Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 20 Master Budgets and Performance Planning

Conceptual Learning Objectives C1: Describe the importance and benefits of budgeting and the process of budget administration. C2: Describe a master budget and the process of preparing it. 20-3

A1: Analyze expense planning using activity-based budgeting. Analytical Learning Objectives 20-4

P1: Prepare each component of a master budget and link each to the budgeting process. P2: Link both operating and capital expenditures budgets to budgeted financial statements. P3: Appendix 20A: Prepare production and manufacturing budgets. Procedural Learning Objectives 20-5

Advantages Communicates plans and instructions Promotes analysis and a focus on the future Motivates employees Provides a basis for evaluating performance against past or expected results Coordinates business activities Defines goals and objectives Budget Process C

Continuous or Rolling Budget The budget may be a monthly or quarterly budget that rolls forward one month or quarter at a time. As the current month or quarter is completed a new quarter is added. Qtr Qtr Qtr Qtr Budget Timing C1 20-7

Master Budget Components Sales budget Merchandise purchases Prepare financial budgets: l Cash l Income l Balance sheet Prepare capital expenditure budget Prepare selling and general administrative budgets C

Sales Budget (Exhibit 20.6) P1 20-9

Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks are on hand on September 30. Inventory to be purchased = Budgeted ending inventory + Budgeted cost of sales for the period – Budgeted beginning inventory Let’s prepare the purchases budget for Hockey Den. Merchandise Purchases Budget (Exhibit 20.7) P

Merchandise Purchases Budget (Exhibit 20.8) P

From Hockey Den’s sales budget Selling Expense Budget (Exhibit 20.9) P

General and Administrative Expense Budget (Exhibit 20.10) P

Cash budget (Expected Receipts & disbursements) Budgeted income statement Budgeted balance sheet Financial Budgets P

40% of Hockey Den’s sales are for cash. 60% are credit sales (collected in full in the month following sale). Let’s prepare the cash receipts budget for Hockey Den. Budgeted Cash Receipts P

40% are October cash sales Budgeted Cash Receipts P2 From Hockey Den’s sales budget 60 percent of September sales are collected in October 20-16

Budgeted Cash Receipts (Exhibit 20.12) P

Hockey Den’s purchases of merchandise are entirely on account. Full payment is made in the month following purchase. The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. Cash Disbursements for Purchases P

From merchandise purchases budget Cash Disbursements for Purchases P

Hockey Den: Will pay a cash dividend of $3,000 in November. Will purchase $25,000 of equipment in December. Has an income tax liability of $20,000 from the previous quarter that will be paid in October. Has a September 30 cash balance of $20,000. Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. Continue Cash Budget P

Hockey Den: Pays interest equal to 1% 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% income tax rate. Will pay taxes for current quarter next year. Let’s prepare the cash budget for Hockey Den. Cash Budget P

From Cash Disbursements for Purchases P2 From Cash Receipts Budget 20-22

P2 From Selling Expense Budget (Exhibit 20.14) 20-23

.01 × $10,000 Because Hockey Den maintains a minimum cash balance of $20,000, the company must borrow $12,800. P2 (Exhibit 20.14) 20-24

Ending cash balance for October is the beginning November balance. Cash Budget Continued P

.01 × $22,800 Cash balance is sufficient to repay the $22,800 loan. P2 (Exhibit 20.14) 20-26

P2 Exhibit

Cash Budget Continued P2 Exhibit

From the Sales Budget P2 From the Merchandise Purchases Budget Exhibit

From the Selling Expense Budget P2 Exhibit

From the General and Administrative Expense Budget Depreciation is a non-cash expense. P2 Exhibit

From the Cash Budget P2 Exhibit

$71,672 ×.40 P2 Exhibit

Hockey Den reports the following account balances 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 balance sheet for Hockey Den. Preparing a Budgeted Balance Sheet P

From the Cash Budget P2 Exhibit

From the Merchandise Purchases Budget P2 Exhibit

From the Budgeted Income Statement P2 Exhibit

From the Cash Budget P2 Exhibit

P2 Exhibit

Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. A1 Exhibit

End of Chapter