1. Chapter 9: Profit Planning
The Master Budget
Sales Budget
Sales Forecast
EI Budget
Production Budget
S&A Exp Budget
Operating
Budget
DM Budget
DL Budget
Overhead Budget
Cash Budget
Capital Budget
Financial
Budget
Pro Forma Inc. Stmt
Pro Forma Bal. Sht
Pro Forma SCF

2. Chapter 9: Profit Planning The Text Example Hampton Freeze
The Master Budget
The Text Example Hampton Freeze

3. Tom Willis is the majority stockholder and chief executive officer of Hampton Freeze, Inc., a company he started in The company makes premium popsicles using only natural ingredients and featuring exotic flavors such as tangy tangerine and minty mango. The company’s business is highly seasonal, with most of the sales occurring in spring and summer.

4. In 2002, the company’s second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2002 turned out to be overall a very successful year in terms of both cash flow and net income.

5. With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2003.
In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget.

6. Chapter 9: Profit Planning1 7 6 2 3 4 5 8 9 10

7. Chapter 9: Profit Planning
The Sales Budget
A budget showing the number of units, sales price and total sales for each quarter (or month).

8. Research into the history of cash collections at Hampton Freeze indicated that
70% of sales are collected in the quarter in which the sale is made and
the remaining 30% are collected in the following quarter.

9. Chapter 9: Profit Planning
The Production Budget
A budget showing the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.

10. = + - Finished Units to be Produced Expected Sales in Units
Desired EI of Finished Units
BI of Finished Units = + -

11. Hampton Freeze would like the ending inventory of finished goods to be equal to 20% of next quarter’s sales.
The company has 2,000 units of beginning inventory.

12. Chapter 9: Profit Planning
Plus Desired EI of finished units.
Equals expected sales in units
Less BI of finished units.
Finished units to be produced

13. Chapter 9: Profit Planning
Desired Ending Inventory of Finished Goods equals 20% of next quarter’s sales.
Ending Inventory for one quarter equals Beginning Inventory for next quarter.

14. Chapter 9: Profit Planning

15. Chapter 9: Profit Planning
Notice how inventories are accounted for on the spreadsheet.

16. = + - Required Purchases of Raw Materials
Amount Required for Production
Desired EI of Raw Materials
BI of Raw Materials = + -

17. The Direct Materials Purchases Budget
Chapter 9: Profit Planning
The Direct Materials Purchases Budget
A budget showing the raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories.

18. Hampton Freeze has established a policy of maintaining RM equal to 10% of the amount required for production in the subsequent quarter.
In the first quarter the company plans on producing 14,000 units (from the production budget)
Each unit requires parts costing $0.20.

19. To prepare the Schedule of Expected Cash Disbursements for Materials, Hampton’s policy is to
Pay for 50% of purchases in the quarter in which the purchase is made, and
Pay the remaining 50% in the following quarter.

20. Chapter 9: Profit Planning
Equals amount required for production.
Plus Desired EI of raw materials.
Less BI of raw materials.
Required purchases of Direct Materials

21. Chapter 9: Profit Planning

22. The Direct Labor Budget
Chapter 9: Profit Planning
The Direct Labor Budget
A budget showing the direct labor hours (and total amount) needed to produce the number of units specified in the production budget.

23. Each case produced requires 0.4 direct labor hour.
Each hour costs $15

24. Chapter 9: Profit Planning
The Direct Labor Budget

25. Chapter 9: Profit Planning
The MOH Budget
A budget showing all costs of production other than direct materials and direct labor.

26. Chapter 9: Profit Planning
The MOH Budget
Chapter 9: Profit Planning

27. The Ending Finished Goods Inventory Budget
Chapter 9: Profit Planning
The Ending Finished Goods Inventory Budget
A budget showing the carrying cost of the unsold units remaining in inventory.

28. Chapter 9: Profit Planning
The Ending FG Inventory Budget
Chapter 9: Profit Planning

29. The Selling and Administrative Expense Budget
Chapter 9: Profit Planning
The Selling and Administrative Expense Budget
A budget showing expenses for areas other than manufacturing.

30. Chapter 9: Profit Planning
The S&A Expense Budget
Chapter 9: Profit Planning
HAMPTON FREEZE, INC.
Selling and Administrative Cash Disbursement
For the Year Ended December 31, 2003
Quarter
1st
2nd
3rd
4th
Year
Salaries
Freight out
Advertising
Other expense
Total
93,000
$ ,900
$ ,750
$ ,150
$ ,800
Other Cash Disbursements Projections
Equipment Purchase
50,000
40,000
20,000
130,000
Dividends
8,000
32,000

31. Chapter 9: Profit Planning
The Cash Budget

32. Chapter 9: Profit Planning

33. The Budgeted (Pro-Forma) Income Statement
Chapter 9: Profit Planning
The Budgeted (Pro-Forma) Income Statement

34. Chapter 9: Profit Planning

35. The Budgeted Balance Sheet
Chapter 9: Profit Planning
The Budgeted Balance Sheet

36. Chapter 9: Profit Planning