000 units
units
 May
May 50,000
50,000 units
units
 June
June 30,000
30,000 units
units
 July
July 25,000
25,000 units
units
 August
August 15,000
15,000 units.
units.

The
The selling
selling price
price is
is $10
$10 per
per unit.
unit.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-16
 Sales Budget 2/2

April
April May
May June
June Quarter
Quarter

Budgeted
Budgeted
sales
sales (units)
(units) 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Selling
Selling price
price
per
per unit
unit $$ 10
10 $$ 10
10 $$ 10
10 $$ 10
10
Total
Total
Revenue
Revenue $$200,000
200,000 $$500,000
500,000 $$300,000
300,000 $$1,000,000
1,000,000

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-17
 Production Budget 1/2

The
The management
management of of Breakers,
Breakers, Inc.
Inc.
wants
wants ending
ending inventory
inventory toto be
be equal
equal
to
to 20%
20% of
of the
the following
following month’s
month’s
budgeted
budgeted sales
sales in
in units.
units.

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

 Let’s
Let’s prepare
prepare the
the production
production budget.
budget.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-18
 From
Production Budget 2/2
sales
budget May sales 50,000 units
Desired percent 20%
April
April May
May June Quarter
Desired inventory June
10,000 unitsQuarter
Sales
Sales ininunits
units 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Add:
Add: desired
desired
end.
Ending inventory becomes
end. inventory
inventory 10,000
10,000 6,000
6,000 5,000
5,000 5,000
5,000
Total
beginning inventory the
Total needed
needed 30,000
30,000 56,000
56,000 35,000
35,000 105,000
105,000
Less:
next month
Less: beg.
beg.
inventory
inventory 4,000
4,000 10,000
10,000 6,000
6,000 4,000
4,000
Units
Units to
tobe
be
produced
produced 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000

March 31
ending inventory
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-19
 Direct-Material Budget 1/3

At
At Breakers,
Breakers, five
five pounds
pounds of
of material
material are
are
required
required per
per unit
unit of
of product.
product.

Management
Management wants
wants materials
materials onon hand
hand at at the
the
end
end of
of each
each month
month equal
equal to
to 10%
10% ofof the
the
following
following month’s
month’s production.
production.

On
On March
March 31,
31, 13,000
13,000 pounds
pounds of of material
material are
are
on
on hand.
hand. Material
Material cost
cost $.40
$.40 per
per pound.
pound.

Let’s
Let’s prepare
prepare the
the direct
direct materials
materials
budget.
budget.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-20
 From our
production
Direct-Material Budget 2/3
budget
April
April May
May June
June Quarter
Quarter
Production
Productionininunits
units 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000
Materials
Materialsper
perunit
unit 55 55 55 55
Production
Productionneeds
needs 130,000
130,000 230,000
230,000 145,000
145,000 505,000
505,000
Add:
Add:desired
desired
ending
endinginventory
inventory 23,000
23,000 14,500
14,500 11,500
11,500 11,500
11,500
Total
Totalneeded
needed 153,000
153,000 244,500
244,500 156,500
156,500 516,500
516,500
Less:
Less:beginning
beginning
inventory
inventory 13,000
13,000 23,000
23,000 14,500
14,500 13,000
13,000
Materials
Materialstotobe
be
purchased
purchased 140,000
140,000 221,500
221,500 142,000
142,000 503,500
503,500

10% of the following March 31

month’s production inventory
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-21
 Direct-Material Budget 3/3
July
July Production
Production
Sales
Salesinin units
units April 25,000 May
April 25,000 May June
June Quarter
Quarter
Add: Production
Add: desired
desired ending
Production
endinginininventory
units
units 26,000
inventory 3,000 46,000
26,0003,000 46,000 29,000
29,000 101,000
101,000
Total
Total units
units needed
Materials
needed
Materials per
perunitunit 528,000
28,000
5 55 55 55
Less:
Less: beginning
Productioninventory
needs 5,000
beginning
Production needs 130,000
inventory 130,0005,000 230,000
230,000 145,000
145,000 505,000
505,000
Production in units
Production in units 23,000
23,000
Add:
Add:desired
desired
ending
endinginventory
inventory 23,000
23,000 14,500
14,500 11,500
11,500 11,500
11,500
Total
Totalneeded
needed 153,000
153,000 244,500
244,500 156,500
156,500 516,500
516,500
Less:
Less:beginning
beginning
inventory
inventory June13,000 23,000
Ending Inventory
13,000 23,000 14,500
14,500 13,000
13,000
Materials
July to
Materials tobe
production
be in units 23,000
purchased 140,000
Materials per unit
purchased 140,000 221,500
221,500 142,000
5142,000 503,500
503,500
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-22
 Direct-Labor Budget 1/2
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.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-23
 Direct-Labor Budget 2/2
April
April May
May June
June Quarter
Quarter
Production
Productionininunits
units 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000
Direct
Directlabor
laborhours
hours 0.10
0.10 0.10
0.10 0.10
0.10 0.10
0.10
Labor
Laborhours
hours required
required 2,600
2,600 4,600
4,600 2,900
2,900 10,100
10,100
Guaranteed
Guaranteedlabor
labor
hours
hours 3,000
3,000 3,000
3,000 3,000
3,000
Labor
Laborhours
hours paid
paid 3,000
3,000 4,600
4,600 3,000
3,000 10,600
10,600
Wage
Wagerate
rate $$ 88 $$ 88 $$ 88 $$ 88
Total
Totaldirect
directlabot
labotcost
cost $$ 24,000
24,000 $$ 36,800
36,800 $$ 24,000
24,000 $$ 84,800
84,800

From our This is the greater of

production labor hours required or
budget labor hours guaranteed.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-24
 Overhead Budget

Here is Breakers’ Overhead Budget for the

quarter.
April
April May
May June
June Quarter
Quarter
Indirect
Indirectlabor
labor $$ 17,500
17,500 $$ 26,500
26,500 $$ 17,900
17,900 $$ 61,900
61,900
Indirect
Indirectmaterial
material 7,000
7,000 12,600
12,600 8,600
8,600 28,200
28,200
Utilities
Utilities 4,200
4,200 8,400
8,400 5,200
5,200 17,800
17,800
Rent
Rent 13,300
13,300 13,300
13,300 13,300
13,300 39,900
39,900
Insurance
Insurance 5,800
5,800 5,800
5,800 5,800
5,800 17,400
17,400
Maintenance
Maintenance 8,200
8,200 9,400
9,400 8,200
8,200 25,800
25,800
$$ 56,000
56,000 $$ 76,000
76,000 $$ 59,000
59,000 $$ 191,000
191,000

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-25
 Selling, General, and
Administrative Expense Budget 1/2

At
At Breakers,
Breakers, variable
variable selling
selling and
and
administrative
administrative expenses
expenses are
are $0.50
$0.50 per
per
unit
unit sold.
sold.

Fixed
Fixed selling
selling and
and administrative
administrative
expenses
expenses are are $70,000
$70,000 per
per month.
month.

The
The $70,000
$70,000 fixed
fixed expenses
expenses include
include
$10,000
$10,000 in in depreciation
depreciation expense
expense that
that
does
does not
not require
require aa cash
cash outflow
outflow for
for the
the
month.
month.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-26
 Selling, General and Admin. Expense Budget 2/2

April
April May
May June
June Quarter
Quarter
Sales
Sales ininunits
units 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Variable
VariableS&AS&A rate
rate $$ 0.50
0.50 $$ 0.50
0.50 $$ 0.50
0.50 $$ 0.50
0.50
Variable
Variableexpense
expense $$10,000
10,000 $$25,000
25,000 $$15,000
15,000 $$ 50,000
50,000
Fixed
FixedS&AS&A
expense
expense 70,000
70,000 70,000
70,000 70,000
70,000 210,000
210,000
Total
Total expense
expense 80,000
80,000 95,000
95,000 85,000
85,000 260,000
260,000
Less:
Less: noncash
noncash
expenses
expenses 10,000
10,000 10,000
10,000 10,000
10,000 30,000
30,000
Cash
Cash
disbursements
disbursements $$70,000
70,000 $$85,000
85,000 $$75,000
75,000 $$230,000
230,000
From our
Sales budget
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-27
 Cash Receipts Budget 1/2

At
At Breakers,
Breakers, all
all sales
sales are
are on
on account.
account.

The
The company’s
company’s collection
collection pattern
pattern is:
is:
 70% collected in the month of sale,
70% collected in the month of sale,
 25% collected in the month following the
25% collected in the month following the
sale,
sale,
 5% is uncollected.
5% is uncollected.

The
The March
March 31
31 accounts
accounts receivable
receivable balance
balance
of
of $30,000
$30,000 will
will be
be collected
collected in
in full.
full.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-28
 Cash Receipts Budget 2/2
April
April May
May June
June Quarter
Quarter
Accounts
Accountsrec.
rec.--3/31
3/31 $$ 30,000
30,000 $$ 30,000
30,000
April
Aprilsales
sales
70%
70% xx$200,000
$200,000 140,000
140,000 140,000
140,000
25%
25% xx$200,000
$200,000 $$ 50,000
50,000 50,000
50,000
May
Maysales
sales
70%
70% xx$500,000
$500,000 350,000
350,000 350,000
350,000
25%
25% xx$500,000
$500,000 $$125,000
125,000 125,000
125,000
June
Junesales
sales
70%
70% xx$300,000
$300,000 210,000
210,000 210,000
210,000
Total
Totalcash
cashcollections
collections $$170,000
170,000 $$400,000
400,000 $$335,000
335,000 $$905,000
905,000

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-29
CONSENT OF MCGRAW HILL LLC.
 Cash Disbursement Budget 1/3

Breakers
Breakers payspays $0.40
$0.40 per
per pound
pound for
for its
its
materials.
materials.

One-half
One-half of of aa month’s
month’s purchases
purchases are
are
paid
paid for
for in
in the
the month
month ofof purchase;
purchase; the
the
other
other half
half isis paid
paid in
in the
the following
following
month.
month.

No
No discounts
discounts are are available.
available.

The
The March
March 31 31 accounts
accounts payable
payable
balance
balance is is $12,000.
$12,000.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-30
 Cash Disbursement Budget 2/3
April
April May
May June
June Quarter
Quarter
Accounts
Accounts pay.
pay. 3/31
3/31 $$ 12,000
12,000 $$ 12,000
12,000
April
April purchases
purchases
50%
50% xx $56,000
$56,000 28,000
28,000 28,000
28,000
50%
50% xx $56,000
$56,000 $$ 28,000
28,000 28,000
28,000
May
Maypurchases
purchases
50%
50% xx $88,600
$88,600 44,300
44,300 44,300
44,300
50%
50% xx $88,600
$88,600 $$ 44,300
44,300 44,300
44,300
June
June purchases
purchases
50%
50% xx $56,800
$56,800 28,400
28,400 28,400
28,400
Total
Totalcash
cashpayments
payments
for
formaterials
materials $$ 40,000
40,000 $$ 72,300
72,300 $$ 72,700
72,700 $$185,000
185,000

140,000 lbs. × $.40/lb. = $56,000

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-31
 Cash Disbursement Budget
3/3
Breakers:
Breakers:
Maintains
Maintains aa 12%
12% open
open line
line of
of credit
credit for
for
$75,000.
$75,000.
Maintains
Maintains aa minimum
minimum cash
cash balance
balance ofof
$30,000.
$30,000.
Borrows
Borrows and
and repays
repays loans
loans on
on the
the last
last
day
day of
of the
the month.
month.
Pays
Pays aa cash
cash dividend
dividend of
of $25,000
$25,000 inin
April.
April.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-32
 From our Cash Cash Budget 1/5
Receipts Budget
(Collections and Disbursement
April
April May
May June
June Quarter
Quarter
Beginning
Beginningcash
cashbalance
balance $$40,000
40,000
Add: From our Cash Disbursements
Add: cash
cashcollections
collections 170,000
170,000
Total Budget
Totalcash
cashavailable
available 210,000
210,000
Less:
Less: disbursements
disbursements
Materials 40,000 From our Direct Labor Budget
Materials 40,000
Direct
Direct labor
labor 24,000
24,000 From our Overhead Budget
Mfg.
Mfg. overhead
overhead 56,000
56,000
Selling From our Selling and
Sellingand
andadmin.
admin. 70,000
70,000
Equipment Administrative Expense
Equipment purchase
purchase --
Dividends 25,000 Budget
Dividends 25,000
Total
Totaldisbursements
disbursements 215,000
215,000 To maintain a cash
Excess
Excess (deficiency)
(deficiency)of
of balance of $30,000,
Cash
Cashavailable
availableover
over Breakers must borrow
disbursements
disbursements $$ (5,000)
(5,000) $35,000 on its line of credit.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-33
 Cash Budget 2/5
(Collections and
Disbursements)
April
April May
May June
June Quarter
Quarter
Beginning
Beginningcashcashbalance
balance $$40,000
40,000 $$30,000
30,000
Add:
Add: cash
cashcollections
collections 170,000
170,000 400,000
400,000
Total
Totalcash
cashavailable
available 210,000
210,000 430,000
430,000
Less:
Less: disbursements
disbursements
Materials
Materials 40,000
40,000 72,300
72,300 Breakers must
Direct
Direct labor
labor 24,000
24,000 36,800
36,800
Mfg. borrow an
Mfg. overhead
overhead 56,000
56,000 76,000
76,000
Selling
Sellingandandadmin.
admin. 70,000
70,000 85,000
85,000
additional $13,800
Equipment
Equipment purchase
purchase -- 143,700
143,700 to maintain a
Dividends
Dividends 25,000
25,000 -- cash balance
Total
Totaldisbursements
disbursements 215,000
215,000 413,800
413,800 of $30,000.
Excess
Excess (deficiency)
(deficiency)ofof
Cash
Cashavailable
availableover
over
disbursements
disbursements $$ (5,000)
(5,000) $$16,200
16,200
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-34
 Cash Budget 3/5
(Collections and
Disbursements)
April
April May
May June
June Quarter
Quarter
Beginning
At the end
Beginning cash
cashofbalance
June,
balance $$40,000
Breakers
40,000 $$30,000
30,000 $$30,000
30,000
Add:
Add: cash
cash collections
collections 170,000
170,000 400,000
400,000 335,000
335,000
has
Total
enough cash to repay
Totalcash
cashavailable
available 210,000
210,000 430,000
430,000 365,000
365,000
the
Less: $48,800 loan plus interest
Less: disbursements
disbursements
Materials
Materials at 12%. 40,000
40,000 72,300
72,300 72,700
72,700
Direct
Direct labor
labor 24,000
24,000 36,800
36,800 24,000
24,000
Mfg.
Mfg. overhead
overhead 56,000
56,000 76,000
76,000 59,000
59,000
Selling
Sellingandandadmin.
admin. 70,000
70,000 85,000
85,000 75,000
75,000
Equipment
Equipment purchase
purchase -- 143,700
143,700 48,300
48,300
Dividends
Dividends 25,000
25,000 -- --
Total
Totaldisbursements
disbursements 215,000
215,000 413,800
413,800 279,000
279,000
Excess
Excess (deficiency)
(deficiency)of of
Cash
Cashavailable
availableover
over
disbursements
disbursements $$ (5,000)
(5,000) $$16,200
16,200 $$86,000
86,000
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-35
 Cash Budget 4/5
(Collections and
Disbursements)
April
April May
May June
June Quarter
Quarter
Beginning
Beginningcashcashbalance
balance $$40,000
40,000 $$30,000
30,000 $$30,000
30,000 $$ 40,000
40,000
Add:
Add: cash
cashcollections
collections 170,000
170,000 400,000
400,000 335,000
335,000 905,000
905,000
Total
Totalcash
cashavailable
available 210,000
210,000 430,000
430,000 365,000
365,000 945,000
945,000
Less:
Less: disbursements
disbursements
Materials
Materials 40,000
40,000 72,300
72,300 72,700
72,700 185,000
185,000
Direct
Direct labor
labor 24,000
24,000 36,800
36,800 24,000
24,000 84,800
84,800
Mfg.
Mfg. overhead
overhead 56,000
56,000 76,000
76,000 59,000
59,000 191,000
191,000
Selling
Sellingandandadmin.
admin. 70,000
70,000 85,000
85,000 75,000
75,000 230,000
230,000
Equipment
Equipment purchase
purchase -- 143,700
143,700 48,300
48,300 192,000
192,000
Dividends
Dividends 25,000
25,000 -- -- 25,000
25,000
Total
Totaldisbursements
disbursements 215,000
215,000 413,800
413,800 279,000
279,000 907,800
907,800
Excess
Excess (deficiency)
(deficiency)ofof
Cash
Cashavailable
availableover
over
disbursements
disbursements $$ (5,000)
(5,000) $$16,200
16,200 $$86,000
86,000 $$ 37,200
37,200
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-36
Ending cash
balance for April Cash Budget 5/5
is the beginning
May balance.
(Collections and Disbursement

April
April May
May June
June Quarter
Quarter
Excess
Excess(deficiency)
(deficiency)ofof
Cash
Cashavailable
availableover
over
disbursements
disbursements $$(5,000)
(5,000) $$16,200
16,200 $$86,000
86,000 $$37,200
37,200
Financing:
Financing:
Borrowing
Borrowing 35,000
35,000 13,800
13,800 48,800
48,800
Repayments
Repayments -- -- (48,800)
(48,800) (48,800)
(48,800)
Interest
Interest -- -- (838)
(838) (838)
(838)
Total
Totalfinancing
financing 35,000
35,000 13,800
13,800 (49,638)
(49,638) (838)
(838)
Ending
Endingcash
cashbalance
balance $$30,000
30,000 $$30,000
30,000 $$36,362
36,362 $$36,362
36,362

Interest Monthly Months Interest

Rate Borrowing Interest Rate Outstanding Expense
12% / 12 = 1% $35,000 × 1% × 2 = $700
12% / 12 = 1% $13,800 × 1% × 1 = 138
$ 838

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-37
 Cost of Goods Manufactured
April May June Quarter
Direct material:
[Link] inventory $ 5,200 $ 9,200 $ 5,800 $ 5,200
Add: Materials purchases 56,000 88,600 56,800 201,400
Material available for use 61,200 97,800 62,600 206,600
Deduct: End. material inventory 9,200 5,800 4,600 4,600
Direct material used 52,000 92,000 58,000 202,000
Direct labor 24,000 36,800 24,000 84,800
Manufacturing overhead 56,000 76,000 59,000 191,000
Total manufacturing costs 132,000 204,800 141,000 477,800
Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800
Subtotal 135,800 221,000 150,400 481,600
Deduct: [Link]-in-process inventory 16,200 9,400 17,000 17,000
Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-38
 Cost of Goods Sold

April May June Quarter

Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600
Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400
Cost of goods available for sale 138,000 257,600 161,000 483,000
Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000
Cost of goods sold $ 92,000 $ 230,000 $ 138,000 $ 460,000

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-39
Budgeted Income Statement
Breakers,
Breakers, Inc.
Inc.
Budgeted
BudgetedIncome
Income Statement
Statement
For
Forthe
the Three
Three Months
MonthsEnded
EndedJune
June 30
30
Revenue
Revenue (100,000
(100,000×× $10)
$10) $$ 1,000,000
1,000,000
Cost
Costofofgoods
goodssold
sold 460,000
460,000
Gross
Grossmargin
margin 540,000
540,000
Operating
Operatingexpenses:
expenses:
Selling
Sellingand
andadmin.
admin. expenses
expenses $$ 260,000
260,000
Interest
Interestexpense
expense 838
838
Total
Total operating
operatingexpenses
expenses 260,838
260,838
Net
Netincome
income $$ 279,162
279,162

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-40
 Budgeted Statement of Cash Flows
April May June Quarter
Cash flows from operating activities:
Cash receipts from customers $ 170,000 $ 400,000 $ 335,000 $ 905,000
Cash payments:
To suppliers of raw material (40,000) (72,300) (72,700) (185,000)
For direct labor (24,000) (36,800) (24,000) (84,800)
For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000)
For selling and administrative expenses (70,000) (85,000) (75,000) (230,000)
For interest - - (838) (838)
Total cash payments (190,000) (270,100) (231,538) (691,638)
Net cash flow from operating activities $ (20,000) $ 129,900 $ 103,462 $ 213,362
Cash flows from investing activities:
Purchase of equipment - (143,700) (48,300) (192,000)
Net cash used by investing activities $ - $ (143,700) $ (48,300) $ (192,000)
Cash flows from financing activities:
Payment of dividends (25,000) - - (25,000)
Principle of bank loan 35,000 13,800 - 48,800
Repayment of bank loan - - (48,800) (48,800)
Net cash provided by financing activities $ 10,000 $ 13,800 $ (48,800) $ (25,000)
Net increase in cash $ (10,000) $ - $ 6,362 $ (3,638)
Balance in cash, beginning 40,000 30,000 30,000 40,000
Balance in cash. end of month $ 30,000 $ 30,000 $ 36,362 $ 36,362

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-41
 Budgeted Balance Sheet 1/2
Breakers
Breakers reports
reports the
the following
following account
account
balances
balances on on March
March 3131 prior
prior to
to
preparing
preparing itsits budgeted
budgeted financial
financial
statements
statements for for June
June 30:
30:
••Land
Land -- $50,000
$50,000
••Building
Building (net)
(net) -- $148,000
$148,000
••Common
Common stockstock -- $217,000
$217,000
••Retained
Retained earnings
earnings -- $46,400
$46,400

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-42
 2/2
Breakers, Inc.
25%of June Budgeted Balance Sheet
sales of June 30
$300,000 Current assets
Cash $ 36,362
11,500 lbs. at Accounts receivable 75,000
Raw materials inventory 4,600
$.40 per lb. Work-in-process inventory 17,000
Finished goods inventory 23,000
5,000 units at Total current assets 155,962
$4.60 per unit Property and equipment
Land 50,000
Building 148,000
50% of June Equipment 192,000
purchases Total property and equipment 390,000
Total assets $ 545,962
of $56,800
Accounts payable $ 28,400
Beginning balance $ 46,400
Add: net income 279,162 Common stock 217,000
Deduct: dividends (25,000) Retained earnings 300,562
Ending balance $300,562 Total liabilities and equities $ 545,962

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-43
Learning Objective 9-7 – Discuss the role of
assumptions and predictions in budgeting.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-44
9-44
CONSENT OF MCGRAW HILL LLC.
 Financial Planning Model
Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
When the interactions of the elements
of the master
Ending Direct budget
Directare expressedSelling
Overhead as and
Inventory Materials Labor Administrative
Budget a set of mathematical
Budget Budget relations,
Budget it Budget
becomes a financial planning model
Direct Materials

that can be used to answer “what if”

Cash Budget
questions about unknown variables. Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement of
Cash Flows
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-45
Learning Objective 9-8 – Describe a typical
organization’s process of budget administration.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-46
 Budget Administration

The Budget Committee is a standing

committee responsible for . . .

 overall policy matters relating
to the budget.
coordinating the preparation of


the budget.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-47
 International Aspects of
Budgeting

Firms
Firms with
with international
international
operations
operations face face special
special
problems
problems when when preparing
preparing a a
budget.
budget.

 Fluctuations
Fluctuations inin foreign
foreign currency
currency
exchange
exchange rates.
rates.

 High
High inflation
inflation rates
rates in
in some
some
foreign
foreign countries.
countries.

 Differences
Differences inin local
local economic
economic
conditions.
conditions.
© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-48
Learning Objective 9-9 – Discuss the behavioral
issues in budgeting.

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-49
CONSENT OF MCGRAW HILL LLC.
 Behavioral Impact of Budgets

Budgetary Slack: Padding the Budget

People often perceive that their
performance will look better in
their superiors’ eyes if they can
“beat the budget.”

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-50
 Participative Budgeting

Top M anagem ent

M id d le M id d le
M anagem ent M anagem ent

S upervisor S upervisor S upervisor S upervisor

Flow of Budget Data

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
CONSENT OF MCGRAW HILL LLC. 9-51
 End Chapter 9

© MCGRAW HILL LLC. ALL RIGHTS RESERVED. NO REPRODUCTION OR DISTRIBUTION WITHOUT THE PRIOR WRITTEN
9-52
CONSENT OF MCGRAW HILL LLC.