GSCM 1001: Supply Chain

Management Accounting & Finance

Course Code: GSCM 1001 – 22F - 11944

Instructor: Richard Rodman

GSCM 1001: Supply Chain Management Accounting & Finance
This Week’s Agenda

• Course details – description, e-textbook, learning outcomes, course

evaluation
• Budgeting – Chapter 7
• Due dates – quizzes and assignments

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
GSCM 1001: Supply Chain Management Accounting & Finance

Required e-textbook:

Brewer (CDN), Introduction to Managerial Accounting,

Sixth Canadian Edition (6ce)
Peter Brewer

Quizzes and Assignments – need e-textbook login – only possible when you
buy the e-textbook

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Course Description

• Students learn management accounting concepts and fundamental

financial management activities in this introductory course.
• After acquiring a working knowledge of financial statements, students
better understand the impact of supply chain management decisions
on financial results.

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Learning Outcomes

Upon successful completion of this course, the student will have reliably
demonstrated the ability to:

1. Describe the essential principles of financial management in the

supply chain;
2. Interpret key financial statements to determine the profitability and
financial position of participants in the supply chain;
3. Explain basic cost concepts and structure, calculate cost, and analyze
cost behavior;

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Learning Outcomes

Upon successful completion of this course, the student will have reliably
demonstrated the ability to:

4. Define the concepts of forecasting, budgeting, and financial

planning;
5. Describe the time-value of money, its relation to capital investment
and risk and return;
6. Describe basic capital structures and sources of finance;
7. Analyze the financial implications of supply chain decisions;

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Learning Outcomes

Upon successful completion of this course, the student will have reliably
demonstrated the ability to:

8. Select appropriate payment options under various international

trade scenarios;
9. Discuss the impact of currency exchange on global sourcing risk;
10. Allocate cost and overhead expenses to products and services within
the supply.

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
• No PHONES, laptops, tablets etc. allowed
• Please bring a calculator – just a simple one
• Bring your school ID – no ID, you do not write the test or exam
• Tests and exam key times…please be in class at 7pm with ID…we will need 10-15 minutes to verify ID…tests/exams
start at 7:15pm and end at 8:45pm.
• Reminder – Wednesday classes are in room E119, Thursday classes are in room A119

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
• Preview Quizzes - Smartbooks - encourage preparation for classroom (due date is
6pm on day of class) - each quiz has value of 1% = total of 10%
• Review Assignments - Smartbooks - review classroom content (due date is
generally midnight of day that is 7 days after class) - each assignment has value of
3% = total of 30%
• Each Test has value of 15% = total of 30%
• Final Exam is split between two classes - value of 15% for each exam = total of 30%

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Businesses

• What is the #1 purpose of every “For Profit Business”?

- ________________________

• If your business is not making profit – in most cases, it will be bankrupt

• When is not making profit ok?
- Startup company – building the company – better have buckets of cash
- Setting up a new product
- Any other times?

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – Chapter 7

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7 – Learning Objectives

1.Understand the concept of budgets and budgeting.

2.Prepare each component budget of the master budget.
3.Develop budgeted financial statements from the component budgets
of the master budget.
4.Understand history of budgeting – “hockey stock” –
5.Types of budgets – capital, operations, zero based, rolling forecast
6.Understand the budgeting process and the role of the beyond
budgeting model.

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7

• What is a budget?
- Set of targets – now go make a plan to achieve those targets
- Budget – could be interchanged with target, plan, KPI, indicator, etc.
- Could be dollars or any other measure
- Budget is usually dollars
• Businesses that are small – rarely have a budget – no need
• Who uses a budget?
- Senior management, Owners, Investors, Banks

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7

• What is the MOST IMPORTANT budget?

• Capital Budget?
• Expense Budget?
• Manpower Budget?
• Profit Budget?

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7
• CASH BUDGET!
• Every day – every company has a cash flow spreadsheet – they must
know how much cash they have – remember cash comes in and out
goes out
• Have to pay suppliers long before you collect cash from your customer
– is most cases
• When is that not true?
• Buying custom things online – they won’t start making it until you pay
• Selling anything custom – you are not spending $ until you are sure
they are paying – so collect payment first

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7

• Who creates a budget?

- Accounting coordinates the budget
- Managers from each area create a budget for their area
• Who approves a budget?
- If you create a budget for your department – your boss approves it
- It keeps going up the chain to the top
• In some cases – the top of the company will provide strict budget
targets that you must have – now go create your budget…

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7 – Planning & Control

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Remember this? → Strategy = how to measure it

• How an organization plans to achieve its goals and objectives to satisfy

their Vision.
• Starts with a Marketing & R&D Plan – what service/product and how to
convince a customer to buy it?
- Resource & Manpower Plan – what equipment and people are needed
- Operational Plan – how to use the Resources and Manpower
- Financial Plan – to achieve the Operational Plan
• what money is needed (materials & equipment & people) and when
• what is financial result – profit – short term and long term
© 2020 McGraw-Hill Limited

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting – chapter 7 – Advantages of Budgeting

Define goal
and objectives
Communicating
plans Think about and
plan for the future
Advantages
Coordinate
activities Means of allocating
resources
Uncover potential
bottlenecks

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
The Master Budget
Interrelationships
The Master Budget
Interrelationships
The Master Budget
Interrelationships
Choosing the Budget Period

Operating Budget

2013 2014 2015 2016

The annual operating budget

may be divided into quarterly
or monthly budgets.
Zero-Based Budgeting

• Zero-based budgeting is an alternate approach to budgeting.

• Particularly used in governmental and not-for-profit sectors.
• Managers are required to justify all budgeted expenditures, not just changes from
the previous year.
Preparing the Master Budget
The master budget includes:
1. A sales budget, including a schedule of expected cash collections.
2. A production budget (a merchandise purchase budget is used for a merchandising company).
3. A direct materials budget, including a schedule of expected cash disbursements for raw
materials.
4. A direct labor budget (not required for a merchandising company).
5. A manufacturing overhead budget.
6. An ending finished goods inventory budget.
7. A selling and administrative expenses budget.
8. A cash budget.
9. A budgeted income statement.
10. A budgeted balance sheet.
The Sales Budget

Detailed schedule showing expected sales for the coming

periods expressed in units and dollars.
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 Example Part 1

April May June Quarter

Budgeted sales (units) 20,000 50,000 30,000 100,000

Selling price per unit

Total sales
The Sales Budget Example Part 2

April May June Quarter

Budgeted sales (units) 20,000 50,000 30,000 100,000

Selling price per unit $ 10 $ 10 $ 10 $ 10

Total sales $ 200,000 $ 500,000 $ 300,000 $ 1,000,000
Expected Cash Collections Example Part 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% is uncollectible.
• The March 31 accounts receivable balance of $30,000 will be
collected in full.
Expected Cash Collections Example Part 2

April May June Quarter

Accounts rec. - 3/31 $ 30,000 $ 30,000

Total cash collections

Expected Cash Collections Example Part 3
April May June Quarter
Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000

Total cash collections $ 170,000 ?

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 Solution ✓

What will be the total cash collections for the quarter?

d. $905,000
Expected Cash Collections Example Part 4
April May June Quarter
Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000
May sales
70% x $500,000 350,000 350,000
25% x $500,000 $ 125,000 125,000

Total cash collections $ 170,000 $ 400,000

Expected Cash Collections Example Part 4

April May June Quarter

Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000
May sales
70% x $500,000 350,000 350,000
25% x $500,000 $ 125,000 125,000
June sales
70% x $300,000 210,000 210,000
Total cash collections $ 170,000 $ 400,000 $ 335,000 $ 905,000
The Production Budget

Sales Production
Budget Budget

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
The Production Budget Format

Budgeted sales in units XXX

Add: desired ending inventory XXX
Total needs XXX
Less: beginning inventory XXX
Required XXX
The Production Budget Example Part 1

• 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.

The Production Budget Example Part 2

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000
Total needed 30,000
Less beginning inventory 4,000
Required production 26,000

Following month’s budgeted sales 50,000

Desired percent 20%
Desired inventory 10,000
The Production Budget Example Part 3

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000
Total needed 30,000
Less beginning inventory 4,000
Required production 26,000 ?

March 31
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 Solution✓

What is the required production for May?

a. 56,000 units
The Production Budget Example Part 4

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000
Total needed 30,000 56,000
Less beginning inventory 4,000
Required production 26,000
The Production Budget Example Part 5

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000
Total needed 30,000 56,000
Less beginning inventory 4,000 10,000
Required production 26,000 46,000
The Production Budget Example Part 6 20% of the following
month’s unit sales

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less beginning inventory 4,000 10,000 6,000 4,000
Required production 26,000 46,000 29,000 101,000
The Direct Materials Budget Format

Raw materials needed to meet the production XXX

schedule
Add: desired ending inventory of raw materials XXX

Total raw material needs XXX

Less: beginning inventory of raw materials XXX
Raw materials to be purchased XXX
The Direct Materials Budget Example Part 1

At Royal Company, 5kg 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, 13,000kg of material are on hand. Material cost is $0.40 per kg.

• Let’s prepare the direct materials budget.

The Direct Materials Budget Example Part 2

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit
Production needs
Add desired ending inventory
Total needed
Less beginning inventory
Materials to be purchased

From production budget

The Direct Materials Budget Example Part 3

April May June Quarter

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
Add desired ending inventory
Total needed
Less beginning inventory
Materials to be purchased
The Direct Materials Budget Example Part 4

April May June Quarter

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

Add desired ending inventory 23,000

Total needed 153,000
Less beginning inventory
Materials to be purchased

10% of the following month’s production

The Direct Materials Budget Example Part 5

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production
Add desiredneeds
ending 130,000 230,000 145,000 505,000
inventory 23,000
March 31
Total needed 153,000
inventory
Less beginning inventory 13,000
Materials to be purchased 140,000 ?
Quick Check ✓

How much material should be purchased in May?

a. 221,500kg
b. 240,000kg
c. 230,000kg
d. 211,500kg
Quick Check Solution ✓

How much material should be purchased in May?

a. 221,500kg
The Direct Materials Budget Example Part 6

April May June Quarter

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
Add desired 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 purchased 140,000 221,500 142,000 503,500

10% of July’s production needs

Expected Cash Disbursement for Materials Part 1

Royal pays $0.40 per kilo for its materials.

One-half of a month’s purchases are 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.
Expected Cash Disbursement for Materials Example Part 2
April May June Quarter
Accounts payable 3/31 $ 12,000 $ 12,000
April purchases

May purchases

June purchases

Total cash disbursements

Expected Cash Disbursement for Materials Example Part 3
April May June Quarter
Accounts payable 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases

June purchases

Total cash disbursements $ 40,000 ?

140,000 kgs. × $.40/kg. = $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 Solution ✓

What are the total cash disbursements for the quarter?

a. $185,000
Expected Cash Disbursement for Materials Example Part 4

April May June Quarter

Accounts payable 3/31 $ 12,000 $ 12,000
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

Total cash disbursements $ 40,000 $ 72,300

Expected Cash Disbursement for Materials Example Part 5

April May June Quarter

Accounts payable 3/31 $ 12,000 $ 12,000
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 cash disbursements $ 40,000 $ 72,300 $ 72,700 $ 185,000
The Direct Labour Budget Example Part 1

❑At Royal, each unit of product requires 0.05 hours 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 agreed 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.
The Direct Labour Budget Example Part 3

April May June Quarter

Production 26,000 46,000 29,000 101,000
Direct labour hours
Labour hours required
Guaranteed labour hours
Labour hours paid
Wage rate
From production
Total direct labour cost
budget
The Direct Labour Budget Example Part 4

April May June Quarter

Production 26,000 46,000 29,000 101,000
Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours
Labour hours paid
Wage rate
Total direct labour cost
The Direct Labour Budget Example Part 5

April May June Quarter

Production 26,000 46,000 29,000 101,000
Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours 1,500 1,500 1,500
Labour hours paid 1,500 2,300 1,500 5,300
Wage rate
Total direct labour cost
Higher of labour hours required
or labour hours guaranteed.
The Direct Labour Budget Example Part 6

April May June Quarter

Production 26,000 46,000 29,000 101,000
Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours 1,500 1,500 1,500
Labour hours paid 1,500 2,300 1,500 5,300
Wage rate $ 10 $ 10 $ 10 $ 10
Total direct labour cost $ 15,000 $ 23,000 $ 15,000 $ 53,000
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?
a. $79,500
b. $64,500
c. $61,000
d. $57,000
Quick Check Solution ✓

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?
d. $57,000 April May June Quarter
Labour hours required 1,300 2,300 1,450
Regular hours paid 1,500 1,500 1,500 4,500
Overtime hours paid - 800 - 800

Total regular hours 4,500 $10 $ 45,000

Total overtime hours 800 $15 $ 12,000
Total pay $ 57,000
Manufacturing Overhead Budget Example Part 1

Royal Company uses a variable manufacturing overhead rate of $1

per unit produced.
Fixed manufacturing overhead is $50,000 per month and includes
$20,000 of non-cash costs (primarily depreciation of plant assets).

• Let’s prepare the manufacturing overhead budget.

Manufacturing Overhead Budget Example Part 2

April 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
Total mfg. OH costs
Less noncash costs
Cash disbursements
for manufacturing OH
From production
budget
Manufacturing Overhead Budget Example Part 3

April 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
Less noncash costs
Cash disbursements
for manufacturing OH
Manufacturing Overhead Budget Example Part 4
April 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
Less noncash costs 20,000 20,000 20,000 60,000
Cash disbursements
for manufacturing OH $ 56,000 $ 76,000 $ 59,000 $ 191,000

Depreciation is a non-cash charge.

Ending Finished Goods Inventory Budget Example Part 1

Now, Royal can complete the JUNE 30 ending finished goods inventory budget.

At Royal, manufacturing overhead is applied to units of product on the basis of

direct labour hours.

Let’s calculate June 30 ending finished goods inventory.

Ending Finished Goods Inventory Budget Example Part 2

Production costs per unit Quantity Cost Total

Direct materials 5.00 kilos $ 0.40 $ 2.00
Direct labour
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory (June 30) in units
Unit product cost
Ending finished goods inventory

Direct materials
budget and information
Ending Finished Goods Inventory Budget Example Part 3

Production costs per unit Quantity Cost Total

Direct materials 5.00 kilos $ 0.40 $ 2.00
Direct labour 0.05 hrs. $ 10.00 0.50
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory (June 30) in units
Unit product cost
Ending finished goods inventory

Direct labour
budget
Ending Finished Goods Inventory Budget Example Part 4

Production costs per unit Quantity Cost Total

Direct materials 5.00 kg $ 0.40 $ 2.00
Direct labour 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory (June 30) in units
Unit product cost $ 4.99
Ending finished goods inventory ?

Total mfg. OH for quarter $251,000 = $49.70 per hr.*

Total labour hours required 5,050 hrs.
*rounded
Quick Check ✓

What is the value of the June 30 ending finished goods inventory?

a. $ 9,980
b. $24,950
c. $57,385
d. $49,900
Quick Check Solution✓

What is the value of the June 30 ending finished goods inventory?

b. $24,950
Ending Finished Goods Inventory Budget Example Part 5

Production costs per unit Quantity Cost Total

Direct materials 5.00 kilos $ 0.40 $ 2.00
Direct labour 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory (June 30) in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950

Production
Budget
Selling and Administrative Expense Budget Example Part 1

• At Royal, 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.
Selling and Administrative Expense Budget Example Part 2

April May June Quarter

Budgeted sales 20,000
Variable selling and admin. rate $ 0.50
Variable expense $ 10,000
Fixed selling and admin. expense 70,000
Total expense 80,000
Less noncash expenses 10,000
Cash disbursements for selling & admin. $ 70,000 ?
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 Solution ✓

What are the total cash disbursements for selling and administrative
expenses for the quarter?

b. $230,000
Selling and Administrative Expense Budget Example Part 3
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Variable selling and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $10,000 $25,000 $15,000 $ 50,000
Fixed selling and admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less noncash expenses 10,000 10,000 10,000 30,000
Cash disbursements for selling & admin. $70,000 $85,000 $75,000 $230,000
The Cash Budget

• Composed of four major sections:

1. Receipts
2. Disbursements
3. Cash excess or deficiency
4. Financing
Cash balance, beginning XXX
Add: receipts XXX
Total cash available before financing XXX
Less: disbursements XXX
Excess (deficiency) of cash available over XXX
disbursements
The Cash Budget Example Part 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 paid in cash.
❑Has an April 1 cash balance of $40,000.
The Cash Budget Example Part 2
April May June Quarter
Beginning cash balance $40,000
Add cash collections 170,000
Total cash available 210,000 Schedule of Expected
Less disbursements Cash Collections
Materials 40,000
Direct labour
Mfg. overhead
Selling and admin. Schedule of Expected
Equipment purchase Cash Disbursements
Dividends
Total disbursements
Excess (deficiency) of
cash available over
disbursements
The Cash Budget Example Part 3
April May June Quarter
Beginning cash balance $ 40,000 Direct Labour
Add cash collections 170,000 Budget
Total cash available 210,000
Less disbursements
Materials 40,000
Direct labour 15,000 Manufacturing
Mfg. overhead 56,000 Overhead Budget
Selling and admin. 70,000
Equipment purchase
Dividends
Total disbursements Selling and Administrative
Excess (deficiency) of
Expense Budget
cash available over
disbursements
The Cash Budget Example Part 4
April May June Quarter
Beginning cash balance $ 40,000
Add cash collections 170,000
Total cash available 210,000
Less disbursements
Because Royal maintains
Materials 40,000
Direct labour 15,000
a cash balance of $30,000,
Mfg. overhead 56,000 the company must
Selling and admin. 70,000 borrow on its
Equipment purchase - line of credit
Dividends 49,000
Total disbursements 230,000
Excess (deficiency) of
cash available over
disbursements $ (20,000)
The Cash Budget Example Part 5: Financing and Repayment

April May June Quarter

Excess (deficiency) of
Cash available over
disbursements $(20,000)
Financing:
Borrowing 50,000
Repayments -
Interest -
Total financing 50,000
Ending cash balance $ 30,000 $ 30,000 $ - $ -

Ending cash balance for April

is the beginning May balance.
The Cash Budget Example Part 6
April May June Quarter
Beginning cash balance $ 40,000 $ 30,000
Add cash collections 170,000 400,000
Total cash available 210,000 430,000
Less disbursements
Materials 40,000 72,300
Direct labour 15,000 23,000
Mfg. overhead 56,000 76,000
Selling and admin. 70,000 85,000
Equipment purchase - 143,700
Dividends 49,000 -
Total disbursements 230,000 400,000
Excess (deficiency) of
cash available over
disbursements $ (20,000) $ 30,000
The Cash Budget Example Part 7: Financing and Repayment

April May June Quarter

Excess (deficiency) of
Cash available over
disbursements $ (20,000) $ 30,000
Financing:
Borrowing 50,000 -
Repayments - -
Interest - -
Total financing 50,000 -
Ending cash balance $ 30,000 $ 30,000

Because the ending cash balance is

exactly $30,000, Royal will not repay
the loan this month.
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 Solution ✓

What is the excess (deficiency) of cash available over disbursements

for June?
d. $ 95,000
The Cash Budget Example Part 8
April May June Quarter
Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
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 230,000 400,000 270,000 900,000
Excess (deficiency) of
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
The Cash Budget Example Part 9

April May June Quarter

Beginning cash balance$ 40,000 $ 30,000 $ 30,000 $ 40,000
Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less disbursements
Materials 40,000 72,300 72,700 185,000
Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead At the end of 76,000
56,000 June, Royal
59,000has 191,000
enough cash
to repay70,000
Selling and admin. the $50,000
85,000 loan plus interest
75,000 230,000 at 16%.
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
Excess (deficiency) of
cash available over
disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
The Cash Budget Example Part 10: Financing and Repayment

April May June Quarter

Excess (deficiency) of
Cash available over
disbursements $(20,000) $ 30,000 $ 95,000 $ 45,000
Financing:
Borrowing 50,000 - - 50,000
Repayments - - (50,000) (50,000)
Interest - - (2,000) (2,000)
Total financing 50,000 - (52,000) (2,000)
Ending cash balance $ 30,000 $ 30,000 $ 43,000 $ 43,000

$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment of June 30.
The Budgeted Income Statement

Cash Budgeted
Budget Income
Statement

After we complete the cash budget,

we can prepare the budgeted income
statement for Royal.
The Budgeted Income Statement Example

Royal Company
Budgeted Income Statement
For the Three Months Ended June 30

Sales (100,000 units @ $10) $ 1,000,000

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
The Budgeted Balance Sheet Example Part 1

Royal reported the following account balances prior to preparing its budgeted
financial statements:
❑Land: $50,000
❑Common shares: $200,000
❑Retained earnings: $146,150
The Budgeted Balance Sheet Example Part 2
25% of June
Royal Company
Budgeted Balance Sheet
sales of
June 30 $300,000
Current assets
Cash $ 43,000
Accounts receivable 75,000
11,500kg
Raw materials inventory 4,600 at $0.40/kg
Finished goods inventory 24,950
Total current assets 147,550
Property and equipment 5,000 units
Land 50,000
Equipment (assumed) 367,000
at $4.99 each
Total property and equipment 417,000
Total assets $ 564,550

Accounts payable $ 28,400 50% of June

Common stock 200,000 purchases
Retained earnings 336,150
Total liabilities and equities $ 564,550 of $56,800
 Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable 75,000
Beginning balance $ 146,150
Raw materials inventory Add: net income
4,600 239,000
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 (assumed) 367,000
Total property 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
The Self-Imposed Budget

• A self-imposed or participatory budget is a budget that is prepared with the full

cooperation and participation of managers at all levels.
Participative Budget System
Responsibility Accounting

Managers should be held responsible for those items — and only

those items — that
the manager can actually control
to a significant extent.
The Budget Committee

A standing committee responsible for

- overall policy matters relating to the budget
- coordinating the preparation of the budget
Beyond Budgeting – Weaknesses of traditional budgeting

• Managers tend to regard a budget as “set in stone”—evaluating

performance often feared and resented.
• Which can lead to “gaming” in budgeting.
• Budgeting has become to be seen as “purely” financial and can be
perceived as disconnected from strategic objectives.
Beyond Budgeting – Weaknesses of traditional budgeting

• Traditional budgeting tends to have a “functional” orientation, whereas

recent management thinking is more “process” (or “cross-functional”)
oriented.
• Given the pace of change that organizations face, is a “static” budget
relevant?
Beyond Budgeting

• The Beyond Budgeting Round Table (BBRT) has recommended a model

that uses relative performance targets and emphasizes the principles of
strategic management and empowering employees.
Beyond Budgeting
• Key Principles:
1. Set challenging relative performance targets.
2. Adopt continuous and inclusive planning.
3. Use rolling forecasts.
4. Use market-like structures for coordination.
5. Decentralize resource management.
6. Control through self-regulation and transparent information.
7. Use low-powered incentives lined to group or organizational performance.
Chapter Summary
• Budgets help communicate plans, force managers to think about the future,
allocate resources and evaluate performance.
• Each budget in the master budget helps managers throughout the organization
work towards the same vision.
• The cash budget helps identify cash shortfalls and encourages managers to plan for
them.
• The budgeted income statement and balance sheet are constructed from the
master budget.
• Involving managers in the budgeting process helps to create a successful budget.
 Zero-Based Budgeting
Zero-based budgeting is an alternate approach to
budgeting.
Particularly used in governmental and not-for-
profit sectors.
Managers are required to justify all budgeted
expenditures, not just changes from the previous
year.
Budgeting – chapter 7 – Master Budgeting

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
Budgeting Summary – Chapter 7

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
 Due dates – quizzes and assignments

• Get the easy marks – Quizzes and Assignments

• Be aware of the due dates – zero tolerance for missed dates on Quizzes
and Assignments
• ALL QUIZZES AND ASSIGNMENTS can only be completed online – buy
the online textbook

Course Code: GSCM 1001 – 22F – 11944 – Supply Chain Management Accounting and Finance
GSCM 1001: Supply Chain Management Accounting & Finance

• Get the e-textbook → 40% of class evaluation is from Quizzes and Assignments in the
e-textbook – you need your own login (only get it when you buy the e-textbook)
• Course details – description, e-textbook, learning outcomes, course evaluation
• Due dates – quizzes and assignments – due dates are the due dates