SPPTChap009.ppt
- 1. Financial Planning and Analysis: The Master Budget Chapter 9 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 2. Financial Planning and Analysis (FP&A) Systems A financial planning and analysis (FP&A) system helps managers assess the company’s future and know if they are reaching their performance goals. A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance. The planning component of the FP&A system is called the master budget. It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization. 9-2
- 3. Purposes of Budgeting Systems Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. 1. Planning 2. Facilitating Communication and Coordination 3. Allocating Resources 4. Controlling Profit and Operations 5. Evaluating Performance and Providing Incentives 9-3
- 4. Budgeted Income Statement Cash Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Direct Materials Budget Selling and Administrative Budget Direct Labor Budget Overhead Budget Ending Inventory Budget Direct Materials Budgeted Balance Sheet Budgeted Statement of Cash Flows 9-4
- 5. Activity-Based Costing versus Activity- Based Budgeting Resources Cost objects: products and services produced, and customers served. Activities Resources Forecast of products and services to be produced and customers served. Activities Activity-Based Costing (ABC) Activity-Based Budgeting (ABB) 9-5
- 6. Sales Budget Breakers, Inc. 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. 9-6
- 7. Sales Budget April May June Quarter Budgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10 $ 10 $ 10 $ 10 $ Total Revenue 200,000 $ 500,000 $ 300,000 $ 1,000,000 $ 9-7
- 8. Production Budget The management of Breakers, Inc. 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. 9-8
- 9. April May June Quarter Sales in units 20,000 50,000 30,000 100,000 Add: desired end. inventory 10,000 6,000 5,000 5,000 Total needed 30,000 56,000 35,000 105,000 Less: beg. inventory 4,000 10,000 6,000 4,000 Units to be produced 26,000 46,000 29,000 101,000 Production Budget May sales 50,000 units Desired percent 20% Desired inventory 10,000 units From sales budget March 31 ending inventory Ending inventory becomes beginning inventory the next month 9-9
- 10. Direct-Material Budget At Breakers, 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, 13,000 pounds of material are on hand. Material cost $.40 per pound. Let’s prepare the direct materials budget. 9-10
- 11. April May June Quarter Production in units 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 Direct-Material Budget From our production budget 10% of the following month’s production March 31 inventory 9-11
- 12. April May June Quarter Production in units 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 June Ending Inventory July production in units 23,000 Materials per unit 5 Total units needed 115,000 Inventory percentage 10% June desired ending inventory 11,500 Direct-Material Budget July Production Sales in units 25,000 Add: desired ending inventory 3,000 Total units needed 28,000 Less: beginning inventory 5,000 Production in units 23,000 9-12
- 13. Direct-Labor Budget At Breakers, each unit of product requires 0.1 hours of direct labor. The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Let’s prepare the direct labor budget. 9-13
- 14. April May June Quarter Production in units 26,000 46,000 29,000 101,000 Direct labor hours 0.10 0.10 0.10 0.10 Labor hours required 2,600 4,600 2,900 10,100 Guaranteed labor hours 3,000 3,000 3,000 Labor hours paid 3,000 4,600 3,000 10,600 Wage rate 8 $ 8 $ 8 $ 8 $ Total direct labot cost 24,000 $ 36,800 $ 24,000 $ 84,800 $ Direct-Labor Budget From our production budget This is the greater of labor hours required or labor hours guaranteed. 9-14
- 15. Overhead Budget Here is Breakers’ Overhead Budget for the quarter. April May June Quarter Indirect labor 17,500 $ 26,500 $ 17,900 $ 61,900 $ Indirect material 7,000 12,600 8,600 28,200 Utilities 4,200 8,400 5,200 17,800 Rent 13,300 13,300 13,300 39,900 Insurance 5,800 5,800 5,800 17,400 Maintenance 8,200 9,400 8,200 25,800 56,000 $ 76,000 $ 59,000 $ 191,000 $ 9-15
- 16. Selling and Administrative Expense Budget At Breakers, variable selling and administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are $70,000 per month. The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflow for the month. 9-16
- 17. Selling and Administrative Expense Budget April May June Quarter Sales in units 20,000 50,000 30,000 100,000 Variable S&A rate 0.50 $ 0.50 $ 0.50 $ 0.50 $ Variable expense 10,000 $ 25,000 $ 15,000 $ 50,000 $ Fixed S&A 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 70,000 $ 85,000 $ 75,000 $ 230,000 $ From our Sales budget 9-17
- 18. Cash Receipts Budget At Breakers, all sales are on account. The company’s collection pattern is: 70% collected in the month of sale, 25% collected in the month following the sale, 5% is uncollected. The March 31 accounts receivable balance of $30,000 will be collected in full. 9-18
- 19. 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 $ Cash Receipts Budget 9-19
- 20. Cash Disbursement Budget Breakers pays $0.40 per pound 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. No discounts are available. The March 31 accounts payable balance is $12,000. 9-20
- 21. April May June Quarter Accounts pay. 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 payments for materials 40,000 $ 72,300 $ 72,700 $ 185,000 $ Cash Disbursement Budget 140,000 lbs. × $.40/lb. = $56,000 9-21
- 22. Cash Disbursement Budget Breakers: Maintains a 12% open line of credit for $75,000. Maintains a minimum cash balance of $30,000. Borrows and repays loans on the last day of the month. Pays a cash dividend of $25,000 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. 9-22
- 23. April May June Quarter Beginning cash balance 40,000 $ Add: cash collections 170,000 Total cash available 210,000 Less: disbursements Materials 40,000 Direct labor 24,000 Mfg. overhead 56,000 Selling and admin. 70,000 Equipment purchase - Dividends 25,000 Total disbursements 215,000 Excess (deficiency) of Cash available over disbursements (5,000) $ To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit. Cash Budget (Collections and Disbursements) From our Cash Receipts Budget From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget 9-23
- 24. 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 labor 24,000 36,800 Mfg. overhead 56,000 76,000 Selling and admin. 70,000 85,000 Equipment purchase - 143,700 Dividends 25,000 - Total disbursements 215,000 413,800 Excess (deficiency) of Cash available over disbursements (5,000) $ 16,200 $ Cash Budget (Collections and Disbursements) Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000. 9-24
- 25. April May June Quarter Beginning cash balance 40,000 $ 30,000 $ 30,000 $ Add: cash collections 170,000 400,000 335,000 Total cash available 210,000 430,000 365,000 Less: disbursements Materials 40,000 72,300 72,700 Direct labor 24,000 36,800 24,000 Mfg. overhead 56,000 76,000 59,000 Selling and admin. 70,000 85,000 75,000 Equipment purchase - 143,700 48,300 Dividends 25,000 - - Total disbursements 215,000 413,800 279,000 Excess (deficiency) of Cash available over disbursements (5,000) $ 16,200 $ 86,000 $ At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12%. Cash Budget (Collections and Disbursements) 9-25
- 26. 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 labor 24,000 36,800 24,000 84,800 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 25,000 - - 25,000 Total disbursements 215,000 413,800 279,000 907,800 Excess (deficiency) of Cash available over disbursements (5,000) $ 16,200 $ 86,000 $ 37,200 $ Cash Budget (Collections and Disbursements) 9-26
- 27. April May June Quarter Excess (deficiency) of Cash available over disbursements (5,000) $ 16,200 $ 86,000 $ 37,200 $ Financing: Borrowing 35,000 13,800 48,800 Repayments - - (48,800) (48,800) Interest - - (838) (838) Total financing 35,000 13,800 (49,638) (838) Ending cash balance 30,000 $ 30,000 $ 36,362 $ 36,362 $ Cash Budget (Financing and Repayment) Interest Rate Borrowing Monthly Interest Rate Months Outstanding Interest Expense 12% / 12 = 1% $35,000 × 1% × 2 = $700 12% / 12 = 1% $13,800 × 1% × 1 = 138 838 $ Ending cash balance for April is the beginning May balance. 9-27
- 28. Cost of Goods Manufactured April May June Quarter Direct material: Beg.material inventory 5,200 $ 9,200 $ 5,800 $ 5,200 $ Add: Materials purchases 56,000 88,600 56,800 201,400 Material available for use 61,200 97,800 62,600 206,600 Deduct: End. material inventory 9,200 5,800 4,600 4,600 Direct material used 52,000 92,000 58,000 202,000 Direct labor 24,000 36,800 24,000 84,800 Manufacturing overhead 56,000 76,000 59,000 191,000 Total manufacturing costs 132,000 204,800 141,000 477,800 Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800 Subtotal 135,800 221,000 150,400 481,600 Deduct: End.Work-in-process inventory 16,200 9,400 17,000 17,000 Cost of goods manufactured 119,600 $ 211,600 $ 133,400 $ 464,600 $ 9-28
- 29. Cost of Goods Sold April May June Quarter Cost of goods manufactured 119,600 $ 211,600 $ 133,400 $ 464,600 $ Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400 Cost of goods available for sale 138,000 257,600 161,000 483,000 Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000 Cost of goods sold 92,000 $ 230,000 $ 138,000 $ 460,000 $ 9-29
- 30. Budgeted Income Statement Revenue (100,000 × $10) 1,000,000 $ Cost of goods sold 460,000 Gross margin 540,000 Operating expenses: Selling and admin. expenses 260,000 $ Interest expense 838 Total operating expenses 260,838 Net income 279,162 $ Breakers, Inc. Budgeted Income Statement For the Three Months Ended June 30 9-30
- 31. Budgeted Statement of Cash Flows April May June Quarter Cash flows from operating activities: Cash receipts from customers 170,000 $ 400,000 $ 335,000 $ 905,000 $ Cash payments: To suppliers of raw material (40,000) (72,300) (72,700) (185,000) For direct labor (24,000) (36,800) (24,000) (84,800) For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000) For selling and administrative expenses (70,000) (85,000) (75,000) (230,000) For interest - - (838) (838) Total cash payments (190,000) (270,100) (231,538) (691,638) Net cash flow from operating activities (20,000) $ 129,900 $ 103,462 $ 213,362 $ Cash flows from investing activities: Purchase of equipment - (143,700) (48,300) (192,000) Net cash used by investing activities - $ (143,700) $ (48,300) $ (192,000) $ Cash flows from financing activities: Payment of dividends (25,000) - - (25,000) Principle of bank loan 35,000 13,800 - 48,800 Repayment of bank loan - - (48,800) (48,800) Net cash provided by financing activities 10,000 $ 13,800 $ (48,800) $ (25,000) $ Net increase in cash (10,000) $ - $ 6,362 $ (3,638) $ Balance in cash, beginning 40,000 30,000 30,000 40,000 Balance in cash. end of month 30,000 $ 30,000 $ 36,362 $ 36,362 $ 9-31
- 32. Budgeted Balance Sheet Breakers reports the following account balances on March 31 prior to preparing its budgeted financial statements for June 30: • Land - $50,000 • Building (net) - $148,000 • Common stock - $217,000 • Retained earnings - $46,400 9-32
- 33. Breakers, Inc. Budgeted Balance Sheet June 30 Current assets Cash 36,362 $ Accounts receivable 75,000 Raw materials inventory 4,600 Work-in-process inventory 17,000 Finished goods inventory 23,000 Total current assets 155,962 Property and equipment Land 50,000 Building 148,000 Equipment 192,000 Total property and equipment 390,000 Total assets 545,962 $ Accounts payable 28,400 $ Common stock 217,000 Retained earnings 300,562 Total liabilities and equities 545,962 $ 25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit. 50% of June purchases of $56,800 Beginning balance 46,400 $ Add: net income 279,162 Deduct: dividends (25,000) Ending balance 300,562 $ 9-33
- 34. Budgeted Income Statement Cash Budget Sales of Services or Goods Ending Inventory Budget Work in Process and Finished Goods Production Budget Direct Materials Budget Selling and Administrative Budget Direct Labor Budget Overhead Budget Ending Inventory Budget Direct Materials Budgeted Balance Sheet Budgeted Statement of Cash Flows When the interactions of the elements of the master budget are expressed as a set of mathematical relations, it becomes a financial planning model that can be used to answer “what if” questions about unknown variables. 9-34
- 35. Budget Administration The Budget Committee is a standing committee responsible for . . . overall policy matters relating to the budget. coordinating the preparation of the budget. 9-35
- 36. Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.” 9-36
- 37. Participative Budgeting Flow of Budget Data Supervisor Supervisor Middle Management Supervisor Supervisor Middle Management Top Management 9-37
Editor's Notes
- #2: Chapter 9: Financial Planning and Analysis: The Master Budget
- #3: A financial planning and analysis (FP&A) system helps managers assess the company’s future and know if they are reaching their performance goals. A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance. The planning component of the FP&A system is called the master budget. It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization. (LO1)
- #4: A budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. The procedures used to develop a budget constitute a budgeting system. Budgeting systems have five primary purposes: (1) planning, (2) facilitating communication and coordination, (3) allocating resources, (4) controlling profit and operations and (5) evaluating performance and providing incentives. (LO2)
- #5: The master budget comprises many separate budgets, or schedules, that are interdependent. Based on the sales budget, a company develops a set of operational budgets that specify how its operations will be carried out to meet the demand for its goods or services. A manufacturing company develops a production budget, which shows the number of product units to be manufactured and ending inventory budgets. From the production budget, a manufacturer develops budgets for the direct materials, direct labor, and overhead that will be required in the production process. A budget for selling and administrative expenses also is prepared. The operational portion of the master budget is similar in a merchandising firm, but instead of a production budget for goods, a merchandiser develops a budget for merchandise purchases. A merchandising firm will not have a budget for direct materials. Based on the sales budget for its services, a service industry firm develops a set of budgets that show how the demand for those services will be met. Every business prepares a cash budget. This budget shows expected cash receipts, as a result of selling goods or services, and planned cash disbursements, to pay the bills incurred by the firm. The final portion of the master budget includes a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO3)
- #6: Applying ABC concepts to the budgeting process yields activity-based budgeting or ABB. Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities that are necessary to produce these products and services are determined. Finally, the resources necessary to perform the specified activities are quantified. Conceptually, ABB takes the ABC model and reverses the flow of the analysis. ABC assigns resource costs to activities, and then it assigns activity costs to products and services produced and customers served. ABB, on the other hand, begins by forecasting the demand for products and services as well as the customers to be served. These forecasts then are used to plan the activities for the budget period and to allocate the resources necessary to carry out the activities. (LO4)
- #7: We will prepare each type of budget that make up the master budget. Breakers, Inc. is preparing budgets for the quarter ending June 30. The unit sales are projected for the months of April through August. The selling price per unit is budgeted at $10. (LO5)
- #8: The projected units are multiplied by $10 for each month to determine the budgeted revenue for the months of April, May, June and the quarter. (LO5)
- #9: Now that the sales budget is complete, the production budget can be prepared. The purpose of the production budget is to ensure that production meets budgeted sales and provides sufficient ending inventory. Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. Management has determined that the ending inventory should be equal to 20% of the sales for the following month. At the end of March, there were 4,000 units on hand. (LO6)
- #10: The number of units projected to be sold in the first month is obtained from the sales budget. The desired ending inventory is calculated by multiplying the projected sales for the next month, May, by 20%. This is added to the projected sales to determine the units needed for April. The ending inventory for the previous month, March, is deducted from the amount needed to determine the number of units that must be produced. The ending inventory for the first month, April, becomes the beginning inventory for the second month. The May and June production budget are prepared in the same manner as April. Sales in units for the quarter is the sum of April, May and June sales. Since the end of June is also the end of the quarter, the ending inventory for the quarter is the same as the ending inventory for June. Since the beginning of April is also the beginning of the quarter, the beginning inventory for the quarter is the same as April’s beginning inventory. Total units needed for the quarter is the sum of the sales units and the ending inventory. The beginning inventory is subtracted from the total units needed to arrive at the units to be produced for the quarter. (LO6)
- #11: Five pounds for materials are required to produce one unit. Management has determined that direct materials ending inventory should be 10% of the next month’s production. There are 31,000 pounds of direct materials in March’s ending inventory. The cost is 40 cents per pound. (LO6)
- #12: The first row in the direct materials budget is the units to be produced each month and for the quarter. This information is obtained from the production budget. For each month, the units to be produced needs to be multiplied by 5 pounds to determine the amount of direct materials needed in each month. The ending inventory for April is 10% of May’s direct material needs. The desired ending inventory for April is added to the production needs for April. The beginning inventory is subtracted from the total direct material needed for the month to arrive at the materials to be purchased. The calculations are the same for each month. As in the production budget, the ending inventory for the quarter is the same as the ending inventory for June and the beginning inventory for the quarter is the same as the beginning inventory in April. (LO6)
- #13: The ending direct material inventory for June requires a bit more explanation. The projections for July must be expanded to determine the production budget for July, which will provide the information necessary to calculate the materials needed for June’s ending inventory. (LO6)
- #14: Each unit can be produced in one tenth of an hour. Breaker’s pays employees for 40 hours each week. The wage rate is $8 per hour and there is no overtime pay. Management has projected that direct laborers will be paid for a minimum of 3,000 hours per month for the next three months. (LO5)
- #15: The direct labor budget starts with the units to be produced from the production budget. The production for each month and the quarter is multiplied by one tenth of an hour to determine the labor hours required. The labor hours required is compared to the number of guaranteed labor hours. The labor hours to be paid is the greater of the two for each month. The labor hours to be paid for the quarter is the sum of the labor hours paid for the three months. The labor hours paid is multiplied by the $8 wage rate to determine the total direct labor cost. (LO5)
- #16: The manufacturing-overhead budget shows the cost of overhead expected to be incurred in the production process during the budget period. Breaker’s manufacturing overhead budget lists the expected cost of each overhead item by month. At the bottom of the schedule, the total budgeted overhead for each month is shown. (LO5)
- #17: Management at Breaker’s has projected the variable selling and administrative expenses to by 50 cents per unit sold. The fixed selling and administrative costs are projected to be $70,000 per month. Each month, $10,000 of the fixed expenses is for depreciation, which does not require a cash outflow. This information will be important when the cash disbursements budget is prepared. (LO5)
- #18: Once again, we start with the unit sales for each month and the quarter from the sales budget. The sales for each month and the quarter are multiplied by the variable selling and administrative cost rate of 50 cents per unit to determine the variable S&A costs. This is added to the fixed S&A costs of $70,000 for each month to arrive at the total S&A expenses for each month. Don’t forget that the fixed S&A expenses for the quarter is the sum of fixed S&A expenses for the three months. The noncash expenses are deducted from the total expenses to determine the amount of cash disbursements required for each month and the quarter for selling and administrative expenses. (LO5)
- #19: All sales at Breakers are on account. The company has experienced the following collection pattern: 70% collected in the month of the sale, 25% is collected in the month following the sale, 5% becomes uncollectible. The accounts receivable balance at the end of March is $30,000 and is expected to be collected in full in April. (LO5)
- #20: During April, the remainder of March’s sales will be collected, which is the $30,000 accounts receivable balance on March 31. 70% of April’s sales are also expected to be collected in April. Therefore, the total collections expected in April is $170,000. May’s collections will be 25% of April’s sales and 70% of May’s sales. June’s collections will be 25% of May’s sales and 70% of June’s sales. The collections for the quarter is the sum of the collections for the three months. (LO5)
- #21: Breakers pays 40 cents per pound for its materials. The company pays for half of its materials purchases in the month of the purchase and the remaining half is paid for in the following month. There are no discounts available to Breakers. The balance in accounts payable is $12,000 at the end of March. (LO5)
- #22: The purchases for each month is multiplied by 40 cents per pound to determine the cost of materials purchased for the month. This cost is then multiplied by 50%. 50% of April’s materials purchases will be paid for in April, the remaining 50% will be paid in May. This pattern is followed in May and June to determine the cash disbursements for materials for each month. The cash disbursements for each month are added together to determine the cash disbursements for the quarter. (LO5)
- #23: Breakers will also make cash disbursements for payments on an open line of credit, loans, a cash dividend, and equipment purchases. All borrowings and repayments occur on the last day of each month. (LO5)
- #24: The cash budget is a combination of the cash receipts budget, the cash disbursements for materials budget and other cash disbursements required, such as for direct labor and overhead. The cash budget starts with the beginning cash balance for April. This is also the beginning cash balance for the quarter. The cash collections for the month are found on the cash receipts budget and added to the beginning cash balance to arrive at the total cash available. The cash outflow for materials is found on the cash disbursements budget. The cash outflow for wages can be found on the direct labor budget. Cash outflow requirements for manufacturing overhead can be found on the overhead budget. Cash outflow for S&A costs can be found on the selling and administrative expense budget. There are no equipment purchases made in April, but dividends are paid. The disbursements are totaled and them subtracted from the total cash available for the month. In April, there is a cash deficit. (LO5)
- #25: Cash collections and disbursements are determined in the same manner for the month of May. Although there is not a cash deficit at the end of May, the $16,200 available is still below the $30,000 minimum balance requirement by $13,800. (LO5)
- #26: June’s collections and disbursements budget follows the same format. There will be enough cash at the end of June to repay the amounts borrowed in April and May plus the 12% interest. (LO5)
- #27: The beginning cash balance for the quarter is April’s beginning cash balance. The cash collections for the quarter are added to determine the total cash available for the quarter. Each item’s cash disbursements are totaled for the quarter and then added together to determine the total cash disbursements for the quarter. The disbursements for the quarter are then deducted from the collections for the quarter. There is a $37,200 cash surplus for the quarter. (LO5)
- #28: Now let’s discuss the financing and repayment needs. Because there is a cash deficit in April, Breakers must borrow $35,000 to maintain the $30,000 minimum balance required. The ending cash balance for April becomes the beginning cash balance for May. Cash collections and disbursements are determined in the same manner for the month of May. Although there is not a cash deficit at the end of May, the $16,200 available is still below the $30,000 minimum balance requirement by $13,800; therefore, Breakers must borrow an additional $13,800 at the end of May to have a $30,000 cash balance for the beginning of June. The $35,000 borrowed at the end of April requires a $700 interest payment and the $13,800 borrowed at the end of May requires an interest payment of $138. The total to be repaid for principle and interest is $49,638. The ending cash balance for June is also the ending cash balance for the quarter. The borrowings for the quarter is the sum of the borrowings in April and May. The repayments and interest for the quarter occurred in June. The ending cash balance for the quarter is the ending cash balance for June since the end of June is also the end of the quarter. (LO5)
- #29: The cost of goods manufactured schedule is prepared from the direct materials budget, the direct labor budget and the overhead budget. The ending work-in-process inventory amounts are estimates provided by management. The amounts for direct materials are in dollars, not units. The direct materials beginning inventory, purchases, and ending inventory amounts were taken from the direct materials budget. These amounts were multiplied by the cost of 40 cents per pound to arrive at the dollar amounts. (LO6)
- #30: The cost of goods sold schedule starts where the cost of goods manufactured left off. The cost of goods manufactured at the beginning of April can be divided by the units manufactured, 26,000, to arrive at a unit cost of $4.60. The 4,000 units in finished goods inventory at the beginning of April is multiplied by the unit cost to determine the beginning inventory cost. The ending inventory for each month is also multiplied by $4.60 to determine the cost of the ending inventory. Remember, the ending inventory for one month becomes the beginning inventory for the following month. The beginning inventory for the quarter is the same as the beginning inventory for April and the ending inventory for the quarter is the same as the ending inventory for June. (LO6)
- #31: Now that the cost of goods manufactured and cost of goods sold schedules are complete, the budgeted income statement can be prepared. A budgeted income statement for the quarter ending June 30 can now be prepared for Breakers. Revenue is taken from the sales budget. Cost of goods sold is taken from the cost of goods sold schedule. Gross margin is revenue less cost of goods sold. The operating expenses is taken from the selling and administrative expense budget and the cash budget. Net income is gross margin less total operating expenses. (LO5)
- #32: The information for the budgeted statement of cash flows can be taken from the cash budget. (LO5)
- #33: Account balances for property, plant, and equipment and stockholders’ equity accounts are needed before preparing the budgeted balance sheet. (LO6)
- #34: The budgeted balance sheet is prepared for the date June 30. Cash is taken from the cash budget or the budgeted statement of cash flows. Accounts receivable is 25% of June sales. (Recall the collections pattern from the cash collections schedule.) The raw materials, work-in-process, and finished goods inventory amounts can be taken from the cost of goods manufactured and costs of goods sold schedules. The amount for equipment can be taken from the cash disbursements budget or the budgeted statement of cash flows. The accounts payable balance is 50% of June’s purchases for direct materials. (Recall the cash disbursements pattern for direct materials.) The ending retained balance is the beginning balance plus net income less dividends paid. (LO6)
- #35: Managers must make assumptions and predictions in preparing budgets because organizations operate in a world of uncertainty. One way of coping with that uncertainty is to supplement the budgeting process with a financial planning model. A financial planning model is a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organization’s activities. A financial planning model is a mathematical expression of all the relationships expressed in a master budget flow chart. In a fully developed financial planning model, all of the key estimates and assumptions are expressed as general mathematical relationships. Then the model is run on a computer many times to determine the impact of different combinations of these unknown variables. “What if” questions can be answered about such unknown variables as inflation, interest rates, the value of the dollar, demand, competitors’ actions, union demands in forthcoming wage negotiations, and a host of other factors. The widespread availability of personal computers and electronic-spreadsheet software has made financial planning models a more common management tool. (LO7)
- #36: In small organizations, the procedures used to gather information and construct a master budget are usually informal. In contrast, larger organizations use a formal process to collect data and prepare the master budget. Such organizations usually designate a budget director or chief budget officer, which is often the controller. A budget committee, consisting of key senior executives, often is appointed to advise the budget director during the preparation of the budget. This committee is responsible for policy matters relating to the budget and coordinating the preparation of the budget. The authority to give final approval to the master budget usually belongs to the board of directors. By exercising its authority to make changes in the budget and grant final approval, the board of directors can have considerable influence on the overall direction the organization takes. E-budgeting is an increasingly popular, Internet-based budgeting tool that can help streamline and speed up an organization’s budgeting process. The e in e-budgeting stands for both electronic and enterprisewide; employees throughout an organization, at all levels and around the globe, can submit and retrieve budget information electronically via the Internet. Managers in organizations using e-budgeting have found that it greatly streamlines the entire budgeting process. In the past, these organizations have compiled their master budgets on hundreds of spreadsheets, which had to be collected and integrated by the corporate controller’s office. (LO8)
- #37: When a supervisor provides a departmental cost projection for budgetary purposes, there is an incentive to overestimate costs. When the actual cost incurred in the department proves to be less than the inflated cost projection, the supervisor appears to have managed in a cost-effective way. At least that is the perception of many managers, and, in the behavioral area, perceptions are what count most. These illustrations are examples of padding the budget. Budget padding means underestimating revenue or overestimating costs. The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called budgetary slack. (LO9)
- #38: Most people will perform better and make greater attempts to achieve a goal if they have been consulted in setting the goal. The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that “this is our budget,” rather than the all-too-common feeling that “this is the budget you imposed on us.” While participative budgeting can be very effective, it also can have shortcomings. Too much participation and discussion can lead to uncertainty and delay. Also, when those involved in the budgeting process disagree in significant and irreconcilable ways, the process of participation can accentuate those differences. Finally, the problem of budget padding can be severe unless incentives for accurate projections are provided. (LO9)