Profit Planning

Chapter Nine
9-2

The Master Budget: An Overview

Sales
Budget
Ending
Finished
Goods Selling and
Budget Production
Administrative
Budget
Budget

Direct Direct Manufacturing

Materials Labor Overhead
Budget Budget Budget

Cash
Budget

Budgeted Financial Statements

9-3

Learning Objective 2

Prepare a sales budget,

including a schedule of
expected cash collections.
9-4

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.
9-5

The Sales Budget

The individual months of April, May, and June are

summed to obtain the total projected sales in units
and dollars for the quarter ended June 30 th
9-6

Expected Cash Collections

•• All
All sales
sales are
are on
on account.
account.
•• Royal’s
Royal’s collection
collection pattern
pattern is:
is:
 70%
70% collected
collected in
in the
the month
month of
of sale,
sale,
 25%
25% collected
collected in
in the
the month
month following
following sale,
sale,
 5%
5% uncollectible.
uncollectible.
•• The
The March
March 3131 accounts
accounts receivable
receivable balance
balance of
of
$30,000
$30,000 will
will be
be collected
collected in
in full.
full.
9-7

Expected Cash Collections

9-8

Expected Cash Collections

From the Sales Budget for April.

9-9

Expected Cash Collections

From the Sales Budget for May.

9-10

Quick Check 

What will be the total cash collections for the

quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000
9-11

Quick Check 

What will be the total cash collections for the

quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000
9-12

Expected Cash Collections

9-13

Learning Objective 3

Prepare a
production budget.
9-14

The Production Budget

Sales Production
Budget Budget
ed
andl et
p
Expected
om
C
Cash
Collections

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
9-15

The Production Budget

• The management at 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.

9-16

The Production Budget

9-17

The Production Budget

Budgeted May sales 50,000

Desired ending inventory % 20%
March 31
Desired ending inventory 10,000
ending inventory
9-18

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
9-19

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
9-20

The Production Budget

9-21

The Production Budget

Assumed ending inventory.

9-22

Learning Objective 4

Prepare a direct materials

budget, including a
schedule of expected cash
disbursements for
purchases of materials.
9-23

The Direct Materials Budget

•• At
At Royal
Royal Company,
Company, fivefive pounds
pounds of of material
material
are
are required
required per
per unit
unit of
of product.
product.
•• Management
Management wants
wants materials
materials on on 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 is
is $0.40
$0.40 per
per
pound.
pound.
Let’s
Let’s prepare
prepare the
the direct
direct materials
materials budget.
budget.
9-24

The Direct Materials Budget

From production budget

9-25

The Direct Materials Budget

9-26

The Direct Materials Budget

March 31 inventory

10% of following month’s Calculate the materials to

production needs. be purchased in May.
9-27

Quick Check 

How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
9-28

Quick Check 

How
How much
much materials
materials should
should be
be purchased
purchased in
in May?
May?
a.
a. 221,500
221,500 pounds
pounds
b.
b. 240,000
240,000 pounds
pounds
c.
c. 230,000
230,000 pounds
pounds
d.
d. 211,500
211,500 pounds
pounds
9-29

The Direct Materials Budget

9-30

The Direct Materials Budget

Assumed ending inventory

 9-31

Expected Cash Disbursement for Materials

•• Royal
Royal pays
pays $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 is is paid
paid for
for in
in
the
the month
month ofof purchase;
purchase; the
the other
other half
half is
is paid
paid
in
in the
the following
following month.
month.
•• The
The March
March 31 31 accounts
accounts payable
payable balance
balance is is
$12,000.
$12,000.

Let’s
Let’s calculate
calculate expected
expected cash
cash disbursements.
disbursements.
9-32

Expected Cash Disbursement for Materials

9-33

Expected Cash Disbursement for Materials

Compute the expected cash

disbursements for materials
for the quarter.

140,000 lbs. × $.40/lb. = $56,000

9-34

Quick Check 

What are the total cash disbursements for the

quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400
9-35

Quick Check 

What are the total cash disbursements for the

quarter?
a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400
9-36

Expected Cash Disbursement for Materials

9-37

Learning Objective 5

Prepare a direct
labor budget.
 9-38

The Direct Labor Budget

•• At
At Royal,
Royal, each
each unit
unit of
of product
product requires
requires 0.05
0.05 hours
hours (3
(3
minutes)
minutes) ofof direct
direct labor.
labor.
•• The
The Company
Company has has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of of work
work each
each week.
week.
•• In
In exchange
exchange for for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agree
agree to
to
aa wage
wage rate
rate of
of $10
$10 perper hour
hour regardless
regardless of of the
the hours
hours
worked
worked (no(no overtime
overtime pay).
pay).
•• For
For the
the next
next three
three months,
months, thethe direct
direct labor
labor workforce
workforce will
will
be
be paid
paid for
for aa minimum
minimum of of 1,500
1,500 hours
hours per
per month.
month.
 Let’s
Let’s prepare
prepare the the direct
direct labor
labor budget.
budget.
9-39

The Direct Labor Budget

From production budget.

9-40

The Direct Labor Budget

9-41

The Direct Labor Budget

Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
9-42

The Direct Labor Budget

9-43

Quick Check 

What would be the total direct labor 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
9-44

Quick Check 

What would be the total direct labor 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 Aprilin aMay
month?
June Quarter
Labor hours required 1,300 2,300 1,450
a. $79,500 Regular hours paid 1,500 1,500 1,500 4,500
b. $64,500 Overtime hours paid - 800 - 800

c. $61,000 Total regular hours 4,500 $10 $ 45,000

d. $57,000 Total overtime hours 800 $15 $ 12,000
Total pay $ 57,000
9-45

Learning Objective 6

Prepare a
manufacturing
overhead budget.
9-46

Manufacturing Overhead Budget

• At Royal, manufacturing overhead is applied to units

of product on the basis of direct labor hours.
• The variable manufacturing overhead rate is $20 per
direct labor hour.
• Fixed manufacturing overhead is $50,000 per month
and includes $20,000 of noncash costs (primarily
depreciation of plant assets).

 Let’s prepare the manufacturing overhead budget.

9-47

Manufacturing Overhead Budget

Direct Labor Budget.

9-48

Manufacturing Overhead Budget

Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labor hours required 5,050

* rounded
9-49

Manufacturing Overhead Budget

Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
9-50

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct materials
budget and information.
9-51

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead

Budgeted finished goods inventory

Ending inventory in units
Unit product cost
Ending finished goods inventory

Direct labor budget.

9-52

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units
Unit product cost $ 4.99
Ending finished goods inventory ?

Total mfg. OH for quarter $251,000

= $49.70 per hour *
Total labor hours required 5,050
9-53

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total

Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead 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 $24,950

Production Budget.
9-54

Learning Objective 7

Prepare a selling and

administrative
expense budget.
 9-55

Selling and Administrative Expense Budget

•• At
At Royal,
Royal, thethe selling
selling and
and administrative
administrative expenses
expenses budget
budget is
is
divided
divided into
into variable
variable and
and fixed
fixed components.
components.
•• The
The 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 andand administrative
administrative expenses
expenses are
are $70,000
$70,000 per
per
month.
month.
•• The
The fixed
fixed selling
selling and
and administrative
administrative expenses
expenses include
include
$10,000
$10,000 in in costs
costs –– primarily
primarily depreciation
depreciation –– that
that are
are not
not cash
cash
outflows
outflows of of the
the current
current month.
month.

Let’s
Let’s prepare
prepare the
the company’s
company’s selling
selling and
and administrative
administrative
expense
expense budget.
budget.
9-56

Selling and Administrative Expense Budget

Calculate the selling and administrative

cash expenses for the quarter.
9-57

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
9-58

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
9-59

Selling and Administrative Expense Budget

9-60

Learning Objective 8

Prepare a cash
budget.
9-61

Format of the Cash Budget

The cash budget is divided into four sections:

1. Cash receipts listing all cash inflows excluding
borrowing;
2. Cash disbursements listing all payments
excluding repayments of principal and interest;
3. Cash excess or deficiency; and
4. The financing section listing all borrowings,
repayments and interest.
9-62

The Cash Budget

Royal:
Royal:

 Maintains
Maintains aa 16%
16% open
open line
line of
of credit
credit for
for $75,000
$75,000

 Maintains
Maintains aa minimum
minimum cash
cash balance
balance of
of $30,000
$30,000

 Borrows
Borrows on
on the
the first
first day
day of
of the
the month
month 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 $49,000
$49,000 in
in April
April

 Purchases
Purchases $143,700
$143,700 of
of equipment
equipment in
in May
May and
and
$48,300
$48,300 in
in June
June (both
(both purchases
purchases paid
paid in
in cash)
cash)

 Has
Has an
an April
April 11 cash
cash balance
balance of
of $40,000
$40,000
9-63

The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections.
Collections.
9-64

The Cash Budget

Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements.
Disbursements.

Direct Labor
Budget.

Manufacturing
Overhead Budget.

Selling and Administrative

Expense Budget.
9-65

The Cash Budget

Because Royal maintains

a cash balance of $30,000,
the company must borrow
$50,000 on its line-of-credit.
9-66

The Cash Budget

Ending cash balance for April

is the beginning May balance.
9-67

The Cash Budget

9-68

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
9-69

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
9-70

The Cash Budget

$50,000 × 16% × 3/12 = $2,000

Borrowings on April 1 and
repayment on June 30.
9-71

The Budgeted Income Statement

Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C

After we complete the cash budget,

we can prepare the budgeted income
statement for Royal.
9-72

Learning Objective 9

Prepare a budgeted
income statement.
9-73

The Budgeted Income Statement

Sales
Sales Budget.
Budget.
Royal Company
Budgeted Income Statement
For the Three Months Ended June 30
Ending
Ending Finished
Finished
Sales (100,000 units @ $10) $ 1,000,000 Goods
Cost of goods sold (100,000 @ $4.99) 499,000
Goods Inventory.
Inventory.
Gross margin 501,000
Selling and administrative expenses 260,000 Selling
Selling and
and
Operating income 241,000 Administrative
Administrative
Interest expense 2,000
Expense
Expense Budget.
Budget.
Net income $ 239,000

Cash
Cash Budget.
Budget.
9-74

Learning Objective 10

Prepare a
budgeted balance
sheet.
9-75

The Budgeted Balance Sheet

Royal
Royal reported
reported the
the following
following account
account
balances
balances prior
prior to
to preparing
preparing its
its budgeted
budgeted
financial
financial statements:
statements:
•• Land
Land -- $50,000
$50,000
•• Common
Common stock
stock -- $200,000
$200,000
•• Retained
Retained earnings
earnings -- $146,150
$146,150
•• Equipment
Equipment -- $175,000
$175,000
9-76
Royal Company
Budgeted Balance Sheet 25%
25% of
of June
June
June 30 sales
sales of
of
Current assets $300,000.
$300,000.
Cash $ 43,000
Accounts receivable 75,000 11,500
11,500 lbs.
lbs.
Raw materials inventory 4,600 at
at $0.40/lb.
$0.40/lb.
Finished goods inventory 24,950
Total current assets 147,550 5,000
5,000 units
units
Property and equipment at
at $4.99
$4.99 each.
each.
Land 50,000
Equipment 367,000
Total property and equipment 417,000
Total assets $ 564,550
50%
50% ofof June
June
Accounts payable $ 28,400
purchases
purchases
Common stock 200,000
of
of $56,800.
$56,800.
Retained earnings 336,150
Total liabilities and equities $ 564,550
9-77
Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash $ 43,000
Accounts receivable Beginning balance
75,000 $146,150
Add: net income 239,000
Raw materials inventory 4,600
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 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