Master Budgeting

CHAPTER 8

Managerial
Accounting
Seventeenth edition

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution
permitted without the prior written consent of McGraw Hill.
 Learning Objective 1
Understand why organizations budget
and the processes they use to create
budgets.

© McGraw Hill 8-2

 Basic Framework of
Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. A company’s budget ordinarily covers a one-year
period corresponding to its fiscal year.
2. Some companies also use a perpetual budget,
which is a 12-month budget that continuously
rolls forward.

© McGraw Hill 8-3

 Choosing the Budget Period

Operating budgets ordinarily A continuous budget is a 12-

cover a one-year period month budget that rolls forward
corresponding to a company’s one month (or quarter) as the
fiscal year. Many companies current month (or quarter) is
divide their annual budget into completed.
four quarters.

© McGraw Hill 8-4

 Budgets Are Used for Two Key
Purposes
Planning involves Control involves the steps
developing objectives taken by management to
and preparing various increase the likelihood that
budgets to achieve the objectives set down while
those objectives. planning are attained and that
all parts of the organization
are working together toward
that goal.

© McGraw Hill 8-5

 Why Do Organizations Create
Budgets? (Planning Perspective)

© McGraw Hill 8-6

 Why Do Organizations Create
Budgets? (Control Perspective)
From a control standpoint, organizations
compare their budgets to actual results to:

Improve the Evaluate and

efficiency and reward employees.
effectiveness of
operations.

© McGraw Hill 8-7

 How Do Organizations Create
Budgets?
Companies usually create budgets by relying on
some combination of top-down budgeting and
self-imposed budgeting. A self-imposed budget
or participative budget is a budget that is
prepared with the full cooperation and
participation of managers at all levels.

© McGraw Hill 8-8

 Self-Imposed Budgets

When managers throughout the organization work collaboratively to prepare a

budget, they often strive to establish challenging targets that are also highly
achievable. These goals are likely to build a lower-level manager’s confidence and
commitment to the budget.

© McGraw Hill 8-9

 Advantages of Self-Imposed
Budget
1. It shows respect for the opinions of lower-level managers
when they are involved in the budgeting process.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals
participate in setting their own goals than when the
goals are imposed from above.
4. It empowers them to take ownership of the budget and
to be accountable for deviations from it.

© McGraw Hill 8-10

 Self-Imposed Budgets –
Management Review
Self-imposed budgets should be reviewed by
higher levels of management to prevent
“budgetary slack.”
Most companies issue broad guidelines in
terms of overall profits or sales. Lower-level
managers are directed to prepare budgets
that meet those targets.

© McGraw Hill 8-11

 Master Budget – An Overview
1

Access the text alternative for slide images.

© McGraw Hill 8-12

 Seeing the Big Picture 1

To help you see the “big picture,” keep

in mind that the 10 schedules in the
master budget are designed to answer
the 10 questions shown on the next
screen.

© McGraw Hill 8-13

 Seeing the Big Picture 2

1. How much sales revenue will we earn?

2. How much cash will we collect from customers?
3. How much raw material will we need to purchase?
4. How much manufacturing costs will we incur?
5. How much cash will we pay to our suppliers and our direct laborers, and how
much cash will we pay for manufacturing overhead resources?
6. What is the total cost that will be transferred from finished goods inventory to
cost of goods sold?
7. How much selling and administrative expense will we incur, and how much cash
will we pay related to those expenses?
8. How much money will we borrow from or repay to lenders—including interest?
9. How much operating income will we earn?
10. What will our balance sheet look like at the end of the budget period?

© McGraw Hill 8-14

 Master Budget – An Overview
2

A master budget is based on various estimates and

assumptions. For example, the sales budget
requires three estimates/assumptions as follows:
1. What are the budgeted unit sales?
2. What is the budgeted selling price per unit?
3. What percentage of accounts receivable will be
collected in the current and subsequent
periods?

© McGraw Hill 8-15

 Master Budget – An Overview
3

When Microsoft Excel© is used to create a master budget,

these types of assumptions can be depicted in a Budget
Assumptions tab, thereby enabling Excel-based budgets to
answer “what-if” questions.

© McGraw Hill 8-16

 Learning Objective 2
Prepare a sales budget, including a
schedule of expected cash collections.

© McGraw Hill 8-17

 Budgeting Example
1. Royal Company is preparing budgets for the
quarter ending June 30.
2. 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

3. The selling price is $10 per unit.

© McGraw Hill 8-18
 Sales Budget
The individual months of April, May, and June are
summed to obtain the total budgeted sales in units
and dollars for the quarter ended June 30.
April May June Quarter
Budgeted sales in units 20,000 50,000 30,000 100,000
Selling price per unit $ 10 $ 10 $ 10 $ 10
Total budgeted sales $ 200,000 $ 500,000 $ 300,000 $ 1,000,000

© McGraw Hill 8-19

 Expected Cash Collections 1

All sales are on account.

Royal’s collection pattern is:
70% collected in the month of sale.
30% collected in the month following sale.
In April, the March 31 accounts receivable balance
of $30,000 will be collected in full in April.

© McGraw Hill 8-20

 Expected Cash Collections 2

April May June Quarter

Accounts receivable 3/31 $ 30,000 $ 30,000

© McGraw Hill 8-21

 Expected Cash Collections 3

April May June Quarter

Accounts receivable 3/31 $ 30,000 $
30,000
April sales:
70% × $200,000 140,000 140,000
30% × $200,000 60,000 60,000

From the sales budget for April

© McGraw Hill 8-22

 Expected Cash Collections 4

April May June Quarter

Accounts receivable 3/31 $ 30,000 $ 30,000
April sales:
70% × $200,000 140,000 140,000
30% × $200,000 60,000 60,000
May sales:
70% × $500,000 350,000 350,000
30% × $500,000 150,000 150,000

From the sales budget for May

© McGraw Hill 8-23

 Quick Check 1
What will be the total cash collections for the
quarter?
a. $700,000.
b. $220,000.
c. $190,000.
d. $940,000.

© McGraw Hill 8-24

 Quick Check 1a
What will be the total cash collections for the
quarter?
a. $700,000.
b. $220,000.
c. $190,000.
d. Answer: $940,000.

© McGraw Hill 8-25

 Expected Cash Collections 5

April May June Quarter

Accounts receivable 3/31 $ 30,000 $ 30,000
April sales:
70% × $200,000 140,000 140,000
30% × $200,000 60,000 60,000
May sales:
70% × $500,000 350,000 350,000
30% × $500,000 150,000 150,000
June sales:
70% × $300,000 210,000 210,000
$ 170,000 $ 410,000 $ 360,000 $ 940,000

Accounts Receivable 6/30 = 30%×$300,000 = $90,000

© McGraw Hill 8-26

 Learning Objective 3
Prepare a production budget.

© McGraw Hill 8-27

 Production Budget 1

Sales Budget and Expected Cash Collections

(Completed).
• Production Budget.
The production budget must be adequate to meet
budgeted sales and to provide for the desired
ending inventory.

© McGraw Hill 8-28

 Production Budget 2

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.

If Royal was a merchandising company, it would prepare a

merchandise purchase budget instead of a production budget.

© McGraw Hill 8-29

 Production Budget 3

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add: Desired ending inventory
Total needs
Less: Beginning inventory
Required production

© McGraw Hill 8-30

 Production Budget 4

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add: Desired ending inventory 10,000
Total needs 30,000
Less: Beginning inventory 4,000
Required production 26,000

Budgeted May sales 50,000

March 31 ending Desired ending inventory % 20%
inventory Desired ending inventory 10,000

© McGraw Hill 8-31

 Quick Check 2
What is the required production for May?
a. 56,000 units.
b. 46,000 units.
c. 62,000 units.
d. 52,000 units.

© McGraw Hill 8-32

 Quick Check 2a
What is the required production for May?
a. 56,000 units.
b. Answer: 46,000 units.
c. 62,000 units.
d. 52,000 units.

© McGraw Hill 8-33

 Production Budget 5

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Add: Desired ending inventory 10,000 6,000
Total needs 30,000 56,000
Less: Beginning inventory 4,000 10,000
Required production 26,000 46,000

© McGraw Hill 8-34

 Production Budget 6

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 needs 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

July sales of 25,000 units×20% = 5,000

© McGraw Hill 8-35

 Learning Objective 4
Prepare a direct materials budget,
including a schedule of expected cash
disbursements for purchases of materials.

© McGraw Hill 8-36

 Direct Materials Budget 1

At Royal Company, five pounds 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, there are 13,000 pounds of
material on hand. Material cost is $0.40 per
pound.
Let’s prepare the direct materials budget.
© McGraw Hill 8-37
 Direct Materials Budget 2

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit (pounds)
Production needs
Add: Desired ending inventory
Total needed
Less: Beginning inventory
Materials to be purchased

From production budget

© McGraw Hill 8-38

 Direct Materials Budget 3

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit (pounds) 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

© McGraw Hill 8-39

 Direct Materials Budget 4

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit (pounds) 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 13,000
Materials to be purchased 140,000

March 31 inventory.
10% of following month’s production needs.
Now, why don’t you calculate the materials to be purchased in May.

© McGraw Hill 8-40

 Quick Check 3
How much materials should be purchased in
May?
a. 221,500 pounds.
b. 240,000 pounds.
c. 230,000 pounds.
d. 211,500 pounds.

© McGraw Hill 8-41

 Quick Check 3a
How much materials should be purchased in
May?
a. Answer: 221,500 pounds.
b. 240,000 pounds.
c. 230,000 pounds.
d. 211,500 pounds.

© McGraw Hill 8-42

 Direct Materials Budget 5

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit (pounds) 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: Desired ending inventory 23,000 14,500
Total needed 153,000 244,500
Less: Beginning inventory 13,000 23,000
Materials to be purchased 140,000 221,500

© McGraw Hill 8-43

 Direct Materials Budget 6

April May June Quarter

Production 26,000 46,000 29,000 101,000
Materials per unit (pounds) 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 153,000 244,500 156,500 516,000
Less: Beginning inventory 13,000 23,000 14,500 13,000
Materials to be purchased 140,000 221,500 142,000 503,500

Beginning inventory from April

© McGraw Hill 8-44

 Expected Cash Disbursement
for Materials 1

Royal pays $0.40 per pound for its materials.

One-half of a month’s purchases is 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.

© McGraw Hill 8-45

 Expected Cash Disbursement
for Materials 2

April May June Quarter

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

© McGraw Hill 8-46

 Expected Cash Disbursement
for Materials 3

April June July Quarter

Accounts payable 3/31 $ 12,000 $ 12,000
April purchases:
50% × $56,000 28,000 28,000
50% × $56,000 28,000 28,000

Compute the expected cash

140,000 lbs. × $0.40/lb. = $56,000 disbursements for materials
for the quarter.

© McGraw Hill 8-47

 Quick Check 4
What are the total cash disbursements for the
quarter?
a. $185,000.
b. $68,000.
c. $56,000.
d. $201,400.

© McGraw Hill 8-48

 Quick Check 4a
What are the total cash disbursements for the
quarter?
a. Answer: $185,000.
b. $68,000.
c. $56,000.
d. $201,400.

© McGraw Hill 8-49

 Expected Cash Disbursement
for Materials 4

April May June Quarter

Accounts payable 3/31 $ 12,000 $ 12,000
April purchases:
50% × $56,000 28,000 28,000
50% × $56,000 28,000 28,000
May purchases:
50% × $88,600 44,300 44,300
50% × $88,600 44,300 44,300
June purchases:
50% × $56,800 28,400 28,400
Total cash disbursements $ 40,000 $ 72,300 $ 72,700 $ 185,000

Accounts payable at June 30 = $56,800×50% = $28,400

© McGraw Hill 8-50

 Learning Objective 5
Prepare a direct labor budget.

© McGraw Hill 8-51

 Direct Labor Budget 1

At Royal, each unit of product requires 0.05

hour (3 minutes) of direct labor. The labor
can be unskilled because the production
process is relatively simple and formal
training is not required.
Royal pays its workers at the rate of $10 per
hour.
Let’s prepare the direct labor budget.

© McGraw Hill 8-52

 Direct Labor Budget 2

April May June Quarter

Units of production 26,000 46,000 29,000 101,000
Direct labor time per unit
Labor-hours required
Hourly wage rate
Total direct labor costs

From production budget

© McGraw Hill 8-53

 Direct Labor Budget 3

April May June Quarter

Units of production 26,000 46,000 29,000 101,000
Direct labor time per unit 0.05 0.05 0.05 0.05
Labor-hours required 1,300 2,300 1,450 5,050
Hourly wage rate
Total direct labor costs

© McGraw Hill 8-54

 Direct Labor Budget 4

April May June Quarter

Units of production 26,000 46,000 29,000 101,000
Direct labor time per unit 0.05 0.05 0.05 0.05
Labor-hours required 1,300 2,300 1,450 5,050
Hourly wage rate $ 10 $ 10 $ 10 $ 10
Total direct labor costs $ 13,000 $ 23,000 $ 14,500 $ 50,500

© McGraw Hill 8-55

 Learning Objective 6
Prepare a manufacturing
overhead budget.

© McGraw Hill 8-56

 Manufacturing Overhead
Budget 1

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,
which includes $20,000 of noncash costs (primarily
depreciation of plant assets).
Let’s prepare the manufacturing overhead budget.

© McGraw Hill 8-57

 Manufacturing Overhead
Budget 2

April May June Quarter

Budgeted direct labor-hours 1,300 2,300 1,450 5,050
Variable mfg. OH rate
Variable mfg. OH costs
Fixed mfg. OH costs
Total mfg. OH costs
Less: Noncash costs
Cash disbursement for mfg. OH

Direct labor budget

© McGraw Hill 8-58

 Manufacturing Overhead
Budget 3

April May June Quarter

Budgeted direct labor-hours 1,300 2,300 1,450 5,050
Variable mfg. OH rate $ 20 $ 20 $ 20 $ 20
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 disbursement for mfg. OH $ 56,000 $ 76,000 $ 59,000 $ 191,000

Total mfg. OH for quarter $251, 000

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

* rounded

© McGraw Hill 8-59

 Manufacturing Overhead
Budget 4

April May June Quarter

Budgeted direct labor-hours 1,300 2,300 1,450 5,050
Variable mfg. OH rate $ 20 $ 20 $ 20 $ 20
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 disbursement for mfg. OH $ 56,000 $ 76,000 $ 59,000 $ 191,000

Depreciation is a noncash charge.

© McGraw Hill 8-60

 Ending Finished Goods
Inventory Budget 1

Production costs per unit Quantity Cost Total

Direct materials 5.00 Ibs. $ 0.40 $ 2.00

Direct materials budget

and information

© McGraw Hill 8-61

 Ending Finished Goods
Inventory Budget 2

Production costs per unit Quantity Cost Total

Direct materials 5.00 Ibs. $ 0.40 $ 2.00
Direct labor 0.05 hr. $ 10.00 0.50

Direct labor budget

© McGraw Hill 8-62

 Ending Finished Goods
Inventory Budget 3

Production costs per unit Quantity Cost Total

Direct materials 5.00 Ibs. $ 0.40 $ 2.00
Direct labor 0.05 hr. $ 10.00 0.50
Manufacturing overhead 0.05 hr. $ 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

© McGraw Hill 8-63

 Ending Finished Goods
Inventory Budget 4

Production costs per unit Quantity Cost Total

Direct materials 5.00 Ibs. $ 0.40 $ 2.00
Direct labor 0.05 hr. $ 10.00 0.50
Manufacturing overhead 0.05 hr. $ 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

© McGraw Hill 8-64

 Ending Finished Goods
Inventory Budget 5

Production costs per unit Quantity Cost Total

Direct materials 5.00 Ibs. $ 0.40 $ 2.00
Direct labor 0.05 hr. $ 10.00 0.50
Manufacturing overhead 0.05 hr. $ 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

© McGraw Hill 8-65

 Learning Objective 7
Prepare a selling and
administrative expense
budget.

© McGraw Hill 8-66

 Selling and Administrative
Expense Budget 1

At Royal, the selling and administrative expense budget is

divided into variable and fixed components.
The 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.

© McGraw Hill 8-67

 Selling and Administrative
Expense Budget 2

April May June Quarter

Budgeted sales 20,000
Variable S&A rate 0.50
Variable expenses $ 10,000
Fixed S&A expenses 70,000
Total S&A expenses 80,000
Less: Noncash expenses 10,000
Cash S&A expenses $ 70,000

Calculate the selling and administrative

cash expenses for the quarter.

© McGraw Hill 8-68

 Quick Check 6
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.

© McGraw Hill 8-69

 Quick Check 6a
What are the total cash disbursements for
selling and administrative expenses for the
quarter?
a. $180,000
b. Answer: $230,000.
c. $110,000
d. $70,000

© McGraw Hill 8-70

 Selling and Administrative
Expense Budget 3

April May June Quarter

Budgeted sales 20,000 50,000 30,000 100,000
Variable S&A rate 0.50 0.50 0.50 0.50
Variable expenses $ 10,000 $ 25,000 $ 15,000 $ 50,000
Fixed S&A expenses 70,000 70,000 70,000 210,000
Total S&A expenses 80,000 95,000 85,000 260,000
Less: Noncash expenses 10,000 10,000 10,000 30,000
Cash S&A expenses $ 70,000 $ 85,000 $ 75,000 $ 230,000

© McGraw Hill 8-71

 Learning Objective 8

Prepare a cash budget.

© McGraw Hill 8-72

 Format of the Cash Budget
The cash budget is divided into four sections:
1. Cash receipts section lists all cash inflows excluding cash
received from financing;
2. Cash disbursements section consists of all cash payments
excluding repayments of principal and interest;
3. Cash excess or deficiency section determines if the company
will need to borrow money or if it will be able to repay funds
previously borrowed; and
4. Financing section details the borrowings and repayments
projected to take place during the budget period.

© McGraw Hill 8-73

 Additional Cash Budget
Information
Assume the following information for 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 (both purchases paid in cash).
• Has an April 1 cash balance of $40,000.
© McGraw Hill 8-74
 Cash Budget 1

April May June Quarter

Beginning cash balance $ 40,000
Add: Cash collections 170,000
Total cash available $ 210,000
Less: Cash disbursements Schedule of expected
Materials cash collections
Direct labor
Manufacturing overhead
Selling and administrative
Equipment purchase
Dividend
Total disbursements
Excess (deficiency)
Financing:
Borrowing
Repayment
Interest
Total financing
Ending cash balance

© McGraw Hill 8-75

 Cash Budget 2

April May June Quarter

Beginning cash balance $ 40,000
Add: Cash collections 170,000
Total cash available $ 210,000
Less: Cash disbursements
Schedule of expected
Materials 40,000
cash disbursements
Direct labor 13,000
Manufacturing overhead
Manufacturing overhead 56,000
budget
Selling and administrative 70,000
Equipment purchase - Selling and
Dividend 49,000 administrative expense
Total disbursements 228,000 budget
Excess (deficiency)
Financing:
Borrowing
Repayment
Interest -
Total financing -
Ending cash balance -

© McGraw Hill 8-76

 Cash Budget 3

April May June Quarter

Beginning cash balance $ 40,000
Add: Cash collections 170,000
Total cash available $ 210,000
Less: Cash disbursements
Materials 40,000 Because Royal
Direct labor 13,000 maintains a cash
Manufacturing overhead 56,000 balance of $30,000,
Selling and administrative 70,000
the company must
Equipment purchase -
Dividend 49,000
borrow $48,000 on
Total disbursements 228,000 its line of credit.
Excess (deficiency) (18,000)
Financing:
Borrowing
Repayment
Interest -
Total financing -
Ending cash balance -

© McGraw Hill 8-77

 Cash Budget 4

April May June Quarter

Beginning cash balance $ 40,000
Add: Cash collections 170,000
Total cash available $ 210,000
Less: Cash disbursements
Materials 40,000
Direct labor 13,000 Because Royal
Manufacturing overhead 56,000 maintains a cash
Selling and administrative 70,000 balance of $30,000, the
Equipment purchase - company must borrow
Dividend 49,000 $48,000 on its line of
Total disbursements 228,000
credit.
Excess (deficiency) (18,000)
Financing:
Borrowing 48,000 Ending cash balance for
Repayment - April is the beginning
Interest - May balance.
Total financing 48,000
Ending cash balance $ 30,000

© McGraw Hill 8-78

 Cash Budget 5

April May June Quarter

Beginning cash balance $ 40,000 $ 30,000
Add: Cash collections 170,000 410,000
Total cash available $ 210,000 $ 440,000
Less: Cash disbursements
Materials 40,000 72,300
Direct labor 13,000 23,000
Manufacturing overhead 56,000 76,000
Selling and administrative 70,000 85,000
Equipment purchase - 143,700
Dividend 49,000 -
Total disbursements 228,000 400,000
Excess (deficiency) (18,000) 40,000
Financing:
Borrowing 48,000 -
Repayment - -
Interest - -
Total financing 48,000 -
Ending cash balance $ 30,000 $ 40,000

© McGraw Hill 8-79

 Quick Check 7
What is the excess (deficiency) of cash available
over disbursements for June?
a. $95,000.
b. $(21,000).
c. $175,000.
d. $130,500.

© McGraw Hill 8-80

 Quick Check 7a
What is the excess (deficiency) of cash available
over disbursements for June?
a. $95,000.
b. $(21,000).
c. $175,000.
d. Answer: $130,500.

© McGraw Hill 8-81

 Cash Budget 6

April May June Quarter

Beginning cash balance $ 40,000 $ 30,000 $ 40,000 $ 40,000
Add: Cash collections 170,000 410,000 360,000 940,000
Total cash available $ 210,000 $ 440,000 $ 400,000 $ 980,000
Less: Cash disbursements
Materials 40,000 72,300 72,700 185,000
Direct labor 13,000 23,000 14,500 50,500
Manufacturing overhead 56,000 76,000 59,000 191,000
Selling and administrative 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividend 49,000 - - 49,000
Total disbursements 228,000 400,000 269,500 897,500
Excess (deficiency) (18,000) 40,000 130,500 82,500
Financing: $48,000 × 16% × 3/12 =
$1,920
Borrowing 48,000 - 48,000
Borrowings on April 1 and
Repayment - - (48,000) (48,000) repayment on June 30.
Interest - - (1,920) (1,920)
Total financing 48,000 - (49,920) (1,920)
Ending cash balance $ 30,000 $ 40,000 $ 80,580 $ 80,580

© McGraw Hill 8-82

 Budgeted Income Statement
1

Cash Budget (Completed).

• Budgeted income statement.
With interest expense from the cash budget, Royal
can prepare the budgeted income statement.

© McGraw Hill 8-83

 Learning Objective 9
Prepare a budgeted income
statement.

© McGraw Hill 8-84

 Budgeted Income Statement
2

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 1,920
Net income $ 239,080

Sales budget
Ending finished goods inventory
Selling and administrative expense budget
Cash budget

© McGraw Hill 8-85

 Learning Objective 10
Prepare a budgeted
balance sheet.

© McGraw Hill 8-86

 Additional Budgeted Balance
Sheet Information
Royal reported the following account balances
prior to preparing its budgeted financial
statements:
• Land $50,000
• Common Stock $150,000
• Retained Earnings $248,650 (April 1)
• Equipment $175,000

© McGraw Hill 8-87

 Budgeted Balance Sheet 1

Royal Company
Budgeted Balance Sheet
June 30
Assets:
Cash $ 80,580
Accounts receivable 90,000
30% of June sales of $300,000
Raw materials inventory 4,600 11,500 lbs. at $0.40/lb.
Finished goods inventory 24,950
Land 50,000 5,000 units at $4.99 each
Equipment 367,000
Total assets $ 617,130

Liabilities and Stockholders’ Equity

Accounts payable $ 28,400
Common stock 150,000 50% of June purchases of $56,800
Retained earnings 438,730
Total liabilities and stockholders’ equity $ 617,130

© McGraw Hill 8-88

 Budgeted Balance Sheet 2

Royal Company
Budgeted Balance Sheet
June 30
Assets:
Cash $ 80,580
Accounts receivable 90,000
Raw materials inventory 4,600
Finished goods inventory 24,950
Land 50,000 Retained
Earnings
Equipment 367,000
Beginning balance $ 248,650
Total assets $ 617,130
Net income 239,080
Dividends (49,000)
Liabilities and Stockholders’ Equity Ending balance $ 438,730
Accounts payable $ 28,400
Common stock 150,000
Retained earnings 438,730
Total liabilities and stockholders’ equity $ 617,130

© McGraw Hill 8-89

 End of Chapter 8

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