The Master Budget CHAPTER 9 Professor Garvin JD

The Master Budget CHAPTER 9 Professor Garvin, JD; CPA – ACG 2071

Budgeting 2 A plan for a specific period of time; Helps management determine how to use resources Used to estimate future costs & revenues Develop strategy Control Plan Act

3 Rolling (or Continuous) Budget A budget that is continuously updated, so that the next 12 months of operations are always budgeted

4 Participative or Top-Down Budgeting Differences Participative involves many levels of management Benefits Disadvantages

5 Starting Point for Developing the Budgets Prior year’s budgeted figures or actual results - OR 2. Zero-based budgeting

Benefits of Budgeting 6 Forces managers to plan Promotes coordination and communication Provides a benchmark

Master Budget 7 Comprehensive planning document for entire organization Consists of all supporting budgets

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Operating Budgets 9 Sales budget Production budget Direct materials budget Direct labor budget Operating expense budget Manufacturing overhead budget Budgeted income statement

10 Capital Expenditures and Financial Budgets Budgeted income statement Capital expenditures budget Cash budget Budgeted balance sheet Financial budgets

11 Identify the order in which a manufacturer would prepare the following budgets. Also note whether each budget is an operating budget or a financial budget. a. Budgeted income statement b. Combined cash budget c. Sales budget d. Budgeted balance sheet e. Cash payments budget f. Direct materials budget g. Production budget

Sales Budget 12 Plan for sales revenues in future periods � Economic models � Sales trends � Trade journals � Sales force estimates Number of units to be sold x Sales price per unit = Total sales revenue

Sales Budget 13 Unit sales (cases) Unit selling price Total sales revenue Type of : Cash sales (20%) Credit sales (80%) Total sales revenue Tucson Tortilla Sales Budget For the Quarter Ended March 31 Month January February March 30, 000 25, 000 × $20 $600, 000 $400, 000 $500, 000 $120, 000 480, 000 $600, 000 $80, 000 320, 000 $400, 000 $100, 000 400, 000 $500, 000 1 st Quarter 75, 000 × $20 $1, 500, 000 $300, 000 1, 200, 000 $1, 500, 000

Production Budget 14 +Units needed for sales + Desired ending inventory = Total units needed - Units in beginning inventory = Units to produce 14

Production Budget 15 Tucson Tortilla Production Budget For the Quarter Ended March 31 Month January Unit sales (from Sales Budget) Plus: Desired end inventory Total needed Less: Beginning inventory Units to produce February March 1 st Quarter 30, 000 25, 000 75, 000 2, 500 3, 200 32, 000 (3, 000) 29, 000 22, 500 (2, 000) 20, 500 28, 200 (2, 500) 25, 700 78, 200 (3, 000) 75, 200

Direct Materials Budget 16 + Quantity of DM needed for production + Desired DM ending inventory = Total quantity of DM needed - DM beginning inventory = Quantity of DM to purchase 16

Direct Materials Budget 17 Tucson Tortilla: Direct Materials Budget for Masa Harina Corn Flour For the Quarter Ended March 31 Month January Units to be produced (from Production Budget) × Quantity (pounds) of DM needed per unit Quantity (pounds) needed for production Plus: Desired end inventory of DM Total quantity (pounds) needed Less: Beginning inventory of DM Quantity (pounds) to purchase × Cost per pound Total cost of DM purchases February March 1 st Quarter 29, 000 20, 500 25, 700 75, 200 × 5 lbs 145, 000 102, 500 128, 500 376, 000 10, 250 155, 250 (14, 500) 140, 750 × $1. 50 $211, 125 12, 850 115, 350 (10, 250) 105, 100 × $1. 50 $157, 650 16, 150 144, 650 (12, 850) 131, 800 × $1. 50 $197, 700 16, 150 392, 150 (14, 500) 377, 650 × $1. 50 $566, 475

Direct Labor Budget 18 Units to be produced × DLH per unit = Total DLH needed × Cost per DLH = Total Direct Labor Cost 18

Direct Labor Budget 19 Tucson Tortilla Direct Labor Budget For the Quarter Ended March 31 Month January February Units to be produced (from Production Budget) × Direct labor hours per unit Total hours required × Direct labor cost per hour Total Direct labor cost March 1 st Quarter 29, 000 20, 500 25, 700 75, 200 × 0. 05 1, 450 × $22 $31, 900 × 0. 05 1, 025 × $22, 550 × 0. 05 1, 285 × $22 $28, 270 × 0. 05 3, 760 × $22 $82, 720 How many workers needed? Jan – 1450 hrs ÷ 160 hrs/mo = 9. 06 or 10 workers needed. Feb: 1025 hrs ÷ 160 = 7 workers needed in Feb.

20 Manufacturing Overhead Budget Tucson Tortilla Manufacturing Overhead Budget For the Quarter Ended March 31 Month January February Units to be Produced (from Prod. Budget) 29, 000 20, 500 Variable Costs: Indirect materials ($1. 25 per case) $36, 250 $25, 625 Indirect labor—variable ($0. 75 per case) 21, 750 15, 375 Utilities—variable portion ($0. 50 per case) 14, 500 10, 250 Total variable MOH $72, 500 $51, 250 Fixed MOH Costs: Depr. on factory and production equipment 10, 000 Insurance and property taxes on the factory 3, 000 Indirect labor—fixed portion 15, 000 Utilities—fixed portion 2, 000 Total fixed MOH $30, 000 Total manufacturing overhead $102, 500 $81, 250 March 25, 700 1 st Quarter 75, 200 $32, 125 19, 275 12, 850 $64, 250 $94, 000 56, 400 37, 600 $188, 000 10, 000 3, 000 15, 000 2, 000 $30, 000 $94, 250 30, 000 9, 000 45, 000 6, 000 $90, 000 $278, 000

Operating Expenses Budget 21 Tucson Tortilla Operating Expenses Budget For the Quarter Ended March 31 Month January February 30, 000 20, 000 Sales units (from Sales Budget) Variable Operating Expenses: Sales commissions expense ($1. 50 per case sold) Shipping expense ($2. 00 per case sold) Bad debt expense (1% of credit sales) Variable operating expenses Fixed Operating Expenses: Salaries Office rent Depreciation Advertising Telephone and Internet Fixed operating expenses Total operating expenses March 25, 000 1 st Quarter 75, 000 $45, 000 60, 000 4, 800 $109, 800 $30, 000 40, 000 3, 200 $73, 200 $37, 500 50, 000 4, 000 $91, 500 $112, 500 150, 000 12, 000 $274, 500 $20, 000 4, 000 6, 000 2, 000 1, 000 $33, 000 $142, 800 $20, 000 4, 000 6, 000 2, 000 1, 000 $33, 000 $106, 200 $20, 000 4, 000 6, 000 2, 000 1, 000 $33, 000 $124, 500 $60, 000 12, 000 18, 000 6, 000 3, 000 $99, 000 $373, 500

Budgeted Income Statement 22 Tucson Tortilla Budgeted Income Statement For the month ended January 31 Sales ( 30, 000 cases × $20 per case) Cost of goods sold (30, 000 cases × $12. 00 per case) Gross profit Operating expenses Operating income Less: Interest expense (or add interest income) Less: Provision for income tax* Net income $ 600, 000 (360, 000) 240, 000 (142, 800) $97, 200 0 (34, 020) $63, 180

23 Budgeted Manufacturing Cost per Unit Tucson Tortilla Budgeted Manufacturing Cost per Unit Direct materials (5 pounds of corn flour per case × $1. 50 per pound) Direct labor ( 0. 05 hours per case × $22 per hour) $ 7. 50 1. 10 Manufacturing overhead: Variable—indirect materials ($1. 25 per case), variable indirect labor ($0. 75 per case), and variable utilities ($0. 50 per case) Fixed—$30, 000 per month × 12 months = $360, 000 for the year So, the fixed cost per unit is $360, 000 ÷ 400, 000* cases Cost of manufacturing each case Back 2. 50 . 90 $12. 00

24 Gibbs Co. manufactures 2 sizes of cargo containers. Small sells for $100, Lge for $700. In 2 nd qtr of upcoming year, expected sales: April – 1, 000 small; 450 large; May – 1, 300 small; 500 large; June – 1, 500 small; 670 large. Prepare sales budget for 2 nd quarter with column for each month & quarter total. Gibbs Company Sales Budget For the Months of April through June April 1, 000 x $100, 000 May 1, 300 x $100 $130, 000 June 1, 500 x $100 $150, 000 Quarter 3, 800 x $100 $ 380, 000 450 x $700 500 x $700 670 x $700 1, 620 x $700 Sales revenue (large) $315, 000 $350, 000 $469, 000 $1, 134, 000 Total sales revenue $415, 000 $480, 000 $619, 000 $1, 514, 000 Unit sales (small) Sales price Sales revenue (small) Unit sales (large) Sales price

25 Thomas Cycles manufactures chainless bicycles. On 3/31, TC had 200 bikes in inv. The company has a policy that E. I. in any month must be 20% of the following month’s expected sales. TC expects to sell the following # bikes in each of next four months: April - 1, 000 bikes; May -1, 100; June – 1, 300; July – 1, 200. Prepare a production budget for the 2 nd quarter. Thomas Cycles, Production Budget For the Quarter Ended June 30 Month April Unit sales (from Sales Budget) Plus: Desired end inventory Total needed Less: Beginning inventory Units to produce May June 2 nd Quarter 1, 000 1, 100 1, 300 3, 400 220 260 240 1, 220 1, 360 1, 540 3, 640 200 220 260 200 1, 020 1, 140 1, 280 3, 440

26 Bakery produces bread. Each loaf requires ½ lb of flour costing $3/lb. Expected production is: July-1, 500 loaves; Aug. -1, 800; Sept. -1, 600; Oct. 1, 500. Co. policy is 10% of following mo. ’s flour needs on hand at end of month. End of June – 75 lbs of flour. Prepare Direct Materials Budget for 3 rd Quarter. Bakery, Direct Materials Budget For the Quarter Ended September 30 Month July Units to be produced August September 3 rd Quarter 1, 500 1, 800 1, 600 4, 900 × Quantity (pounds) of DM needed per unit 0. 50 Quantity (pounds) needed for production 750 900 800 2, 450 90 840 75 765 X $3. 00 $ 2, 295 80 90 890 X $3. 00 $ 2, 670 75 80 795 X $3. 00 $ 2, 385 75 2, 525 75 2, 450 X $3. 00 $ 7, 350 Plus: Desired end inventory of DM Total quantity (pounds) needed Less: Beginning inventory of DM Quantity (pounds) to purchase × Cost per pound Total cost of DM purchases

27 Connor Manuf. Production prepared following schedule. Each unit requires 2 hrs of DL. Direct labor workers are paid an average of $15/hr. How many hours required in 1 st qtr? Units to be produced: Jan – 500; Feb – 600; March - 800 Connor Manufacturing Direct Labor Budget For the Quarter Ended March 31 Month Units to be produced (from Production Budget) × Direct labor hours per unit Total hours required × Direct labor cost per hour Total Direct labor cost January February March 1 st Quarter 500 600 800 1, 900 2. 0 1, 000 1, 200 1, 600 3, 800 $ 15. 00 $ 15, 000 $ 18, 000 $ 24, 000 $ 57, 000

28 Probe’s variable MO rate is $1. 50/dlh, fixed MO-$3, 500/mo. How much MO will be budgeted for 2 nd quarter? Budgeted D. L. Hrs: April – 400; May – 700; June - 600 Probe Corporation Manufacturing Overhead Budget For the Quarter Ended June 30 Variable MOH Cost: Budgeted direct labor hours Indirect labor—Variable ($1. 50 per direct labor hour) Total variable MOH Fixed MOH Costs: Total fixed MOH Total manufacturing overhead Month May April 400 $ 1. 50 $ 600 $ 3, 500 $ 4, 100 700 $ 1. 50 $ 1, 050 $ 3, 500 $ 4, 550 June 600 2 nd Quarter 1, 700 $ 1. 50 $ 900 $ 1. 50 $ 2, 550 $ 3, 500 $ 4, 400 $ 10, 500 $ 13, 050

29 Budgeted Unit Sales: July – 1200; Aug – 1400; Sept – 1700. Variable operating exp. are $4. 00 per unit. Fixed monthly operating expenses include $5, 000 salaries; $3, 000 office rent; $2, 500 depreciation. Budget operating expenses for 3 rd Quarter. Davenport Corporation Operating Expenses Budget For the Quarter Ended Sept 31 Month July August September Sales units (from Sales Budget) Variable Operating Expenses: Variable operating expenses ( $4. 00 per unit) Variable operating expenses Fixed Operating Expenses: Salaries Office rent Depreciation Fixed operating expenses Total operating expenses 3 rd Quarter 1, 200 1, 400 1, 700 5, 300 $ 4. 00 $ 4, 800 $ 5, 600 $ 6, 800 $ 17, 200 $ 5, 000 3, 000 2, 500 $ 10, 500 $ 15, 300 $ 5, 000 3, 000 2, 500 $ 10, 500 $ 16, 100 $ 5, 000 3, 000 2, 500 $ 10, 500 $ 17, 300 $ 15, 000 9, 000 7, 500 $ 31, 500 $ 48, 700

Budgeted Income Statement 30 B&S manufactures hear aid devices. For Jan. they expect to sell 600 at an average price of $2, 300/unit. Avg manufacturing cost of each unit sold is $1, 400. Variable operating expenses will be $1. 50/unit sold & fixed operating expenses are expected to be $7, 500/month. Monthly interest expense is $3, 700. Co. has a 30% tax rate. Prepare budgeted income statement for January. Bell & Smythe Budgeted Income Statement For the month ended January 31 Sales (600 aids x $2, 300) Cost of goods sold (600 aids x $1, 400) Gross profit Operating expenses (600 aids x $1. 50) + $7, 500 Operating income Less: Interest expense (or add interest income) Less: Provision for income tax Net income $ 1, 380, 000 (840, 000) $ 540, 000 (8, 400) 531, 600 (3, 700) (158, 370) 369, 530

31 Financial Budget Components Capital expenditures budget Cash collections budget Cash payments budget Combined cash budget Budgeted balance sheet

Capital Expenditure Budget 32 Shows the company’s plans to invest in new property, plant, or equipment (capital investments). Tucson Tortilla Capital Expenditure Budget For the Quarter Ended March 31 New investments in Property, Plant and Equipment January $125, 000 Month February March 0 0 1 st Quarter $125, 000

Cash Collections Budget 33 Tucson Tortilla Cash Collections Budget For the Quarter Ended March 31 Month January February $120, 000 $80, 000 March $100, 000 1 st Quarter $300, 000 425, 000 67, 200 $612, 200 272, 000 67, 200 $439, 200 1, 105, 000 204, 400 $1, 609, 400 Cash sales (from Sales Budget) Collections on Credit Sales: 85% of credit sales made last month 14% of credit sales made two months ago Total cash collections 408, 000 70, 000 $558, 000 Credit Sales: Nov - $480, 000; Dec - $500, 000; Jan - $480, 000; Feb $320, 000 Anticipated January Collections of Credit Sales: 85% × $500, 000 (December credit sales) = $425, 000 14% × $480, 000 (November credit sales) = $67, 200

Building a Cash Payments Budget 34 Co. given “net 30 days” payment terms from suppliers so Co. waits 30 days to pay. Co will pay for Dec purchases, estimated to be $231, 845 in Jan, Jan purchases of $211, 125 in Feb. , and Feb. purchases of $157, 650 in March. DL workers paid twice a month for work performed during month. Co. pays for all MOH, ins & prop taxes in month incurred. Ins & prop taxes budgeted at $3000/month are paid on semiannual basis; in January & July. Direct Materials Payments Cash payments for DM purchases January February $231, 845 $211, 125 Direct Labor Payments Cash payments for direct labor January February $31, 900 $22, 550 Manufacturing Overhead Total manufacturing overhead (from Budget) Less: Depreciation (not a cash expense) Less: Property tax and insurance (paid twice a year, not monthly) Plus: Semiannual payments for property taxes and insurance Cash payments for MOH costs January February March $157, 650 1 st Quarter $600, 620 March $28, 270 1 st Quarter $82, 720 March 1 st Quarter $102, 500 $81, 250 $94, 250 $278, 000 (10, 000) (3, 000) (9, 000) 18, 000 $107, 500 0 $68, 250 0 $81, 250 18, 000 $257, 000

35 Building a Cash Payments Budget Co. pays for all operating exp. , (SG&A) except dep. & bad debt exp. in month incurred. Dep. & bad debt exp. are non-cash exp. , so never appear on cash payments budget. Bad debt exp. simply recognizes the sales revenue that will never be collected. These non-cash exp. need to be deducted from total operating exp. to arrive at monthly cash op exp. Operating Expenses January February March 1 st Quarter Total operating expenses $142, 800 $106, 200 $124, 500 $373, 500 Less: Depreciation expense Less: Bad debt expense Cash operating expenses (6, 000) (4, 800) $132, 000 (6, 000) (3, 200) $97, 000 (6, 000) (4, 000) $114, 500 (18, 000) (12, 000) $343, 500

Cash Payments Budget 36 Tucson Tortilla Cash Payments Budget For the Quarter Ended March 31 Month January February Cash payments for direct materials purchases $231, 845 $211, 125 Cash payments for direct labor 31, 900 22, 550 Cash payments for manufacturing overhead 107, 500 68, 250 Cash payments for operating expenses 132, 000 97, 000 Cash payments for capital investments Cash payments for income taxes Cash dividends Total cash payments 125, 000 0 25, 000 $653, 245 0 0 0 $398, 925 March $157, 650 28, 270 81, 250 1 st Quarter $600, 620 82, 720 257, 000 114, 500 343, 500 0 $381, 670 125, 000 0 25, 000 $1, 433, 840

Combined Cash Budget 37 Tucson Tortilla: Combined Cash Budget - For the Quarter Ended March 31 Month January February March Beginning balance of cash $36, 100 $15, 055 $153, 980 Cash collections 612, 200 558, 000 439, 200 Total cash available 648, 300 573, 055 593, 180 Less: Cash payments (653, 245) (398, 925) (381, 670) Ending cash balance before financing (4, 945) 174, 130 211, 510 Financing: Borrowings 20, 000 0 0 Repayments 0 (20, 000) 0 Interest payments 0 (150) 0 End cash balance $15, 055 $153, 980 $211, 510 1 st Quarter $36, 100 1, 609, 400 1, 645, 500 (1, 433, 840) 211, 660 20, 000 (20, 000) (150) $211, 510

38 Budgeted (Proforma)Balance Sheet Tucson Tortilla: Budgeted Balance Sheet - January 31 Assets Cash (from Cash Budget) Accounts receivable, net of allowance (Next Slide) Raw materials inventory (from Direct Materials Budget) Finished goods inventory (from Production Budget) Prepaid property taxes and insurance (Next Slide) Total current assets Property, plant, and equipment (BB $6, 225, 000 + 125, 000) Less: Accumulated depreciation (BB$1904000 + Jan Dep $16000) Property, plant, and equipment, net Total assets Liabilities and Stockholders’ Equity Accounts payable (Jan DM Purchases pd in Feb) Income tax liability (from income statement) Other current liabilities (line of credit) (from Cash Budget) Total liabilities Stockholders’ equity (Next Slide) Total liabilities and owner’s equity $15, 055 549, 450 15, 375 24, 000 15, 000 $618, 880 6, 350, 000 (1, 920, 000) 4, 430, 000 $5, 048, 880 $211, 125 34, 020 20, 000 $265, 145 4, 783, 735 $5, 048, 880

39 Notes to Budgeted Balance Sheet A/R Net Balance: Jan credit sales (sales budget) $480, 000 + 15% of Dec credit sales ($500, 000) not collected 75, 000 - Allow. for uncollectible accnts ($750 balance before adding $4, 800 bad debt exp (1% of $480, 000) A/R, net of allowance (5, 550) $549, 450

40 Notes to Budgeted Balance Sheet Prepaid Prop Tax & Insurance: Cash payment in Jan for MOH (tax & ins on Manuf facility) (from cash payments budget) - January cost (MOH budget) Prepaid prop tax & insurance, Jan 31 Stockholder’s Equity Beginning Balance (LY ending bal. ) $4, 720, 555 + Net Income (Budgeted Income St) 63, 180 $ 18, 000 (3, 000) $ 15, 000

Sensitivity Analysis 41 A what if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes 41

Cash Collections Budget Co. anticipates the following sales revenue over a five-month period: Nov 42 $16, 000; Dec-$10, 000; Jan-$15, 000; Feb-$12, 000; Mar-$14, 000. How much cash collected each Month? Mar Sales November Sales $16, 000 December Sales $10, 000 January Sales February Sales March Sales $15, 000 $12, 000 $14, 000 Jan Collections Credit $ Feb Collections 720 Credit 4, 500 Cash 3, 750 Credit 3, 375 $ 450 6, 750 Cash 3, 000 Credit 2, 700 Cash Collections $ 675 5, 400 3, 500 Sales are 25% cash and Credit 75% credit. Collection: 30% in the month of the sale; 3, 150 60% in the month after the sale; 6% two months after the sale; 4% are never

Cash Collections Budget 43 Diamond Service Cash Collections Budget For the Quarter Ended March 31 Month Cash sales (from Sales Budget) Collections on Credit Sales: 30% in the month of the sale 60% in the month after the sale 6% two months after the sale Total cash collections January February March 1 st Quarter $ 3, 750 $ 3, 000 $ 3, 500 $ 10, 250 3, 375 4, 500 720 $ 12, 345 2, 700 6, 750 450 $ 12, 900 3, 150 5, 400 675 $ 12, 725 $ 9, 225 $ 16, 650 $ 1, 845 $ 37, 970

Cash Payments Budget 44 Co. pays for 50% of DMs in month of purchase & rest next month. Last mo. ’s DM’s$70, 000, anticipated DM’s next month - $80, 000. DL for next month budgeted$32, 000 & will be paid at end of next month. MFO estimated-150% of DL cost each month& paid in month incurred. Estimate includes $11, 000 depreciation on plant & equip. Mo. Operating exp for next mo. expected-$43, 000, including $2, 000 dep on office equip. & 1, 000 bad debt exp. & are paid in month incurred. Co. will make $7, 000 est. tax payment next. Cash mo. Payments Budget for Month Sentinel Co. Month Cash payments for direct materials purchases - Month of purchase Cash payments for direct materials purchases - Month after purchase (from last month) Cash payments for direct labor Cash payments for manufacturing overhead Cash payments for operating expenses Cash payments for income taxes Total cash payments $ 40, 000 35, 000 32, 000 37, 000 40, 000 7, 000 $ 191, 000

The Master Budget for Service and Merchandising Companies 45 Service companies include: � � The Sales Budget The Operating Expenses Budget The Budgeted Income Statement The financial budgets are the same

The Master Budget for Service and Merchandising Companies 46 Merchandising companies include: � Sales Budget � Cost of Goods Sold, Inventory, and Purchases Budget � Operating Expenses Budget � Budgeted Income Statement � The financial budgets are the same

47 Circle J Convenience Store Cost of Goods Sold, Inventory, and Purchases Budget For the months of January and February Sales revenue (from Sales Budget) Cost of goods sold (60% of sales revenue) Plus: Desired ending inventory 10% of next month’s cost of goods sold) Total inventory required Less: Beginning inventory Purchases of inventory January $500, 000 Month February $520, 000 March $530, 000 $300, 000 $312, 000 $318, 000 31, 200 31, 800 b 33, 000 331, 200 a(30, 000) $301, 200 343, 800 (31, 200) $312, 600 351, 000 (31, 800) $319, 200

END OF SEGMENT Professor Garvin, JD; CPA – ACG 2071