Master Budgets Chapter 22.

Master Budgets Chapter 22

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Budgeting Objectives A budget is a financial plan that managers use to coordinate a business’s activities. Managers use budgets in fulfilling their major responsibilities. Exhibit 22-1 illustrates this process. First, strategies are developed—overall business goals, such as a goal to expand international operations or a goal to be a value leader in one market while diversifying into other markets. Companies then plan and budget for specific actions to achieve those goals. The next step is to act—to carry out the plans. After acting, managers compare actual results with the budget and use the information to make control decisions. The feedback allows them to determine what, if any, corrective action to take. If, for example, the company spent more than expected in one area of operations, managers must cut other costs or increase revenues. These decisions then affect the company’s future strategies and plans. Notice that the process is a loop—the control step is not an end, but an input into the develop strategies step. Successful companies use current period results to help make decisions regarding the company’s future. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Benefits of Budgeting Requires managers to plan
Promotes coordination and communication Provides a benchmark for evaluating actual performance One benefit of budgeting is that is requires managers to plan for the company’s future. Decisions are then based on this formalized plan, which helps prevent haphazard decision making. Keep in mind, however, that budgets are plans for future activities and may need to be modified. Another benefit is that the budget coordinates a company’s activities. Creating a budget facilitates coordination and communication by requiring managers at different levels and in different functions across the entire value chain to work together to make a single, unified, comprehensive plan for the business. A third benefit is that budgets provide a benchmark that motivates employees and helps managers evaluate performance. In most companies, part of the manager’s performance evaluation depends on how actual results compare to the budget. This can be done through a performance report.

Income Statement Performance Report
Exhibit 22-2 Performance Report SERVICE COMPANY Income Statement Performance Report For the Month Ended May 31, 2016 Actual Budget Variance Number of Services Sold 19,000 20,000 (1,000) Service Revenue $ 589,000 $ 600,000 $ (11,000) Variable Expenses: Server Space Expense 38,000 45,000 (7,000) Advertising Expense 29,450 30,000 (550) Total Variable Expenses 67,450 75,000 (7,550) Contribution Margin 521,550 525,000 (3,450) Fixed Expenses: Salary Expenses Internet Access Expense 18,000 Total Fixed Expenses Operating Income $ 483,550 $ 487,000 $ (3,450) Exhibit 22-3 illustrates a performance report for a service company. This report identifies variances—the areas where the actual results differed from the budget. Looking at the report, we see that Actual Service Revenue was $11,000 less than budgeted Service Revenue. This was caused by two factors. The company was able to sell at a higher average price per service. The actual price per service is calculated as $31 per service, or $589,000 divided by 19,000 services, whereas the planned price was $30 per service, or $600,000 divided by 20,000 services. However, the company sold 1,000 fewer services than it planned to sell (19,000 actual services less 20,000 budgeted services). The increase in price per service was not enough to make up for the decrease in the number of services sold. Variable expenses were less than budgeted for both Server Space Expense and Advertising Expense, which creates a favorable variance. Actual Server Space Expense was less than budgeted Server Space Expense because the company sold 1,000 fewer services and because the company reduced the Server Space Expense per service. It budgeted $2.25 per service budgeted, or $45,000 divided by 20,000 services. Its actual cost was $2.00 per service, or $38,000 divided by 19,000 services. Advertising expense remained constant at 5% of revenues, but due to the $11,000 reduction in revenues, Advertising Expense was $550 less, calculated as $11,000 multiplied by 5%. Actual fixed expenses were exactly the same as budgeted fixed expenses. Considering this company’s fixed expenses, one wouldn’t expect these to change unless the company changed the pay rate or number of employees or unless the company negotiated a new contract with its Internet service provider.

Budgeting Procedures Vary from company to company
Should include income from all levels Usually begins several months before the beginning of the budget period The budgeting process varies from company to company. For a small company, the process may be relatively simple and somewhat informal. In larger companies, however, the process can be very complex, with a budget committee coordinating the process. To achieve the benefit of motivating employees, the budget should include input from all levels. This requires significant coordination among the company’s various business segments. Therefore, the budgeting process usually begins several months before the beginning of the budget period.

How Managers Motivate Employees to Accept the Budget’s Goals
Managers must support the budget themselves, or no one else will. Managers must show employees how budgets can help them achieve better results. Managers must have employees participate in developing the budget so that employees feel the goals are realistic and achievable. The most important part of a budgeting system is getting managers and employees to accept the budget so the company can reap the planning, coordination, and control benefits illustrated in Exhibit Few people enjoy having their work monitored and evaluated. If managers use the budget as a benchmark to evaluate employees’ performance, managers must first motivate employees to accept the budget’s goals. Here is how they can do it: • Managers must support the budget themselves, or no one else will. • Managers must show employees how budgets can help them achieve better results. • Managers must have employees participate in developing the budget so that employees feel the goals are realistic and achievable.

Budgetary Games Budgetary slack Spend it or lose it
Managers’ performance is also evaluated by comparing actual results to the budget. When they develop the company’s budget, they may be tempted to participate in budgetary “gaming” and build in budgetary slack. Budgetary slack occurs when managers intentionally understate expected revenues or overstate expected expenses. This increases the chance that actual performance will be better than the budget and that they will receive a good evaluation. But adding slack into the budget makes it less accurate and less useful for planning and control. Another budgetary game is referred to as spend it or lose it. In many companies, if a business segment has a budgeted expense item and does not spend as much as expected for the item, there is a fear the budgeted item will have a lower amount in future budget periods. For example, if the Accounts Payable Department budget allows for $5,000 in Supplies Expense and the department only spends $3,000, then there is a fear the amount will be reduced to $3,000 in the next budget. The employees are then motivated to purchase unneeded supplies, which reduces the operating income for the company.

Types of Budgets Strategic and operational budgets
Static and flexible budgets Master budgets There are many different purposes for budgeting; therefore, there are many different types of budgets. Let’s look at some different types. First, we’ll discuss strategic and operational budgets. A strategic budget is a long-term financial plan used to coordinate the activities needed to achieve the long-term goals of the company. Strategic budgets often span 3 to 10 years. Because of their longevity, they often are not as detailed as budgets for shorter periods. The term “operational” generally indicates a short-term goal. After the company develops strategies and creates a strategic budget, the next step is to plan for shorter periods. An operational budget is a short-term financial plan used to coordinate the activities needed to achieve the short-term goals of the company. Operational budgets are most often one year in length, but may also span only a week, a month, or a quarter, depending on the company’s needs. Operational budgets are generally much more detailed than strategic budgets. Next, let’s examine static and flexible budgets. A static budget is a budget prepared for only one level of sales volume. For example, Smart Touch Learning, the fictitious company we have used to illustrate accounting concepts throughout the textbook, may prepare a budget based on annual sales of 2,000 touch screen tablet computers. All revenue and expense calculations would be based on sales of 2,000 tablets. A flexible budget is a budget prepared for various levels of sales volume. This type of budget is useful for what if analysis. Smart Touch Learning may expect to sell 2,000 tablet computers, but a flexible budget showing results for selling 1,600 tablets, 1,800 tablets, 2,000 tablets, 2,200 tablets, and 2,400 tablets allows managers to plan for various sales levels. Flexible budgets are covered in detail in the next chapter. The master budget, which is what we will be discussing in this chapter, is the set of budgeted financial statements and supporting schedules for the entire organization. Budgeted financial statements are financial statements based on budgeted amounts rather than actual amounts. The master budget is operational and static.

Master Budget Components
Exhibit 22-3 Master Budget Components Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Operating Budget Cost of Goods Sold Budget Selling and Administrative Expense Budget Exhibit 22-3 shows the order in which managers prepare the components of the master budget for a manufacturing company such as Smart Touch Learning. The exhibit shows that the master budget includes three types of budgets: • The operating budget • The capital expenditures budget • The financial budget The operating budget is the set of budgets that projects sales revenue, cost of goods sold, and selling and administrative expenses, all of which feed into the budgeted income statement that projects operating income for the period. The first component of the operating budget is the sales budget, the cornerstone of the master budget. Why? Because sales affect most other components of the master budget. The company will not produce products it does not expect to sell. Additionally, variable production and period costs are projected based on sales and production levels. Therefore, the sales budget is the first step in developing the master budget. The second type of budget is the capital expenditures budget. This budget presents the company’s plan for purchasing property, plant, equipment, and other long-term assets. The third type of budget is the financial budget. The financial budget includes the cash budget and the budgeted financial statements. Prior components of the master budget provide information for the first element of the financial budget: the cash budget. The cash budget details how the business expects to go from the beginning cash balance to the desired ending cash balance and feeds into the budgeted balance sheet and the budgeted statement of cash flows. These budgeted financial statements look exactly like ordinary financial statements. The only difference is that they list budgeted, or projected, amounts rather than actual amounts. Capital Expenditures Budget Cash Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows Financial Budget

>TRY IT! Match the budget types to the definitions.
Budget Types Definitions 5. Financial a. Includes sales, production, and cost of goods sold budgets 6. Flexible b. Long-term budgets 7. Operating c. Includes one level of sales volume 8. Operational d. Includes various levels of sales volumes 9. Static e. Short-term budgets 10. Strategic f. Includes the budgeted financial statements

Prepare an operating budget for a manufacturing company
Learning Objective 3 Prepare an operating budget for a manufacturing company

Master Budget Components

Data for the Sales Budget
Will sell 500 tablet computers in the first quarter Sales will increase by 50 tablets each quarter The tablets sell for $500 each The first step in preparing the master budget is the sales budget. The forecast of sales revenue is the cornerstone of the master budget because the level of sales affects expenses and almost all other elements of the master budget. The sales and marketing teams at Smart Touch Learning project that the company will sell 500 tablet computers in the first quarter of 2017, with sales increasing by 50 tablets each quarter. The tablets sell for $500 each. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

For the Year Ended December 31, 2017
Sales Budget Exhibit 22-5 Sales Budget SMART TOUCH LEARNING Sales Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be sold 500 550 600 650 2,300 Sales price per unit × $500 × $500 Total sales $ 250,000 $275,000 $300,000 $325,000 $ 1,150,000 Exhibit 22-5 shows the sales budget for Smart Touch Learning for Budgeted total sales for each product equals the sales price multiplied by the expected number of units sold. The total sales for the year will be carried to the budgeted income statement.

Calculation of Budgeted Tablets to be Produced
Budgeted tablets to be sold + Desired tablets in ending inventory Total tablets needed − Tablets in beginning inventory Budgeted tablets to be produced Next, we will prepare the production budget. The production budget determines the number of tablets to be produced during the year and is the basis for the production costs budgets: direct materials budget, direct labor budget, and manufacturing overhead budget. Additionally, the information is used to complete the cost of goods sold budget. Let’s look at the formula we will use to prepare the production budget. To calculate the number of tablets to be produced, start with the number of tablets projected to be sold. Add to this amount the desired number of tablets for ending Finished Goods Inventory to calculate the total number of tablets needed. Keep in mind that Smart Touch Learning does not want to end the period with zero inventory; it wants to have enough tablets on hand to begin the next period. The company should have the minimum amount of inventory to be sure the company balances providing goods to customers with turning over the inventory efficiently. Keeping inventory at the minimum level that meets these needs helps reduce inventory storage costs, insurance costs, and warehousing costs, and it reduces the potential for inventory to become obsolete. After determining the number of tablets needed, subtract the number of tablets already on hand in beginning Finished Goods Inventory. The difference is the number of tablets to be produced.

Data for the Production Budget
Finished Goods Inventory balance, $55,000 (see December 31, 2016 balance sheet in Exhibit 22- 4), which consists of 200 tablets at a cost of $275 each Desired ending inventory = 20% of the next quarter’s sales Projected tablets sales in the first quarter of is 700 tablets (50 tablets more than fourth quarter 2017) The following data is needed to prepare the production budget for Smart Touch Learning: • The December 31, 2016 balance sheet for Smart Touch Learning shown in Exhibit 22-4 indicates the Finished Goods Inventory account has a balance of $55,000, which consists of 200 tablets at a cost of $275 each. • The company desires to have an ending inventory each quarter equal to 20% of the next quarter’s sales. • Assume the projected tablets to be sold during the first quarter of 2018 is 700 tablets, 50 tablets more than fourth quarter 2017.

Calculations for Desired Ending Inventory
First Quarter: Second quarter’s sales × 20% = Desired ending inventory Second Quarter: Third quarter’s sales × 20% = Desired ending inventory Third Quarter: Fourth quarter’s sales × 20% = Desired ending inventory Fourth Quarter: First quarter’s sales (2018) × 20% = Desired ending inventory Before we can prepare the production budget, we must compute the ending finished goods inventory for each quarter. The ending inventory is needed in the calculation of number of tablets to be produced. As stated in the data for Smart Touch Learning, the company desires to have an ending finished goods inventory that is equal to 20% of the next quarter’s sales.

First Quarter: Second quarter’s sales × 20% = Desired ending inventory 550 tablets × 20% = 110 tablets Second Quarter: Third quarter’s sales × 20% = Desired ending inventory 600 tablets × 20% = 120 tablets Third Quarter: Fourth quarter’s sales × 20% = Desired ending inventory 650 tablets × 20% = 130 tablets Fourth Quarter: First quarter’s sales (2018) × 20% = Desired ending inventory 700 tablets × 20% = 140 tablets Now that we have calculated the ending inventory for each quarter, we can prepare the production budget.

Production Budget Exhibit Production Budget SMART TOUCH LEARNING Production Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be sold 500 550 600 650 2,300 Plus: Desired tablets in ending inventory 110 120 130 140 Total tablets needed 610 670 730 790 2,440 Less: Tablets in beginning inventory 200 Budgeted tablets to be produced 410 560 660 2,240 Exhibit 22-6 illustrates the production budget for Smart Touch Learning. Note that one period’s ending inventory becomes the next period’s beginning inventory.

Calculation of Amount of Material to be Purchased
Budgeted tablets to be produced × Direct materials cost per unit Direct materials needed for production + Desired direct materials in ending inventory Total direct materials needed − Direct materials in beginning inventory Budgeted purchases of direct materials Smart Touch Learning has determined the number of tablets to be produced each quarter. The next step is to determine the production costs for the tablets, beginning with direct materials costs. The company must estimate the direct materials cost per unit. Then, the company needs to determine the amount of materials to purchase each quarter. The amount of indirect materials needed for the production of tablet computers has been determined to be insignificant and will therefore not be considered in the calculation. That means that the amount of materials in the Raw Materials Inventory account is assumed to be only direct materials. Just as the Finished Goods Inventory account must be considered when calculating the amount of tablets to produce, the Raw Materials Inventory account must be considered when calculating the amount of materials to be purchased. The number of units to be produced is multiplied by the direct materials cost per unit to determine the direct materials needed for production. Direct materials needed for production plus the desired ending inventory gives us the total direct materials needed. By then subtracting the direct materials in ending inventory, we arrive at the budgeted purchases of direct materials. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for the Direct Materials Budget
Raw Materials Inventory balance, $30,000 (see the December 31, 2016, balance sheet in Exhibit 22-4) Desired ending Raw Materials Inventory = 40% of the next quarter’s production needs Desired ending balance for the fourth quarter, $42,600. Cost of direct materials is $150 per unit. The following data is needed to prepare the direct materials budget for Smart Touch Learning: • The December 31, 2016, balance sheet in Exhibit 22-4 places the Raw Materials Inventory balance at $30,000. • Desired ending Raw Materials Inventory is 40% of the next quarter’s production needs. • The desired ending balance for the fourth quarter is $42,600. • The purchasing department has projected that the cost of direct materials is $150 per unit.

First Quarter: 2nd quarter’s production × $150 per unit × 40% = Desired ending inventory Second Quarter: 3rd quarter’s production× $150 per unit × 40% = Desired ending inventory Third Quarter: 4th quarter’s production × $150 per unit × 40% = Desired ending inventory Fourth Quarter: Amount given = Desired ending inventory Before we can prepare the direct materials budget, we must compute the ending raw materials inventory for each quarter. The ending inventory is needed in the calculation of purchases of direct material. As stated in the data for Smart Touch Learning, the company desires to have an ending inventory that is equal to 40% of the next quarter’s production, and the cost of direct materials is $150 per unit.

First Quarter: 2nd quarter’s production × $150 per unit × 40% = Desired ending inventory 560 tablets × $150 per unit × 40% = $33,600 Second Quarter: 3rd quarter’s production× $150 per unit × 40% = Desired ending inventory 610 tablets × $150 per unit × 40% = $36,600 Third Quarter: 4th quarter’s production × $150 per unit × 40% = Desired ending inventory 660 tablets × $150 per unit × 40% = $39,600 Fourth Quarter: Amount given = Desired ending inventory = $42,600 Now that we have calculated the ending raw materials inventory for each quarter, we can prepare the direct materials budget. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Direct Materials Budget
Exhibit Direct Materials Budget SMART TOUCH LEARNING Direct Materials Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 Direct materials cost per unit × $ 150 Direct materials needed for production $ 61,500 $ 84,000 $ 91,500 $ 99,000 $ 336,000 Plus: Desired direct materials in ending inventory 33,600 36,600 39,600 42,600 Total direct materials needed 95,100 120,600 131,100 141,600 378,600 Less: Direct materials in beginning inventory 30,000 Budgeted purchases of direct materials $ 65,100 $ 87,000 $ 94,500 $ 102,000 $ 348,600 Exhibit 22-7 illustrates the direct materials budget for Smart Touch Learning. As with the production budget, note that one period’s ending inventory becomes the next period’s beginning inventory. $84,000 x 40% = $33,600 $91,500 x 40% = $33,600 $99,000 x 40% = $39,600 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for the Direct Labor Budget
Each tablet computer will require three hours of direct labor Direct labor costs average $25 per hour The next production cost to consider is direct labor. The production manager projects that each tablet computer will require three hours of direct labor. The personnel manager projects direct labor costs to average $25 per hour. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Direct Labor Budget Exhibit Direct Labor Budget SMART TOUCH LEARNING Direct Labor Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 Direct labor hours per unit × 3 Direct labor hours needed for production 1,230 1,680 1,830 1,980 6,720 Direct labor cost per hour × $ 25 Budgeted direct labor cost $ 30,750 $ 42,000 $ 45,750 $ 49,500 $ 168,000 Exhibit 22-8 shows the direct labor budget for Smart Touch Learning for To calculate the direct labor cost, multiply the number of tablets to be produced by the number of projected direct labor hours. Then multiply that total by the average direct cost per hour. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for the Manufacturing Overhead Budget
Variable manufacturing cost, $20 per tablet Projected fixed costs are: $12,000 per quarter for depreciation on the manufacturing equipment $15,440 per quarter for other fixed costs Direct labor hours are used as the allocation base Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Predetermined Overhead Allocation Rate
= Total estimated overhead costs Total estimated quantity of the overhead allocation base As a reminder, the formula to calculate the predetermined overhead allocation rate is calculated as total estimated overhead costs divided by total estimated quantity of the overhead allocation base.

Manufacturing Overhead Budget
Exhibit Manufacturing Overhead Budget SMART TOUCH LEARNING Manufacturing Overhead Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 VOH* cost per tablet × $ 20 Budgeted VOH $ 8,200 $ 11,200 $ 12,200 $ 13,200 $ 44,800 Budgeted FOH** Depreciation 12,000 48,000 Utilities, insurance, property taxes 15,440 61,760 Total budgeted FOH 27,440 109,760 Budgeted manufacturing overhead costs $ 35,640 $ 38,640 $ 39,640 $ 40,640 $ 154,560 Direct labor hours (DLHr) 1,230 1,680 1,830 1,980 6,720 Predetermined overhead allocation rate ($154,560 / 6,720 DLHr) $ 23 Exhibit 22-9 shows the manufacturing overhead budget for Smart Touch Learning for 2017. *VOH—Variable Manufacturing Overhead **FOH—Fixed Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Total Projected Manufacturing Cost per Tablet
Direct materials cost per tablet $ 150 Direct labor cost per tablet (3 DLHr per tablet × $25 per DLHr) 75 Manufacturing overhead cost per tablet (3 DLHr per tablet × $23 per DLHr) 69 Total projected manufacturing cost per tablet for 2017 $ 294 Now that the production costs have been determined, Smart Touch Learning’s managers can use them to complete the cost of goods sold budget. Start by calculating the projected cost to produce each tablet in The total projected manufacturing cost to produce each tablet in 2017 is $294, which is calculated as $150 in direct materials, $75 in direct labor, and $69 in manufacturing overhead.

Cost of Goods Sold Budget
Exhibit Cost of Goods Sold Budget SMART TOUCH LEARNING Cost of Goods Sold Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Beginning inventory, 200 tablets $ 55,000 Tablets produced and sold in $294 each (300, 550, 600, 650 tablets per quarter) 88,200 $ 161,700 $ 176,400 $ 191,100 $ 617,400 Total budgeted cost of goods sold $ 143,200 $ 672,400 The cost of goods sold budget for Smart Touch Learning for 2017 is shown in Exhibit Let’s examine how it was prepared. Smart Touch Learning uses the first-in, first-out (FIFO) inventory costing method. Recall that the production budget illustrated in Exhibit 22-6 shows that the company starts 2017 with 200 tablets in Finished Goods Inventory, and the balance sheet in Exhibit 22-4 shows the beginning Finished Goods Inventory has a total cost of $55,000. All other tablets sold in 2017 will assume a production cost of $294 per tablet, as we just calculated previously. Referring to the sales budget in Exhibit 22-5, the company projected sales of 500 tablets in the first quarter. Therefore, using FIFO, 200 tablets will be assigned the beginning inventory costs of $55,000 and the remaining 300 tablets will be assigned the cost of $294 per tablet.

Smart Touch Learning’s Projected Selling and Administrative Costs for 2017
Salaries Expense, fixed $ 30,000 per quarter Rent Expense, fixed 25,000 per quarter Insurance Expense, fixed 2,500 per quarter Depreciation Expense, fixed 1,500 per quarter Supplies Expense, variable 1% of Sales Revenue Next, we will look at how to prepare the selling and administrative expense budget. First, we start with a projection of the selling and administrative costs.

Projected Supplies Expense
= Sales Revenue for each quarter × 1% Quarter Sales Revenue Supplies Expense First $ 250,000 $ 2,500 Second 275,000 2,750 Third 300,000 3,000 Fourth 325,000 3,250 The supplies expense is a variable cost that needs to be calculated. To do this, we multiply the sales revenue for each quarter, as calculated in the sales budget in Exhibit 22-5, by 1%. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Selling and Administrative Expense Budget
Exhibit Selling and Administrative Expense Budget SMART TOUCH LEARNING Selling and Administrative Expense Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Salaries Expense $ 30,000 $ 120,000 Rent Expense 25,000 100,000 Insurance Expense 2,500 10,000 Depreciation Expense 1,500 6,000 Supplies Expense 2,750 3,000 3,250 11,500 Total budgeted S&A expense $ 61,500 $ 61,750 $ 62,000 $ 62,250 $ 247,500 The completed selling and administrative expense budget for Smart Touch Learning for 2017 is shown in Exhibit

>TRY IT! 11. Kendall Company projects 2015 first quarter sales to be $10,000 and increase by 5% per quarter. Determine the projected sales for 2015 by quarter and in total. Round answers to the nearest dollar.

>TRY IT! 11. First quarter: $ 10,000 Second quarter: $10,000 × 1.05 = 10,500 Third quarter: $10,500 × 1.05 = 11,025 Fourth quarter: $11,025 × 1.05 = 11,576 Total: $ 43,101

>TRY IT! 12. Friedman Company manufactures and sells bicycles. A popular model is the XC. The company expects to sell 1,500 XCs in 2014 and 1,800 XCs in At the beginning of 2014, Friedman has 350 XCs in Finished Goods Inventory and desires to have 10% of the next year’s sales available at the end of the year. How many XCs will Friedman need to produce in 2014? Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

>TRY IT! 12. Budgeted XCs to be sold 1,500 Plus: Desired XCs in ending inventory 180 Total XCs needed 1,680 Less: XCs in beginning inventory 350 Budgeted XCs to be produced 1,330 10% of next years sales (1,800 x 10%)

Prepare a financial budget for a manufacturing company
Learning Objective 4 Prepare a financial budget for a manufacturing company

Smart Touch Learning’s 2017 Capital Expenditures Budget
Smart Touch Learning plans to purchase additional manufacturing equipment on January 2, The equipment will cost $160,000 and will be paid in two equal installments during the first and second quarters of 2017. Capital expenditures are purchases of long-term assets, such as delivery trucks, computer systems, office furniture, and manufacturing equipment. The decision to purchase these expensive, long-term assets is part of a strategic plan, and this decision-making process is covered in detail in a later chapter. For now, we will assume Smart Touch Learning plans to purchase additional manufacturing equipment on January 2, The equipment will cost $160,000 and will be paid in two equal installments during the first and second quarters of The installment payments will be included in the cash budget.

Financial Budget Cash budget Budgeted financial statements
Budgeted income statement Budgeted balance sheet Budgeted statement of cash flows The next step in preparing the master budget is to prepare the financial budget which include the cash budget and the budgeted financial statements: the budgeted income statement, the budgeted balance sheet, and the budgeted statement of cash flows.

Sections of the Cash Budget
Cash receipts Cash payments Short-term financing The cash budget pulls information from the other budgets previously prepared and has three sections: cash receipts, cash payments, and short-term financing. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for Calculating Cash Receipts
30% of each quarter’s sales will be cash sales 70% of the sales are expected to be on account 60% collected in the quarter of the sale 40% collected in the quarter following the sale Bad debt expense is not significant Accounts Receivable balance, $70,000 (see the December 31, 2016, balance sheet in Exhibit 22-4) is expected to be collected in the first quarter of 2017 The primary source of cash is from customers. The sales budget illustrated in Exhibit 22-5 shows the projected sales by quarter. Smart Touch Learning projects that 30% of the sales will be cash sales, which indicates cash will be collected immediately. The remaining 70% of the sales are expected to be on account. The company expects to collect 60% of the credit sales in the quarter of the sale and 40% in the quarter following the sale. Bad debt expense is not significant and, therefore, is not considered in the budgeting process. The balance sheet in Exhibit 22-4 for December 31, 2016, shows Accounts Receivable has a balance of $70,000 and this amount is expected to be collected in the first quarter of 2017.

Cash Receipts from Customers
Exhibit Cash Receipts from Customers First Quarter Second Third Fourth Total Total sales (from Sales Budget, Exhibit 22-5) $ 250,000 $ 275,000 $ 300,000 $ 325,000 $ 1,150,000 Cash Receipts from Customers: Accounts Receivable balance, December 31, 2016 $ 70,000 1st Qtr. – Cash sales (30%) 75,000 1st Qtr. – Credit sales (70%), 60% collected in 1st qtr. 105,000 1st Qtr. – Credit sales (70%), 40% collected in 2nd qtr. 2nd Qtr. – Cash sales (30%) 82,500 2nd Qtr. – Credit sales (70%), 60% collected in 2nd qtr. 115,500 2nd Qtr. – Credit sales (70%), 40% collected in 3rd qtr. $ 77,000 3rd Qtr. – Cash sales (30%) 90,000 3rd Qtr. – Credit sales (70%), 60% collected in 3rd qtr. 126,000 3rd Qtr. – Credit sales (70%), 40% collected in 4th qtr. $ 84,000 4th Qtr. – Cash sales (30%) 97,500 4th Qtr. – Credit sales (70%), 60% collected in 4th qtr. 136,500 Total cash receipts from customers $ 268,000 $ 293,000 $ 318,000 $ 1,129,000 Accounts Receivable balance, December 31, 2017: 4th Qtr. – Credit sales (70%), 40% collected in 1st qtr. 2018 $ 91,000 $250,000-75, ,000 $275,000-82, ,500 $300,000 -90,000 -126,000 Exhibit shows the calculations for cash receipts from customers. The total cash receipts from customers for each quarter will be carried to the cash budget. The December 31, 2017 balance in Accounts Receivable will be carried to the budgeted balance sheet.

Cash Payments Capital expenditures Product costs
Direct materials purchases Direct labor costs Manufacturing overhead costs Selling and administrative expenses Smart Touch Learning has cash payments for capital expenditures, product costs (direct materials purchases, direct labor costs, and manufacturing overhead costs), and selling and administrative expenses. Therefore, the calculations for cash payments require reference to several previously developed budgets.

Data for Calculating Cash Payments for Direct Materials
All direct materials purchases are on account 75% paid in the quarter of the purchase 25% paid in the quarter following the purchase Accounts Payable balance, $20,000 (see the December 31, 2016, balance sheet in Exhibit 22- 4) will be paid in the first quarter of 2017 Recall that Exhibit 22-7 showed the purchases of direct materials. This information, along with the following data, is needed to calculate the cash payments for direct materials. We will assume that all direct materials purchases are on account, and Smart Touch Learning projects payments will be 75% in the quarter of the purchase and 25% in the quarter following the purchase. Reference to the December 31, 2016, balance sheet shown previously in Exhibit 22-4 indicates Accounts Payable has a balance of $20,000. This amount will be paid in the first quarter of 2017.

Direct Materials Budget
Exhibit Direct Materials Budget SMART TOUCH LEARNING Direct Materials Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 Direct materials cost per unit × $ 150 Direct materials needed for production $ 61,500 $ 84,000 $ 91,500 $ 99,000 $ 336,000 Plus: Desired direct materials in ending inventory 33,600 36,600 39,600 42,600 Total direct materials needed 95,100 120,600 131,100 141,600 378,600 Less: Direct materials in beginning inventory 30,000 Budgeted purchases of direct materials $ 65,100 $ 87,000 $ 94,500 $ 102,000 $ 348,600 Exhibit 22-7 illustrates the direct materials budget for Smart Touch Learning. As with the production budget, note that one period’s ending inventory becomes the next period’s beginning inventory. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Payments Exhibit 22-13 shows the calculations for cash payments.
The calculation of cash payments for direct materials uses information from the direct materials budget shown in Exhibit All direct materials purchases are on account, and Smart Touch Learning projects payments will be 75% in the quarter of the purchase and 25% in the quarter following the purchase. Reference to the December 31, 2016, balance sheet shown in Exhibit 22-4 indicates Accounts Payable has a balance of $20,000. This amount will be paid in the first quarter of 2017. The information for cash payments for direct labor come from Exhibit Smart Touch Learning pays direct labor costs in the quarter incurred. The information for cash payments for manufacturing overhead come from Exhibit Smart Touch Learning makes cash payments for these costs in the quarter incurred. Keep in mind that we are calculating cash payments. Therefore, non-cash expenses are not included in the cash budget. The most common non-cash expense is depreciation. The cash outflow for long-term assets, such as manufacturing equipment, is at the time of purchase. Depreciation is the allocation of the asset cost to an expense account over the life of the asset. The allocation does not affect cash and is not included in the cash budget. We use Exhibit to determine the cash payments for selling and administrative expenses, which Smart Touch Learning pays in the quarter incurred. Again, be sure non-cash expenses, such as the depreciation on the office equipment, are not included in the cash budget. Other cash payments include items such as income tax expense. The financial accountant at Smart Touch Learning has projected income tax expense to be $70,000 for the year. Payments will be made in four equal installments during the four quarters. Cash payments for capital expenditures include the manufacturing equipment purchased on January 2, 2014, for $160,000 that will be paid in two $80,000 installments in the first and second quarters of 2017. Note that the total cash payments for each quarter will be carried to the cash budget. The December 31, 2017 balance in Accounts Payable will be carried to the budgeted balance sheet.

Direct Labor Budget Exhibit Direct Labor Budget SMART TOUCH LEARNING Direct Labor Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 Direct labor hours per unit × 3 Direct labor hours needed for production 1,230 1,680 1,830 1,980 6,720 Direct labor cost per hour × $ 25 Budgeted direct labor cost $ 30,750 $ 42,000 $ 45,750 $ 49,500 $ 168,000 Exhibit 22-8 shows the direct labor budget for Smart Touch Learning for To calculate the direct labor cost, multiply the number of tablets to be produced by the number of projected direct labor hours. Then multiply that total by the average direct cost per hour.

Manufacturing Overhead Budget
Exhibit Manufacturing Overhead Budget SMART TOUCH LEARNING Manufacturing Overhead Budget For the Year Ended December 31, 2017 First Quarter Second Quarter Third Quarter Fourth Quarter Total Budgeted tablets to be produced 410 560 610 660 2,240 VOH* cost per tablet × $ 20 Budgeted VOH $ 8,200 $ 11,200 $ 12,200 $ 13,200 $ 44,800 Budgeted FOH** Depreciation 12,000 48,000 Utilities, insurance, property taxes 15,440 61,760 Total budgeted FOH 27,440 109,760 Budgeted manufacturing overhead costs $ 35,640 $ 38,640 $ 39,640 $ 40,640 $ 154,560 Direct labor hours (DLHr) 1,230 1,680 1,830 1,980 6,720 Predetermined overhead allocation rate ($154,560 / 6,720 DLHr) $ 23 Exhibit 22-9 shows the manufacturing overhead budget for Smart Touch Learning for 2017. *VOH—Variable Manufacturing Overhead **FOH—Fixed Manufacturing Overhead Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for Short-Term Financing
$30,000 minimum cash balance Borrowings are made at the beginning of each quarter in increments of $1,000 Interest is paid on any outstanding principal balance at the beginning of the following quarter at 3% per quarter Repayments on the principal balance are made at the beginning of the quarter in increments of $1,000 Next, in order to prepare the cash budget, we need information on the short-term financing that is available to Smart Touch Learning. The December 31, 2016, balance sheet shown in Exhibit 22-4 shows cash has a balance of $15,000. Smart Touch Learning’s financial accountant recommends maintaining a larger cash balance in the future. The recommended minimum cash balance for 2017 is $30,000. The company has arranged short-term financing through a local bank. The company borrows cash as needed at the beginning of each quarter, in increments of $1,000, in order to maintain the minimum cash balance. Interest is paid on any outstanding principal balance at the beginning of the following quarter at 3% per quarter. Repayments on the principal balance are also made at the beginning of the quarter, in increments of $1,000, as cash is available. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Budget—First Quarter, Before Short-Term Financing Calculations
Exhibit Cash Budget—First Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter Second Third Fourth Total Beginning cash balance $ 15,000 Cash receipts 250,000 268,000 293,000 318,000 1,129,000 Cash available 265,000 1,144,000 Cash payments: Capital expenditures 80,000 160,000 Purchases of direct materials 68,825 81,525 92,625 100,125 343,100 Direct labor 30,750 42,000 45,750 49,500 168,000 Manufacturing overhead 23,640 26,640 27,640 28,640 106,560 Selling and administrative expenses 60,000 60,250 60,500 60,750 241,500 Income taxes 17,500 70,000 Interest expense Total cash payments 280,715 Ending cash balance before financing (15,715) Minimum cash balance desired (30,000) Projected cash excess (deficiency) (45,715) Financing: Borrowing Principal repayments Total effects of financing Ending cash balance Now that we have compiled the information needed for cash receipts and cash payments, let’s insert those amounts into the cash budget so we can determine the amount of short-term financing needed during Exhibit shows the partially completed cash budget for 2017. Notice that the cash payment for interest expense for the first quarter is $0. The December 31, 2016, balance sheet from Exhibit 22-5 does not show Notes Payable or Interest Payable as liabilities. Therefore, no interest is owed at the beginning of the first quarter of Exhibit shows a cash balance before financing of negative $15,715, which is the cash available of $265,000 less the cash payments of $280,715. This amount is less than the minimum cash balance desired and creates a cash deficiency of $45,715. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

2017 First Quarter Financing
Ending cash balance + Total effects = Ending cash before financing of financing balance $ (15,715) The ending cash balance plus total effects of financing will equal the ending cash balance. Exhibit showed an ending cash balance before financing of negative $15,715. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

2017 First Quarter Effects of Financing
Ending cash balance + Total effects = Ending cash before financing of financing balance $ (15,715) + $ 46,000 = $ 30,285 As shown in the partially completed cash budget in Exhibit 22-14, Smart Touch has a cash deficiency of $45,715 for the first quarter. The company borrows funds in increments of $1,000 so the amount to be borrowed is $46,000. Smart Touch Learning will then have an ending cash balance for the first quarter of $30,285. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Budget—Second Quarter, Before Short-Term Financing Calculations
Exhibit Cash Budget—Second Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter Second Third Fourth Total Beginning cash balance $ 15,000 $ 30,285 Cash receipts 250,000 268,000 293,000 318,000 1,129,000 Cash available 265,000 298,285 1,144,000 Cash payments: Capital expenditures 80,000 160,000 Purchases of direct materials 68,825 81,525 92,625 100,125 343,100 Direct labor 30,750 42,000 45,750 49,500 168,000 Manufacturing overhead 23,640 26,640 27,640 28,640 106,560 Selling and administrative expenses 60,000 60,250 60,500 60,750 241,500 Income taxes 17,500 70,000 Interest expense Total cash payments 280,715 Ending cash balance before financing (15,715) Minimum cash balance desired (30,000) Projected cash excess (deficiency) (45,715) Financing: Borrowing 46,000 Principal repayments Total effects of financing Ending cash balance The ending cash balance for the first quarter, then, becomes the beginning cash balance for the second quarter. Exhibit shows the cash budget completed for the first quarter.

2017 Second Quarter Interest Expense
Principal × Rate × Time = Interest Expense The amount borrowed at the beginning of the first quarter accrued interest during the quarter and must be paid at the beginning of the second quarter. The formula to calculate the interest expense is the principal multiplied by the rate multiplied by time. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

2017 Second Quarter Interest Expense
Principal × Rate × Time = Interest Expense $46,000 × 3% per quarter × 1 quarter = $1,380 For Smart Touch Learning’s second quarter, the interest expense is $1,380. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Budget—Third Quarter, Before Short-Term Financing Calculations
Exhibit Cash Budget—Third Quarter, Before Short-Term Financing Calculations SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter Second Third Fourth Total Beginning cash balance $ 15,000 $ 30,285 $ 30,990 Cash receipts 250,000 268,000 293,000 318,000 1,129,000 Cash available 265,000 298,285 323,990 1,144,000 Cash payments: Capital expenditures 80,000 160,000 Purchases of direct materials 68,825 81,525 92,625 100,125 343,100 Direct labor 30,750 42,000 45,750 49,500 168,000 Manufacturing overhead 23,640 26,640 27,640 28,640 106,560 Selling and administrative expenses 60,000 60,250 60,500 60,750 241,500 Income taxes 17,500 70,000 Interest expense 1,380 Total cash payments 280,715 309,295 Ending cash balance before financing (15,715) (11,010) Minimum cash balance desired (30,000) Projected cash excess (deficiency) (45,715) (41,010) Financing: Borrowing 46,000 Principal repayments Total effects of financing Ending cash balance When the interest payment is recorded for the second quarter, it is determined that Smart Touch Learning again has a cash deficiency and must borrow funds to maintain the minimum cash balance of $30,000. Carefully examine Exhibit 22-16, which shows the first and second quarters after financing and the third quarter before financing. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

2017 Third Quarter Interest Expense
Principal × Rate × Time = Interest Expense We again need to calculate the interest expense in the third quarter. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

2017 Third Quarter Interest Expense
Principal × Rate × Time = Interest Expense ($46,000 + $42,000) × 3% per quarter × 1 quarter = $2,640 For Smart Touch Learning’s third quarter, the interest expense is $2,640. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Completed Cash Budget Exhibit Completed Cash Budget SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter Second Third Fourth Total Beginning cash balance $ 15,000 $ 30,285 $ 30,990 $ 30,335 Cash receipts 250,000 268,000 293,000 318,000 1,129,000 Cash available 265,000 298,285 323,990 348,335 1,144,000 Cash payments: Capital expenditures 80,000 160,000 Purchases of direct materials 68,825 81,525 92,625 100,125 343,100 Direct labor 30,750 42,000 45,750 49,500 168,000 Manufacturing overhead 23,640 26,640 27,640 28,640 106,560 Selling and administrative expenses 60,000 60,250 60,500 60,750 241,500 Income taxes 17,500 70,000 Interest expense 1,380 2,640 1,230 5,250 Total cash payments 280,715 309,295 246,655 257,745 1,094,410 Ending cash balance before financing (15,715) (11,010) 77,335 90,590 49,590 Minimum cash balance desired (30,000) Projected cash excess (deficiency) (45,715) (41,010) 47,335 60,590 19,590 Financing: Borrowing 46,000 88,000 Principal repayments (47,000) (41,000) (88,000) Total effects of financing Ending cash balance $ 49,590 After the third quarter interest payment is calculated and the ending cash balance before financing is determined, Smart Touch Learning shows a projected cash excess for the third quarter, as shown in Exhibit The cash excess can be used to repay a portion of the amount previously borrowed, again in increments of $1,000. Exhibit shows the completed cash budget.

2017 Fourth Quarter Interest Expense
Principal × Rate × Time = Interest Expense ($46,000 + $42,000 – $47,000) × 3% per quarter × 1 quarter = $1,230

Completed Cash Budget Exhibit Completed Cash Budget SMART TOUCH LEARNING Cash Budget For the Year Ended December 31, 2017 First Quarter Second Third Fourth Total Beginning cash balance $ 15,000 $ 30,285 $ 30,990 $ 30,335 Cash receipts 250,000 268,000 293,000 318,000 1,129,000 Cash available 265,000 298,285 323,990 348,335 1,144,000 Cash payments: Capital expenditures 80,000 160,000 Purchases of direct materials 68,825 81,525 92,625 100,125 343,100 Direct labor 30,750 42,000 45,750 49,500 168,000 Manufacturing overhead 23,640 26,640 27,640 28,640 106,560 Selling and administrative expenses 60,000 60,250 60,500 60,750 241,500 Income taxes 17,500 70,000 Interest expense 1,380 2,640 1,230 5,250 Total cash payments 280,715 309,295 246,655 257,745 1,094,410 Ending cash balance before financing (15,715) (11,010) 77,335 90,590 49,590 Minimum cash balance desired (30,000) Projected cash excess (deficiency) (45,715) (41,010) 47,335 60,590 19,590 Financing: Borrowing 46,000 88,000 Principal repayments (47,000) (41,000) (88,000) Total effects of financing Ending cash balance $ 49,590 Note that the principal repayment in the fourth quarter is only $41,000 even though the company has $60,590 in excess cash. At the beginning of the fourth quarter, the balance on the note is $41,000, which is the total of the amounts borrowed in the first and second quarters less the repayment made in the third quarter. In other words, $46,000 plus $42,000 less $47,000. Smart Touch Learning will only repay what has been borrowed and now has excess cash to be used for other purposes. Also, pay special attention to the total column of the cash budget. You cannot simply add across each row to determine these amounts because this is a summary for the entire year. For example, the beginning cash balance for the year is the same as the beginning cash balance for the first quarter, but not the sum of the beginning balances for each quarter. The budgeted financial statements are the next step in the budgeting process and the cash budget provides several amounts needed. The interest expense calculations are carried to the budgeted income statement and the ending cash balance is carried to the budgeted balance sheet. Smart Touch Learning repaid all amounts borrowed during the year. If those amounts had not been repaid in full, the balance would be carried to the budgeted balance sheet as the balance for Notes Payable.

Summary of Amounts Needed to Calculate 2017 Budgeted Net Income
Account Budget Exhibit Amount Sales Revenue Sales 22-5 $ 1,150,000 Cost of Goods Sold 22-10 672,400 S&A Expenses S&A Expense 22-11 247,50 Interest Expense Cash 22-17 5,250 Income Tax Expense 70,000 Smart Touch Learning has now determined all amounts needed to calculate the budgeted net income for Following is a summary of the sources for these figures.

Income taxes 17,500 70,000 Interest expense 1,380 2,640 1,230 5,250

Budgeted Income Statement
Exhibit Budgeted Income Statement SMART TOUCH LEARNING Budgeted Income Statement For the Year Ended December 31, 2017 Sales Revenue $ 1,150,000 Cost of Goods Sold 672,400 Gross Profit 477,600 Selling and Administrative Expenses 247,500 Operating Income 230,100 Interest Expense 5,250 Income before Income Taxes 224,850 Income Tax Expense 70,000 Net Income $ 154,850 Exhibit shows the budgeted income statement for Smart Touch Learning for the year ended December 31, 2017.

Summary of Amounts Needed to Calculate 2017 Budgeted Balance Sheet
Account Source Exhibit Amount Cash Cash budget 22-17 $ 49,590 Accounts Receivable Cash receipts from customers 22-12 91,000 Raw Materials Inventory Direct materials budget 22-7 42,600 Finished Goods Inventory Production budget Cost of goods sold budget 22-6 22-10 140 units $ 294 per unit Equipment 2016 balance sheet Capital expenditures budget 22-4 210,340 160,000 Accumulated Depreciation Manufacturing overhead budget S&A expense budget 22-9 22-11 12,000 48,000 6,000 Accounts Payable Cash payment 22-13 25,500 Common Stock 300,000 Retained Earnings Budgeted income statement 22-18 48,340 154,850 The budgeted balance sheet for Smart Touch Learning for December 31, 2017, will pull amounts from the various budgets previously completed. One remaining calculation is for Retained Earnings. Retained Earnings is increased by the amount of net income earned and decreased by the amount of dividends declared. The net income is shown in Exhibit 22-18, and the company does not project dividends for the year. A summary of the sources for the balance sheet figures is below. Take the time to look at each exhibit referenced to ensure you know where each figure came from.

Budgeted Balance Sheet
The budgeted balance sheet for Smart Touch Learning for December 31, 2017, is shown in Exhibit Keep in mind that the balance sheet only shows the ending balances of each account as of December 31, 2017.

Budgeted Statement of Cash Flows data from the cash budget
The last step in the preparation of the master budget is the budgeted statement of cash flows. The information comes from the cash budget, illustrated in Exhibit All cash receipts and disbursements are designated as operating activities, investing activities, or financing activities. The direct method is used and illustrated in Exhibit

>TRY IT! 13. Meeks Company has the following sales for the first quarter of 2015: January February March Cash sales $ 5,000 $ 5,500 $ 5,250 Sales on account 15,000 14,000 14,500 Total sales $ 20,000 $ 19,500 $ 19,750 Sales on account are collected the month after the sale. The Accounts Receivable balance on January 1 is $12,500, the amount of December’s sales on account. Calculate the cash receipts from customers for the first three months of 2015.

>TRY IT! 13. January February March Receipts from cash sales $ 5,000 $ 5,500 $ 5,250 Receipts from sales on account 12,500 15,000 14,000 Total cash receipts from customers $ 17,500 $ 20,500 $ 19,250 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Describe how information technology can be used in the budgeting process

Technology makes it more cost effective for managers to
Conduct sensitivity analysis Combine individual unit budgets to create the companywide master budget Exhibits 22-5 through show that managers must prepare many calculations to develop the master budget for a small company such as Smart Touch Learning. Technology makes it more cost effective for managers to conduct sensitivity analysis and combine individual unit budgets to create the companywide master budget. The master budget models the company’s planned activities. Actual results, however, often differ from plans. Management, therefore, wants to know how budgeted income and cash flows would change if key assumptions turned out to be incorrect. We previously defined sensitivity analysis as a what-if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes. Many companies use computer spreadsheet programs like Excel to prepare master budget schedules and statements. Today, what-if budget questions are easily answered within Excel with a few keystrokes. Companies with multiple business segments must combine the budget data from each of the segments to prepare the companywide budgeted financial statements. This process can be difficult for companies whose business segments use different spreadsheets to prepare the budgets. Companies often turn to budget-management software to solve this problem. Often designed as a component of the company’s Enterprise Resource Planning system, this software helps managers develop and analyze budgets. Software also allows managers to conduct sensitivity analyses on their own segment’s data. When the manager is satisfied with his or her budget, he or she can easily enter it in the companywide budget. His or her segment’s budget automatically integrates with budgets from all other business segments—from around the building, around the state, around the country, or around the world. Whether at headquarters or on the road, top executives can log into the budget system through the Internet and conduct their own sensitivity analyses on individual business segments’ budgets or on the companywide budget. The result is that managers spend less time compiling and summarizing data and more time analyzing and making decisions that ensure the budget leads the company to achieve its key strategic goals. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

>TRY IT! 14. Crowley Company projects the following sales: January February March Cash sales $ 5,000 $ 5,500 $ 6,000 Sales on account 15,000 16,500 18,000 Total sales $ 20,000 $ 22,000 $ 24,000 Crowley collects sales on account in the month after the sale. The Accounts Receivable balance on January 1 is $13,500, which represents December’s sales on account. Crowley projects the following cash receipts from customers: Cash receipts from cash sales $ 5,000 $ 5,500 $ 6,000 Cash receipts from sales on account 13,500 15,000 16,500 Total sales $ 18,500 $ 20,500 $ 22,500 Recalculate sales and cash receipts from customers if total sales remain the same but cash sales are only 20% of the total. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

>TRY IT! 14. January February March Cash sales (20%) $ 4,000 $ 4,400 $ 4,800 Sales on account (80%) 16,000 17,600 19,200 Total sales $ 20,000 $ 22,000 $ 24,000 Receipts from cash sales Receipts from sales on account 13,500 Total cash receipts from customers $ 17,500 $ 20,400 $ 22,400 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Master Budget Components—Merchandising Company
Manufacturer So far, this chapter has illustrated the preparation of the master budget for a manufacturing company. Appendix 22A illustrates the process for a merchandising company. Many of the calculations and budgets are the same, but in some ways, the master budget for a merchandising company is easier to complete. Merchandising companies purchase the products they sell rather than manufacture them. Therefore, the inventory, purchases, and cost of goods sold budget replaces the production budget, direct materials budget, direct labor budget, manufacturing overhead budget, and cost of goods sold budget. Exhibit 22A-1 shows the master budget components for a merchandising company.

Exhibit 22A-2 Balance Sheet GREG’S TUNES Budgeted Balance Sheet March 31, 2016 Assets Current Assets: Cash $ 16,400 Accounts Receivable 16,000 Merchandise Inventory 48,000 Prepaid Insurance 1,800 Total Current Assets $ 82,200 Property, Plant, and Equipment: Equipment and Fixtures 32,000 Less: Accumulated Depreciation (12,800) 19,200 Total Assets $ 101,400 Liabilities Current Liabilities: Accounts Payable $ 16,800 Salaries and Commissions Payable 4,250 Total Liabilities $ 21,050 Stockholders' Equity Common Stock, no par 20,000 Retained Earnings 60,350 Total Stockholders’ Equity 80,350 Total Liabilities and Stockholders’ Equity We will use Greg’s Tunes, a fictitious company, to illustrate the preparation of the master budget. Greg’s Tunes is a retail chain store that carries a complete line of music CDs and DVDs. We will prepare the master budget for one of the stores in the chain for April, May, June, and July—the main selling season. Exhibit 22A-2 shows the balance sheet for Greg’s Tunes for March 31, The balance sheet provides some of the data that we use in preparing the master budget.

Data for the Sales Budget
Sales in March were $40,000. The sales manager projects the following monthly sales: In a merchandising company, just as with a manufacturing company, the forecast of sales revenue is the cornerstone of the master budget because the level of sales affects expenses and almost all other elements of the master budget. Budgeted total sales for each product equals the sales price multiplied by the expected number of units sold. Sales in March were $40,000. Projected sales are given for April through August. Sales are 60% cash and 40% on account. Greg’s Tunes collects all credit sales the month after the sale. The $16,000 balance in Accounts Receivable at March 31, 2016, is March’s sales on account, or 40% of $40,000. There are no other Accounts Receivable. Uncollectible accounts are immaterial and thus aren’t included in the master budget. Sales are 60% cash and 40% on account. Greg’s Tunes collects all credit sales the month after the sale. The $16,000 balance in Accounts Receivable at March 31, 2016, is March’s sales on account (40% of $40,000). There are no other Accounts Receivable. Uncollectible accounts are immaterial and thus aren’t included in the master budget.

Sales Budget Exhibit 22A-3 Sales Budget GREG’S TUNES Sales Budget
Four Months Ended July 31, 2016 April May June July Total Cash sales (60%) $ 30,000 $ 48,000 $ 36,000 $ 144,000 Sales on account (40%) 20,000 32,000 24,000 96,000 Total budgeted sales $ 50,000 $ 80,000 $ 60,000 $ 240,000 Exhibit 22A-3 shows the sales budget for Greg’s Tunes for the four months. The April through July total budgeted sales of $240,000 is carried to the budgeted income statement.

Data for the Inventory, Purchases, and Cost of Goods Sold Budget
Beginning merchandise inventory is known from last month’s balance sheet Budgeted cost of goods sold = 70% of sales Ending merchandise inventory = $20, % of next month’s cost of goods sold After the sales budget, we next need to prepare the inventory, purchases, and cost of goods sold budget. This budget determines cost of goods sold for the budgeted income statement, ending merchandise inventory for the budgeted balance sheet, and merchandise inventory purchases for the cash budget. Beginning merchandise inventory is known from last month’s balance sheet. Budgeted cost of goods sold averages 70% of sales. Desired ending merchandise inventory should be equal to $20,000 plus 80% of next month’s cost of goods sold.

Solving for the Budgeted Purchases Figure
To prepare the inventory, purchases, and cost of goods sold budget, we will need to calculate the amount of inventory that needs to be purchased. To do this, we begin with the equation for cost of goods sold. Then, we can rearrange the equation to isolate purchases on the left side.

Inventory, Purchases, and Cost of Goods Sold Budget
Exhibit 22A-4 Inventory, Purchases, and Cost of Goods Sold Budget GREG’S TUNES Inventory, Purchases, and Cost of Goods Sold Budget Four Months Ended July 31, 2016 April May June July Total Cost of goods sold (70% × sales) $ 35,000 $ 56,000 $ 42,000 $ 168,000 Plus: Desired ending merchandise inventory [$20,000 + (80% × COGS for next month)]* 64,800 53,600 48,000 42,400 Total merchandise inventory required 99,800 109,600 90,000 77,400 210,400 Less: Beginning merchandise inventory (48,000) (64,800) (53,600) Budgeted Purchases $ 51,800 $ 44,800 $ 36,400 $ 29,400 $ 162,400 Exhibit 22A-4 shows Greg’s merchandise inventory, purchases, and cost of goods sold budget. The beginning balance of merchandise inventory for April is the ending balance from the March 31 balance sheet. *April: [$20,000 + (80% × $56,000)] = $64,800 May: [$20,000 + (80% × $42,000)] = $53,600 June: [$20,000 + (80% × $35,000)] = $48,000 July: [$20,000 + (80% × COGS for August)] = [$20,000 + (80% × (70% × $40,000))] = $42,400

Data for the Selling and Administrative Expense Budget
The monthly payroll for Greg’s Tunes is salaries of $2,500 plus sales commissions equal to 15% of sales. This is a mixed cost, with both a fixed and a variable component. Other monthly expenses are as follows: The monthly payroll for Greg’s Tunes is salaries of $2,500 plus sales commissions equal to 15% of sales. This is a mixed cost, with both a fixed and a variable component. Other monthly expenses are also given. This information will be used to prepare the selling and administrative expense budget.

Selling and Administrative Expense Budget
Exhibit 22A-5 Selling and Administrative Expense Budget GREG’S TUNES Selling and Administrative Expense Budget Four Months Ended July 31, 2016 April May June July Total Variable expenses: Commissions Expense (15% of sales) $ 7,500 $ 12,000 $ 9,000 $ 36,000 Miscellaneous Expenses (5% of sales) 2,500 4,000 3,000 12,000 Total variable expenses 10,000 16,000 48,000 Fixed expenses: Salaries Expense Rent Expense 2,000 8,000 Depreciation Expense 500 Insurance Expense 200 800 Total fixed expenses 5,200 20,800 Total selling and administrative expenses $ 15,200 $ 21,200 $ 17,200 $ 68,800 The selling and administrative expense budget for Greg’s Tunes is shown in Exhibit 22A-5.

>TRY IT! 15. Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2014 and 280 tents in At the beginning of 2014, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2014?

>TRY IT! Budgeted tents to be sold 250 Plus: Desired tents in ending inventory (280 tents × 5%) 14 Total tents needed 264 Less: Tents in beginning inventory 25 Budgeted tents to be purchased 239

Capital Expenditures Budget
Greg’s Tunes plans to purchase a used delivery truck in April, paying $3,000 at the time of the purchase. No other capital expenditures Cash payment will be shown on the cash budget We continue the budgeting process for Greg’s Tunes by preparing the capital expenditures budget, cash budget, and budgeted financial statements—the budgeted income statement, the budgeted balance sheet, and the budgeted statement of cash flows. Greg’s Tunes plans to purchase a used delivery truck in April, paying $3,000 at the time of the purchase. Because this is the only capital expenditure, a separate budget is not illustrated. The cash payment will be shown on the cash budget.

Budgeted Cash Receipts From Customers
Exhibit 22A-3 Sales Budget GREG’S TUNES Sales Budget Four Months Ended July 31, 2016 April May June July Total Cash sales (60%) $ 30,000 $ 48,000 $ 36,000 $ 144,000 Sales on account (40%) 20,000 32,000 24,000 96,000 Total budgeted sales $ 50,000 $ 80,000 $ 60,000 $ 240,000 Exhibit 22A-6 Cash Receipts from Customers GREG’S TUNES Budgeted Cash Receipts From Customers Four Months Ended July 31, 2016 April May June July Total Cash sales (60%) $ 30,000 $ 48,000 $ 36,000 $ 144,000 Credit sales receipts, one month after sale (40%) 16,000* 20,000 32,000 24,000 92,000 Total budgeted sales $ 46,000 $ 68,000 $ 54,000 $ 236,000 The primary source of cash is from customers. The sales budget illustrated in Exhibit 22A-3 shows the total sales for the period. Recall that the company’s sales are 60% cash and 40% on credit. The 40% credit sales are collected the month after the sale is made. Exhibit 22A-6 shows that April’s budgeted cash collections consist of two parts. The first is April’s cash sales of $30,000 from the sales budget in Exhibit 22A-3. The second is the collections of March’s credit sales, which is the $16,000 Accounts Receivable from the March 31 balance sheet in Exhibit 22A-2. This process is repeated for all four months. * March 31 Accounts Receivable (Exhibit 22A-2) Accounts Receivable balance, July 31: July sales on account to be collected in August, $20,000

Cash Payments for Purchases
Exhibit 22A-7 Cash Payments for Purchases GREG’S TUNES Budgeted Cash Payments for Purchases Four Months Ended July 31, 2016 April May June July Total 50% of last month’s purchases $ 16,800* $ 25,900 $ 22,400 $ 18,200 $ 83,300 50% of this month’s purchases 25,900 22,400 18,200 14,700 81,200 Total cash payments for purchases $ 42,700 $ 48,300 $ 40,600 $ 32,900 $ 164,500 Greg’s Tunes pays for merchandise inventory purchases 50% during the month of purchase and 50% the month after purchase. We use the inventory, purchases, and cost of goods sold budget from Exhibit 22A-4 to compute budgeted cash payments for purchases of inventory. April’s cash payments for purchases consist of two parts. The first is the payment of 50% of March’s purchases, which is the $16,800 accounts payable balance from the March 31 balance sheet in Exhibit 22A-2. The second is the payment for 50% of April’s purchases, or 50% of $51,800 which equals $25,900. This process is repeated for all four months and is illustrated in Exhibit 22A-7. * March 31 Accounts Payable (Exhibit 22A-2) Accounts Payable balance, July 31: 50% of July purchases to be paid in August, $14,700

April’s Cash Payments for Salaries and Commissions
March payroll = Salaries + Sales commissions of 15% of sales = $2,500 + (15% × $40,000) = $2,500 + $6,000 = $8,500 We next use the selling and administrative expense budget in Exhibit 22A-5 and Greg’s Tunes’ payment information to compute cash payments for selling and administrative expenses. Greg’s Tunes pays half the salary in the month incurred and half in the following month. Therefore, at the end of each month, Greg’s Tunes reports Salaries and Commissions Payable equal to half the month’s payroll. The $4,250 balance in Salaries and Commissions Payable in the March 31 balance sheet in Exhibit 22A-2 is half the March payroll of $8,500. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

April’s Cash Payments for Selling and Administrative Expenses
Payment of 50% of March’s salaries ($2,500 × 50%) (from March 31 balance sheet, Exhibit 22A-2) $ 1,250 Payment of 50% of March’s commissions ($6,000 × 50%) (from March 31 balance sheet, Exhibit 22A-2) 3,000 Payment of 50% of April’s salaries ($2,500 × 50%) (Exhibit 22A-5) 1,250 Payment of 50% of April’s commissions ($7,500 × 50%) (Exhibit 22A-5) 3,750 Payment of Rent Expense (Exhibit 22A-5) 2,000 Payment of Miscellaneous Expenses (Exhibit 22A-5) 2,500 Total April cash payments for S&A Expenses $ 13,750 Recall that the company’s selling and administrative expenses also include $2,000 rent, $500 depreciation, $200 of insurance expense, and miscellaneous expenses of 5% of sales for the month. Greg’s Tunes pays all those expenses in the month incurred except for insurance and depreciation. Recall that the insurance was prepaid insurance, so the cash payment for insurance was made before this budget period; therefore, no cash payment is made for insurance during April through July. Depreciation is a non-cash expense, so it’s not included in the budgeted cash payments for selling and administrative operating expenses. April’s cash payments for selling and administrative expenses consist of the items listed here. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Payments for Selling and Administrative Expenses
Exhibit 22A-8 Cash Payments for Selling and Administrative Expenses GREG’S TUNES Budgeted Cash Payments for Selling and Administrative Expenses Four Months Ended July 31, 2016 April May June July Total Variable expenses: 50% of last month’s Commissions Expense $ 3,000 $ 3,750 $ 6,000 $ 4,500 $ 17,250 50% of this month’s Commissions Expense 3,750 6,000 4,500 18,000 Miscellaneous Expenses 2,500 4,000 3,000 12,000 Total payments for variable expenses 9,250 13,750 13,500 10,750 47,250 Fixed expenses: 50% of last month’s Salaries Expense 1,250 5,000 50% of this month’s Salaries Expense Rent Expense 2,000 8,000 Total payments for fixed expenses Total payments for S&A expenses $ 13,750 $ 18,250 $ 18,000 $ 15,250 $ 65,250 Exhibit 22A-8 shows the cash payments for selling and administrative expenses for Greg’s Tunes. Salaries and Commissions Payable balance, July 31: 50% of July salaries and commissions to be paid in August, $5,000 Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Data for Short-Term Financing
$10,000 minimum cash balance Borrow in $1,000 increments 12% annual interest rate Borrow no more than needed to maintain the $10,000 minimum ending cash balance Notes payable is an installment loan which requires $1,000 payments of principal and monthly interest even if there is excess cash on hand Borrowing and all principal and interest payments occur at the end of the month Greg’s Tunes requires a minimum cash balance of $10,000 at the end of each month. The store can borrow money in $1,000 increments at an annual interest rate of 12%. Management borrows no more than the amount needed to maintain the $10,000 minimum ending cash balance. Total interest expense will vary as the amount of borrowing varies from month to month. Notes payable require $1,000 payments of principal, plus monthly interest on the unpaid principal balance. This is an installment loan; therefore, payments of principal are $1,000 per month even if there is additional excess cash on hand. Borrowing and all principal and interest payments occur at the end of the month. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Cash Budget Exhibit 22A-9 Cash Budget GREG’S TUNES Cash Budget Four Months Ended July 31, 2016 April May June July Total Beginning cash balance $ 16,400 $ 10,950 $ 11,320 $ 19,650 Cash receipts 46,000 68,000 54,000 236,000 Cash available 62,400 78,950 79,320 73,650 252,400 Cash payments: Capital expenditures 3,000 Purchases of merchandise inventory 42,700 48,300 40,600 32,900 164,500 Selling and administrative expenses 13,750 18,250 18,000 15,250 65,250 Interest Expense 80 70 60 210 Total cash payments 59,450 66,630 58,670 48,210 232,960 Ending cash balance before financing 2,950 12,320 20,650 25,440 19,440 Minimum cash balance desired (10,000) Projected cash excess (deficiency) (7,050) 2,320 10,650 15,440 9,440 Financing: Borrowing 8,000 Principal repayments (1,000) (3,000) Total effects of financing 5,000 Ending cash balance $ 24,440 Exhibit 22A-9 shows the cash budget for April, May, June, and July. To prepare the cash budget, we started with the beginning cash balance from the March 31 balance sheet in Exhibit 22A-2 and added the budgeted cash receipts from Exhibit 22A-6 to determine the cash available. Then, we subtracted cash payments for purchases calculated in Exhibit 22A-7, selling and administrative expenses calculated in Exhibit 22A-8, and any capital expenditures. This yields the ending cash balance before financing. Because Greg’s Tunes requires a minimum ending cash balance of $10,000, April’s $2,950 budgeted cash balance before financing falls $7,050 short of the minimum required. To be able to access short-term financing, Greg’s Tunes secured a line of credit with the company’s bank. Securing this credit in advance is crucial to having the credit available to draw upon when cash shortages arise. Because Greg’s Tunes borrows in $1,000 increments, the company will have to borrow $8,000 to cover April’s expected shortfall. Recall that when Greg’s Tunes borrows, the amount borrowed is to be paid back in $1,000 installments plus interest at 12% annually. Note that in May, the company begins to pay the $8,000 borrowed in April. Greg’s Tunes must also pay interest at 12%. For May, the interest paid is calculated as $8,000 owed times 12% times 1/12 of the year, or $80 interest. For June, the company’s interest owed will change because the principal of the note has been paid down by $1,000 in May. June interest is calculated as $7,000 owed times 12% times 1/12 of the year, or $70 interest. For July, interest is $6,000 owed times 12% times 1/12 of the year, or $60 interest. The cash balance at the end of July of $24,440 is the cash balance on the July 31 budgeted balance sheet. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Budgeted Income Statement
Exhibit 22A-10 shows the budgeted income statement for Greg’s Tunes. It is prepared by using information from the sales budget in Exhibit 22A-3, the inventory, purchases, and cost of goods sold budget in Exhibit 22A-4, and the selling and administrative expenses budget in Exhibit 22A-5. The computation of interest expense as part of the cash budget is also used in the budgeted income statement. Income taxes are ignored in order to simplify the process.

Summary of the Sources for the Balance Sheet Figures
Account Source Exhibit Amount Cash Cash budget 22A-9 $ 24,440 Accounts Receivable Cash receipts from customers 22A-6 20,000 Merchandise Inventory Inventory, purchases, and COGS budget 22A-4 42,400 Prepaid Insurance March 31 balance sheet S&A expense budget 22A-2 22A-5 1,800 800 Equipment Capital expenditures budget 32,000 3,000 Accumulated Depreciation 12,800 2,000 Accounts Payable Cash payments for purchases 22A-7 14,700 Salaries and Commissions Payable Cash payments for S&A expenses 22A-8 5,000 Notes Payable Common Stock Retained Earnings Budgeted income statement 22A-10 60,350 2,990 The following is a summary of the sources for the budgeted balance sheet. Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Exhibit 22A-11 Budgeted Balance Sheet GREG’S TUNES Budgeted Balance Sheet July 31, 2016 Assets Current Assets: Cash $ 24,440 Accounts Receivable 20,000 Merchandise Inventory 42,400 Prepaid Insurance ($1,800 − $800) 1,000 Total Current Assets $ 87,840 Property, Plant, and Equipment: Equipment and Fixtures ($32,000 + $3,000) 35,000 Less: Accumulated Depreciation ($12,800 + $2,000) (14,800) 20,200 Total Assets $ 108,040 Liabilities Current Liabilities: Accounts Payable $ 14,700 Salaries and Commissions Payable 5,000 Notes Payable – Short-Term Total Liabilities $ 24,700 Stockholders' Equity Common Stock, no par Retained Earnings ($60,350 + $2,990) 63,340 Total Stockholders’ Equity 83,340 Total Liabilities and Stockholders’ Equity The budgeted balance sheet in shown in Exhibit 22A-11.

Budgeted Statement of Cash Flows
Exhibit 22A-12 Budgeted Statement of Cash Flows GREG’S TUNES Budgeted Statement of Cash Flows Four Months Ended July 31, 2016 Operating Activities: Cash receipts from customers $ 236,000 Cash payments for purchases (164,500) Cash payments for S&A expenses (65,250) Cash payments for interest expense (210) Net cash provided by operating activities $ 6,040 Investing Activities: Cash payments for equipment purchases (3,000) Net cash used for investing activities Financing Activities: Proceeds from issuance of notes payable 8,000 Payment of notes payable Net cash provided by financing activities 5,000 Net increase in cash 8,040 Cash balance, April 1, 2016 16,400 Cash balance, July 31, 2016 $ 24,440 The final step in the master budget process is preparing the budgeted statement of cash flows. The information comes from the cash budget in Exhibit 22A-9. All cash receipts and disbursements are designated as operating activities, investing activities, or financing activities. Exhibit 22A-12 shows the direct method for a budgeted statement of cash flows for Greg’s Tunes.

>TRY IT! 16. Connor Company began operations on January 1 and has projected the following selling and administrative expenses: Rent Expense $1,000 per month, paid as incurred Utilities Expense $500 per month, paid in month after incurred Depreciation Expense $300 per month Insurance Expense $100 per month, 6 months prepaid on January 1 Determine the cash payments for selling and administrative expenses for the first three months of operations.

>TRY IT! 16. January February March Rent $ 1,000 Utilities 500
$ 1,000 Utilities 500 Insurance 600 Total cash payments for S&A $ 1,600 $ 1,500

Master Budgets Chapter 22.

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