1. The Master Budget CHAPTER 9
Professor Garvin, JD; CPA – ACG2071

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

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

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

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

8. 8

9. Operating Budgets Sales budget Production budget Production budget9
Sales budget
Production budget
Production budget
Direct materials budget
Direct materials budget
Direct labor budget
Direct labor budget
Manufacturing overhead budget
Manufacturing overhead budget
Operating expense budget
Budgeted income statement

10. Capital Expenditures and Financial Budgets10
Budgeted income statement
Capital expenditures budget
Cash budget
Budgeted balance sheet
Financial budgets

11. Budgeted income statement Combined cash budget Sales budget 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.
Budgeted income statement
Combined cash budget
Sales budget
Budgeted balance sheet
Cash payments budget
Direct materials budget
Production budget

12. Sales Budget 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

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

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

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

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

17. Direct Materials Budget
Tucson Tortilla: Direct Materials Budget for Masa Harina Corn Flour
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
Units to be produced
(from Production Budget)
29,000
20,500
25,700
75,200
× Quantity (pounds) of DM needed per unit
× 5 lbs
Quantity (pounds) needed for production
145,000
102,500
128,500
376,000
Plus: Desired end inventory of DM
10,250
12,850
16,150
Total quantity (pounds) needed
155,250
115,350
144,650
392,150
Less: Beginning inventory of DM
(14,500)
(10,250)
(12,850)
Quantity (pounds) to purchase
140,750
105,100
131,800
377,650
× Cost per pound
× $1.50
Total cost of DM purchases
$211,125
$157,650
$197,700
$566,475

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

19. Direct Labor Budget Tucson Tortilla Direct Labor Budget
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
Units to be produced
(from Production Budget)
29,000
20,500
25,700
75,200
× Direct labor hours per unit
× 0.05
Total hours required
1,450
1,025
1,285
3,760
× Direct labor cost per hour
× $22
Total Direct labor cost
$31,900
$22,550
$28,270
$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
March
1st Quarter
Units to be Produced (from Prod. Budget)
29,000
20,500
25,700
75,200
Variable Costs:
Indirect materials ($1.25 per case)
$36,250
$25,625
$32,125
$94,000
Indirect labor—variable ($0.75 per case)
21,750
15,375
19,275
56,400
Utilities—variable portion ($0.50 per case)
14,500
10,250
12,850
37,600
Total variable MOH
$72,500
$51,250
$64,250
$188,000
Fixed MOH Costs:
Depr. on factory and production equipment
10,000
30,000
Insurance and property taxes on the factory
3,000
9,000
Indirect labor—fixed portion
15,000
45,000
Utilities—fixed portion
2,000
6,000
Total fixed MOH
$30,000
$90,000
Total manufacturing overhead
$102,500
$81,250
$94,250
$278,000

21. Operating Expenses Budget
Tucson Tortilla Operating Expenses Budget
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
Sales units (from Sales Budget)
30,000
20,000
25,000
75,000
Variable Operating Expenses:
Sales commissions expense ($1.50 per case sold)
$45,000
$30,000
$37,500
$112,500
Shipping expense ($2.00 per case sold)
60,000
40,000
50,000
150,000
Bad debt expense (1% of credit sales)
4,800
3,200
4,000
12,000
Variable operating expenses
$109,800
$73,200
$91,500
$274,500
Fixed Operating Expenses:
Salaries
$20,000
$60,000
Office rent
Depreciation
6,000
18,000
Advertising
2,000
Telephone and Internet
1,000
3,000
Fixed operating  expenses
$33,000
$99,000
Total operating expenses
$142,800
$106,200
$124,500
$373,500

22. Budgeted Income Statement
Tucson Tortilla Budgeted Income Statement
For the month ended January 31
Sales ( 30,000 cases × $20 per case)
$ 600,000
Cost of goods sold (30,000 cases × $12.00 per case)
(360,000)
Gross profit
240,000
Operating expenses
(142,800)
Operating income
$97,200
Less: Interest expense (or add interest income)
Less: Provision for income tax*
(34,020)
Net income
$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)
$ 7.50
Direct labor ( 0.05 hours per case × $22 per hour)
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)
2.50
Fixed—$30,000 per month × 12 months = $360,000 for the year
So, the fixed cost per unit is $360,000 ÷ 400,000* cases
.90
Cost of manufacturing each case
$12.00
Back

24. For the Months of April through June
Gibbs Co. manufactures 2 sizes of cargo containers. Small sells for $100, Lge for $700. In 2nd 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 2nd quarter with column for each month & quarter total.
Gibbs Company
Sales Budget
For the Months of April through June
April
May
June
Quarter
Unit sales (small)
1,000
1,300
1,500
3,800
Sales price
x $100
x $100
Sales revenue (small)
$100,000
$130,000
$150,000
$ 380,000
Unit sales (large)
450
500
670
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

25. Thomas Cycles, Production Budget For the Quarter Ended June 30 Month
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 2nd quarter.
Thomas Cycles, Production Budget
For the Quarter Ended June 30
Month
April
May
June
2nd Quarter
Unit sales (from Sales Budget)
Plus: Desired end inventory
Total needed
Less: Beginning inventory
Units to produce
1,000
1,100
1,300
3,400
220
260
240
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
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 – 75lbs of flour. Prepare Direct Materials Budget for 3rd Quarter.
Bakery, Direct Materials Budget
For the Quarter Ended September 30
Month
July
August
September
3rd Quarter
Units to be produced
× 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
1,500
1,800
1,600
4,900
0.50
0.50
0.50
0.50
750
900
800
2,450 90 80 75 75
840
980
875
2,525 75 90 80 75
765
890
795
2,450
X $3.00
X $3.00
X $3.00
X $3.00
$ 2,295
$ 2,670
$ 2,385
$ 7,350

27. Connor Manufacturing Direct Labor Budget
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 1st qtr? Units to be produced: Jan – 500; Feb – 600; March - 800
Connor Manufacturing Direct Labor Budget
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
Units to be produced
(from Production Budget)
× Direct labor hours per unit
Total hours required
× Direct labor cost per hour
Total Direct labor cost
500
600
800
1,900
2.0
2.0
2.0
2.0
1,000
1,200
1,600
3,800
$ 15.00
$ 15.00
$ 15.00
$ 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
Probe’s variable MO rate is $1.50/dlh, fixed MO-$3,500/mo. How much MO will be budgeted for 2nd quarter? Budgeted D.L. Hrs: April – 400; May – 700; June - 600
Probe Corporation
Manufacturing Overhead Budget
For the Quarter Ended June 30
Month
April
May
June
2nd Quarter
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
400
700
600
1,700
$ 1.50
$ 1.50
$ 1.50
$ 1.50
$ 600
$ 1,050
$ 900
$ 2,550
$ 3,500
$ 3,500
$ 3,500
$ 10,500
$ 4,100
$ 4,550
$ 4,400
$ 13,050

29. Budgeted Unit Sales: July – 1200; Aug – 1400; Sept – 1700
Budgeted Unit Sales: July – 1200; Aug – 1400; Sept – 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 3rd Quarter.
Davenport Corporation Operating Expenses Budget
For the Quarter Ended Sept 31
Month
July
August
September
3rd Quarter
Sales units (from Sales Budget)
Variable Operating Expenses:
Variable operating expenses
( $4.00 per unit)
Fixed Operating Expenses:
Salaries
Office rent
Depreciation
Fixed operating  expenses
Total operating expenses
1,200
1,400
1,700
5,300
$ 4.00
$ 4.00
$ 4.00
$ 4.00
$ 4,800
$ 5,600
$ 6,800
$ 17,200
$ 5,000
$ 5,000
$ 5,000
$ 15,000
3,000
3,000
3,000
9,000
2,500
2,500
2,500
7,500
$ 10,500
$ 10,500
$ 10,500
$ 31,500
$ 15,300
$ 16,100
$ 17,300
$ 48,700

30. Budgeted Income Statement
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
Cost of goods sold
Gross profit
Operating expenses
Operating income
Less: Interest expense (or add interest income)
Less: Provision for income tax
Net income
(600 aids x $2,300)
$ 1,380,000
(600 aids x $1,400)
(840,000)
$ 540,000
(600 aids x $1.50) + $7,500
(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

32. Capital Expenditure Budget
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
Month
January
February
March
1st Quarter
New investments in Property, Plant and Equipment
$125,000

33. Cash Collections Budget
Tucson Tortilla Cash Collections Budget
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
Cash sales (from Sales Budget)
$120,000
$80,000
$100,000
$300,000
Collections on Credit Sales:
85% of credit sales made last month
425,000
408,000
272,000
1,105,000
14% of credit sales made two months ago
67,200
70,000
204,400
Total cash collections
$612,200
$558,000
$439,200
$1,609,400
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

34. Building a Cash Payments Budget
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
January
February
March
1st Quarter
Cash payments for DM purchases
$231,845
$211,125
$157,650
$600,620
Direct Labor Payments
January
February
March
1st Quarter
Cash payments for direct labor
$31,900
$22,550
$28,270
$82,720
Manufacturing Overhead
January
February
March
1st Quarter
Total manufacturing overhead
(from Budget)
$102,500
$81,250
$94,250
$278,000
Less: Depreciation
(not a cash expense)
(10,000)
(30,000)
Less: Property tax and insurance (paid twice a year, not monthly)
(3,000)
(9,000)
Plus: Semiannual payments for property taxes and insurance
18,000
Cash payments for MOH costs
$107,500
$68,250
$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
1st Quarter
Total operating expenses
$142,800
$106,200
$124,500
$373,500
Less: Depreciation expense
(6,000)
(18,000)
Less: Bad debt expense
(4,800)
(3,200)
(4,000)
(12,000)
Cash operating expenses
$132,000
$97,000
$114,500
$343,500

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

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

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

39. Notes to Budgeted Balance Sheet
A/R Net Balance: Jan credit sales (sales budget) $480, % 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) (5,550) A/R, net of allowance $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) $ 18,000
- January cost (MOH budget) (3,000)
Prepaid prop tax & insurance, Jan 31 $ 15,000
Stockholder’s Equity
Beginning Balance (LY ending bal.) $4,720,555
+ Net Income (Budgeted Income St) ,180
Stockholders’ equity, Jan $4,783,735

41. Sensitivity Analysis
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

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

43. Cash Collections Budget
Diamond Service
Cash Collections Budget
For the Quarter Ended March 31
Month
January
February
March
1st Quarter
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
$ 3,750
$ 3,000
$ 3,500
$ 10,250
3,375
2,700
3,150
$ 9,225
4,500
6,750
5,400
$ 16,650
720
450
675
$ 1,845
$ 12,345
$ 12,900
$ 12,725
$ 37,970

44. Sentinel Co. Cash Payments Budget for Month
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 mo.
Sentinel Co. Cash Payments Budget for Month
Month
Cash payments for direct materials purchases
- Month of purchase
- 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

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

46. The Master Budget for Service and Merchandising Companies
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
Month
January
February
March
Sales revenue (from Sales Budget)
$500,000
$520,000
$530,000
Cost of goods sold (60% of sales revenue)
$300,000
$312,000
$318,000
Plus: Desired ending inventory 10% of next month’s cost of goods sold)
31,200
31,800
b33,000
Total inventory required
331,200
343,800
351,000
Less: Beginning inventory
a(30,000)
(31,200)
(31,800)
Purchases of inventory
$301,200
$312,600
$319,200

48. END OF SEGMENT
Professor Garvin, JD; CPA – ACG2071