22 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,

22 - 1

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 22

Master Budgets and Planning

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Communicatesmanagement plans

throughout theorganization.

Provides a benchmarkfor evaluatingperformance.

Promotes analysisand a focus on

the future.

Converts long-termstrategic plans into short-term financial

plans.

Motivates employees throughparticipation in the budgeting process

and the establishment of attainable goals.

Enhances coordination so thatactivities of all units contribute to

meeting the company’s overall goals.

BudgetBudgetProcessProcess

C 1

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Consists of managers from all departments of the organization.

Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated.

Budget CommitteeC 1

*Most of the 9% have eliminated annual budgeting

in favor of rolling or continual budgeting.

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Flow of budget data is a bottom-up process.

S u p erv iso r S u p erv iso r

M id d leM a na ge m e nt

S u p erv iso r S u p erv iso r

M id d leM a na ge m e nt

T o p M an a ge m e nt

Budget CommitteeC 1

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2012 2013 2014 2015

Operating Budget

The annual operating budget The annual operating budget may be divided into quarterlymay be divided into quarterly

or monthly budgets.or monthly budgets.

Budget Timing

A continuous or rolling budget is a twelve-month

budget that rolls forward one month as the

current month is completed.

C 1

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Master Budget ComponentsC 2

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SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions+

Forecasts of customer needs from marketing personnel

Sales BudgetP 1

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In September 2013, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months:

Sales BudgetP 1

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HOCKEY DENMonthly Sales Budget

October 2013 – January 2014

Budgeted Budgeted BudgetedUnit Sales Unit Price Total Sales

September 2013 (actual) 700 100$ 70,000$

October 2013 1,000 100$ 100,000$ November 2013 800 100 80,000 December 2013 1,400 100 140,000 Total 3,200 100$ 320,000$

January 2014 900 100$ 90,000$

Sales BudgetP 1

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The quantity purchased will be affected by:

Just-in-time inventory systems that enable purchases of smaller, frequently

delivered quantities.

Safety stock inventory systems that provide protection against lost sales

caused by delays in supplier shipments.

Merchandise Purchases BudgetP 1

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Inventoryto be

purchased=

Budgetedending

inventory+

Budgeted cost of salesfor the period

–Budgetedbeginninginventory

Let’s prepare the purchases budget for Hockey Den.

Merchandise Purchases BudgetP 1

Hockey Den buys hockey sticks for $60 each and Hockey Den buys hockey sticks for $60 each and maintains an ending inventory equal to 90 percent maintains an ending inventory equal to 90 percent

of the next month’s budgeted sales. On of the next month’s budgeted sales. On September 30, 900 hockey sticks are on hand.September 30, 900 hockey sticks are on hand.

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HOCKEY DENMerchandise Purchases BudgetOctober 2013 – December 2013

October November DecemberNext month's unit sales 800 1,400 900 Ending inventory percentage × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add current month's unit salesTotal units neededDeduct beginning inventory unitsNumber of units to be purchasedBudgeted cost per unitBudgeted cost of purchases

Merchandise Purchases BudgetHOCKEY DEN

Merchandise Purchases BudgetOctober 2013 – December 2013

October November DecemberNext month's unit sales 800 1,400 900 Ending inventory percentage × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add current month's unit sales 1,000 800 1,400 Total units needed 1,720 2,060 2,210 Deduct beginning inventory unitsNumber of units to be purchasedBudgeted cost per unitBudgeted cost of purchases


October November DecemberNext month's unit sales 800 1,400 900 Ending inventory percentage × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add current month's unit sales 1,000 800 1,400 Total units needed 1,720 2,060 2,210 Deduct beginning inventory units 900 Number of units to be purchased 820 Budgeted cost per unit × $ 60Budgeted cost of purchases 49,200$

Beginning inventory is last month's ending inventory.


October November DecemberNext month's unit sales 800 1,400 900 Ending inventory percentage × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add current month's unit sales 1,000 800 1,400 Total units needed 1,720 2,060 2,210 Deduct beginning inventory units 900 720 1,260 Number of units to be purchased 820 1,340 950 Budgeted cost per unit × $ 60 × $ 60 × $ 60Budgeted cost of purchases 49,200$ 80,400$ 57,000$

Beginning inventory is last month's ending inventory.

P 1

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Let’s prepare the selling expense budget for Hockey Den.

Hockey Den pays sales commissions equal to 10 percent of total sales.

Hockey Den pays a monthly salary of $2,000 to its sales manager.

Selling Expense BudgetP 1

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HOCKEY DENSelling Expense Budget

October 2013 – December 2013

October November December TotalBudgeted sales 100,000$ 80,000$ 140,000$ 320,000$ Sales commission % × 10% × 10% × 10% × 10%Sales commission 10,000$ 8,000$ 14,000$ 32,000$ Sales manager's salary 2,000 2,000 2,000 6,000 Total selling expenses 12,000$ 10,000$ 16,000$ 38,000$

From Hockey Den’s sales budget

P 1

Selling Expense Budget

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Let’s prepare the general and administrativeexpense budget for Hockey Den.

General and administrative salaries are $4,500 per month.

Depreciation of equipment is $1,500 per month.

General and AdministrativeExpense Budget

P 1

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HOCKEY DENGeneral and Administrative Expense Budget


October November December TotalAdministrative salaries 4,500$ 4,500$ 4,500$ 13,500$ Equipment depreciation 1,500 1,500 1,500 4,500 Total 6,000$ 6,000$ 6,000$ 18,000$

P 1 General and AdministrativeExpense Budget

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Capital Expenditures Budget

Hockey Den does not anticipate disposal of any plant assets through December 2013, but management is planning to acquire additional equipment for $25,000 cash in December 2013.

Since this is the only budgeted capital expenditure for the quarter, no separate budget is shown.

P 1

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CashBudget

ExpectedReceipts

andDisbursements

BudgetedIncome

Statement

BudgetedBalance

Sheet

Financial BudgetsP 2

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Forty percent of Hockey Den’s sales are for cash.

The remaining 60 percent are credit sales that are collected in full in the month following the sale.

Let’s prepare the cash receipts budget for Hockey Den.

Budgeted Cash ReceiptsP 2

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HOCKEY DENCash Receipts Budget


September October November DecemberBudgeted sales 70,000$ 100,000$ 80,000$ 140,000$

Accounts receivable

Cash receipts from:Cash sales Collection of receivablesTotal cash receipts

From Hockey Den’s sales budget

60 percent of September sales are collected in October




Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$

Cash receipts from:Cash sales 40,000$ 32,000$ 56,000$ Collection of receivablesTotal cash receipts

40% of sales60% of sales




Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$

Cash receipts from:Cash sales 40,000$ 32,000$ 56,000$ Collection of receivables 42,000 60,000 48,000 Total cash receipts 82,000$ 92,000$ 104,000$

P 2

Budgeted Cash Receipts

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Hockey Den’s purchases of merchandise are entirely on account.

Full payment is made in the month following the purchase.

The September 30 balance of Accounts Payable is $58,200.

Let’s look at cash disbursementsfor purchases for Hockey Den.

P 2 Cash Disbursementsfor Purchases

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HOCKEY DENCash Disbursements for Purchases

October 2013 - December 2013

October payments (September 30 balance) 58,200$ November payments (October purchases) 49,200 December payments (November purchases) 80,400

From merchandise purchases budget

Cash Disbursementsfor Purchases

P 2

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Hockey Den:

– Has a September 30 cash balance of $20,000.

– Will pay a cash dividend of $3,000 in November.Continue

Cash BudgetP 2

BeginningCash

Balance

BudgetedCash Receipts

BudgetedCash

Disbursements

PreliminaryCash

Balance+ =–

If adequate, repay loans or buy securities.

If inadequate, increase short-term loans.

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Hockey Den:

– Has an income tax liability of $20,000 from the previous quarter that will be paid in October.

– Will purchase $25,000 of equipment in December.

– Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000.

– Pays interest each month equal to one percent of the prior month’s ending loan balance.

– Repays loans when the ending cash balance exceeds $20,000.

– Owes $10,000 on this loan arrangement on September 30.

– Has 40 percent income tax rate.

– Will pay taxes for current quarter next year.

Cash BudgetP 2

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HOCKEY DENCash Budget


October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandiseSales commissionsSales salariesAdministrative salariesIncome taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From Cash Receipts Budget



October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissionsSales salariesAdministrative salariesIncome taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From Cash Disbursementsfor Purchases



October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salariesIncome taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From Selling Expense Budget



October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxesDividendsInterestEquipment purchaseTotal disbursementsPreliminary balance

From General andAdministrative Expense Budget

Depreciation is anon-cash expense.



October November DecemberBeginning cash balance 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 DividendsInterest 100 Equipment purchaseTotal disbursements 94,800$ Preliminary balance 7,200$

.01 × $10,000

Because Hockey Denmaintains a minimum

cash balance of $20,000,the company must

borrow $12,800.

P 2

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October November DecemberPreliminary balance 7,200$ Additional borrowing 12,800 Loan repaymentEnding cash balance 20,000$

Ending loan balance 22,800$

Ending cash balance for October is the beginning November balance.

Cash Budget ContinuedP 2

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October November DecemberBeginning cash balance 20,000$ 20,000$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ 112,000$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 Dividends 3,000 Interest 100 228 Equipment purchaseTotal disbursements 94,800$ 66,928$ Preliminary balance 7,200$ 45,072$

.01 × $22,800Cash balanceis sufficientto repay the

$22,800 loan.

P 2

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October November DecemberPreliminary balance 7,200$ 45,072$ Additional borrowing 12,800 Loan repayment (22,800) Ending cash balance 20,000$ 22,272$

Ending loan balance 22,800$ $ 0

Ending cash balance for November is the beginning December balance.


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October November DecemberBeginning cash balance 20,000$ 20,000$ 22,272$ Receipts from customers 82,000 92,000 104,000 Total cash available 102,000$ 112,000$ 126,272$ DisbursementsPayments for merchandise 58,200$ 49,200$ 80,400$ Sales commissions 10,000 8,000 14,000 Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 Dividends 3,000 Interest 100 228 Equipment purchase 25,000 Total disbursements 94,800$ 66,928$ 125,900$ Preliminary balance 7,200$ 45,072$ 372$

P 2

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October November DecemberPreliminary balance 7,200$ 45,072$ 372$ Additional borrowing 12,800 19,628 Loan repayment (22,800) Ending cash balance 20,000$ 22,272$ 20,000$

Ending loan balance 22,800$ $ 0 19,628$


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Let’s prepare the budgeted incomestatement for Hockey Den.

Cash Budget

BudgetedIncome

Statement

Complete

d

Budgeted Income StatementP 2

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HOCKEY DENBudgeted Income Statement

For Three Months Ended December 31, 2013

Sales (3,200 units @ $100) 320,000$ Cost of goods sold (3,200 units @ $60) 192,000 Gross profit 128,000$ Operating expenses: Sales commissions 32,000$ Sales salaries 6,000 Administrative salaries 13,500 Equipment depreciation 4,500 Interest expense 328 56,328 Net income before taxes 71,672$ Income tax expense 28,669 Net income 43,003$

From the Sales BudgetP 2

From the Merchandise Purchases Budget

From the SellingExpense Budget

From the General and Administrative Expense Budget

Depreciation is a non-cash expense. $71,672 × .40

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Let’s prepare the budgeted balancesheet for Hockey Den.

BudgetedBalance

Sheet

Complete

d

BudgetedIncome

Statement

Budgeted Balance SheetP 2

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Hockey Den reports the following accountbalances on September 30 prior to preparing

its budgeted financial statements:– Equipment $200,000– Accumulated depreciation $ 36,000– Common stock $150,000– Retained earnings $ 41,800

Let’s prepare the budgeted balancesheet for Hockey Den.

Preparing a BudgetedBalance Sheet

P 2

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HOCKEY DENBudgeted Balance Sheet

December 31, 2013

AssetsCash 20,000$ Accounts receivable 84,000 Inventory 48,600 Equipment 225,000$ Less accumulated depreciation 40,500 184,500 Total assets 337,100$

Liabilities and EquityLiabilities Accounts payable 57,000$ Income taxes payable 28,669 Bank loan payable 19,628 105,297$ Stockholders' equity Common stock 150,000$ Retained earnings 81,803 231,803 Total liabilities and equity 337,100$

From the Cash Budget

P 2

From the Cash Receipts Budget

$36,000 September 30 balance plusthe $4,500 from the General andAdministrative Expense Budget

$200,000 September 30 balance plusthe $25,000 December acquisition

From the Merchandise PurchasesBudget (810 units @ $60)

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HOCKEY DENBudgeted Balance Sheet

December 31, 2013

AssetsCash 20,000$ Accounts receivable 84,000 Inventory 48,600 Equipment 225,000$ Less accumulated depreciation 40,500 184,500 Total assets 337,100$

Liabilities and EquityLiabilities Accounts payable 57,000$ Income taxes payable 28,669 Bank loan payable 19,628 105,297$ Stockholders' equity Common stock 150,000$ Retained earnings 81,803 231,803 Total liabilities and equity 337,100$

P 2

From the MerchandisePurchases BudgetFrom the Budgeted Income Statement

From the Cash BudgetBeginning retained earnings 41,800$ Add net income 43,003 Deduct dividends (3,000) Ending retained earnings 81,803$

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Global ViewRoyal Phillips Electronics of the Netherlands is a diversified Royal Phillips Electronics of the Netherlands is a diversified

company. Preparing budgets and evaluating progress helps the company. Preparing budgets and evaluating progress helps the company achieve its goals. In a recent annual report, the company achieve its goals. In a recent annual report, the

company reports that it budgets sales to grow at a faster pace company reports that it budgets sales to grow at a faster pace than overall economic growth. Based on this sales target, than overall economic growth. Based on this sales target,

company managers prepare detailed operating, capital company managers prepare detailed operating, capital expenditures, and financial budgets.expenditures, and financial budgets.

Budgeted and actual results of companies that do business Budgeted and actual results of companies that do business globally are impacted by changes in foreign currency exchange globally are impacted by changes in foreign currency exchange

rates as well as global and political uncertainties. Forecasting in rates as well as global and political uncertainties. Forecasting in that environment is difficult. that environment is difficult.

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Activity-Based Budgeting

Activity-based budgeting is based on activities rather than traditional items such

as salaries, supplies, depreciation, and utilities.

A 1

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P 3 Appendix 22A: Production and Manufacturing Budgets

Toronto Sticks CompanyProduction Budget


October November DecemberNext month's budgeted unit sales 800 1,400 900 Ratio of inventory to future sales × 90% × 90% × 90%Budgeted ending inventory units 720 1,260 810 Add budgeted sales for the month 1,000 800 1,400 Required units of available production 1,720 2,060 2,210 Deduct beginning inventory units 900 720 1,260 Number of units to be produced 820 1,340 950

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Appendix 22A: Production and Manufacturing Budgets

Toronto Sticks CompanyDirect Materials Budget


October November DecemberBudgeted unit production 820 1,340 950 Materials requirement per unit × 0.5 × 0.5 × 0.5Materials needed for production (units) 410 670 475 Add budgeted ending inventory (units) 335 237.5 225 Total materials requirements (units) 745 907.5 700 Deduct beginning inventory (units) 205 335 237.5 Materials to be purchased (units) 540 572.5 462.5

Materials price per unit 20$ 20$ 20$ Total cost of direct materials purchases 10,800$ 11,450$ 9,250$

P 3

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Toronto Sticks CompanyDirect Labor Budget


October November DecemberBudgeted unit production 820 1,340 950 Labor requirements per hour (hours) × 0.25 × 0.25 × 0.25Total labor hours needed 205 335 237.5 Labor rate per hour 12$ 12$ 12$ Total cost of labor 2,460$ 4,020$ 2,850$

P 3

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Toronto Sticks CompanyFactory Overhead Budget


October November DecemberBudgeted unit production 820 1,340 950 Variable factory overhead rate × $2.50 × $2.50 × $2.50Budgeted variable overhead 2,050$ 3,350$ 2,375$ Budgeted fixed overhead 1,500 1,500 1,500 Total cost of overhead 3,550$ 4,850$ 3,875$

P 3

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End of Chapter 22

Documents

22 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,