Master Budgets and Planning

1
Master Budgets and Planning
Chapter
23
2
Budget Process
Defines goals and objectives
Communicates plansand instructions
Promotes analysis anda focus on the future
Advantages
Coordinates business activities
Motivates employees
Provides a basis forevaluating performance
againstpast or expected results
3
Budget Committee

• Consists of managers from all departmentsof the
  organization.
• Provides central guidance to insure that
  individual budgets submitted from all departments
  are realistic and coordinated.

4
Budget Committee
Flow of Budget Data is a bottom-up process.
5
Budget Timing
Operating Budget
1999
2000
2001
2002
The annual operating budget may be divided into
quarterly or monthly budgets.
6
Budget Timing
Continuous or Rolling Budget
1999
2000
2001
2002
The budget may be a twelve-month budget that
rolls forward one month as the current month is
completed.
7
Master Budget Components
8
Sales Budget
Analysis of economic and market
conditionsForecasts of customer needs from
marketing personnel
9
Sales Budget

• In September 2005, Hockey Den sold 700 hockey
  sticks at 100 each. Hockey Den prepared the
  following sales budget for the next four months

10
Sales Budget
Exh. 23-6
11
Merchandise Purchases Budget

• The quantity purchased is affected by

Just-in-time inventory systems that enable
purchases of smaller, frequently delivered
quantities.
Safety stock inventory systems that provide
protection against lost sales caused by delays in
supplier shipments.
12
Merchandise Purchases Budget
Exh. 23-7

• Hockey Den buys hockey sticks for 60.00 each
  and maintains an ending inventory equal to 90
  percent of the next months budgeted sales. 900
  hockey sticks are on hand on September 30.

Inventory to be purchased
Budgeted ending inventory
Budgeted cost of salesfor the period
Budgetedbeginning inventory



Lets prepare the purchases budget for Hockey Den.
13
Merchandise Purchases Budget
Exh. 23-8
14
Merchandise Purchases Budget
Exh. 23-8
15
Merchandise Purchases Budget
Exh. 23-8
16
Merchandise Purchases Budget
Exh. 23-8
17
Selling Expense Budget

• Hockey Den pays sales commissions equal to 10
  percent of total sales.
• Hockey Den pays a monthly salary of 2,000 to its
  sales manager.

Lets prepare the sales budget for Hockey Den.
18
Selling Expense Budget
Exh. 23-9
From Hockey Dens sales budget
19
General and Administrative Expense Budget

• General and administrative salaries are 4,500
  per month.
• Depreciation of equipment is 1,500 per month.

Lets prepare the general and administrativeexpen
se budget for Hockey Den.
20
General and Administrative Expense Budget
Exh. 23-10
21
Financial Budgets
22
Budgeted Cash Receipts

• Forty percent of Hockey Dens sales are for cash.
• The remaining sixty percent are credit sales that
  are collected in full in the month following sale.

Lets prepare the cash receipts budget for Hockey
Den.
23
Budgeted Cash Receipts
Exh. 23-12
60 percent of September sales are collected in
October
From Hockey Dens sales budget
24
Budgeted Cash Receipts
Exh. 23-12
40 of sales
60 of sales
25
Budgeted Cash Receipts
Exh. 23-12
26
Cash Disbursements for Purchases

• Hockey Dens purchases of merchandise are
  entirely on account.
• Full payment is made in the month following
  purchase.
• The September 30 balance of Accounts Payable is
  58,200.

Lets look at cash disbursementsfor purchases
for Hockey Den.
27
Cash Disbursements for Purchases
Exh. 23-13
From merchandise purchases budget
28
Cash Budget

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

29
Cash Budget

• Hockey Den
• Pays interest equal to one percent of the prior
  months ending loan balance.
• Repays loans when the ending cash balance exceeds
  20,000.
• Owes 10,000 on this loan arrangement on
  September 30.
• Has 40 percent income tax rate.
• Will pay taxes for current quarter next year.

Lets prepare the cash budget for Hockey Den.
30
Exh. 23-11
From Cash Receipts Budget
31
Exh. 23-11
From Cash Disbursementsfor Purchases
32
Exh. 23-11
From Selling Expense Budget
33
Exh. 23-11
From General andAdministrative Expense
BudgetDepreciation is anon-cash expense.
34
Exh. 23-11
Because Hockey Denmaintains a minimumcash
balance of 20,000, the company must borrow
12,800.
.01 10,000
35
Cash Budget Continued
Exh. 23-11
Ending cash balance for October is the beginning
November balance.
36
Exh. 23-11
Cash balanceis sufficientto repay the22,800
loan.
.01 22,800
37
Cash Budget Continued
Exh. 23-11
Ending cash balance for November is the
beginning December balance.
38
Exh. 23-11
39
Cash Budget Continued
Exh. 23-11
40
Budgeted Income Statement
Cash Budget
Budgeted Income Statement
Completed
Lets prepare the budgeted incomestatement for
Hockey Den.
41
Exh. 23-14
From the Sales Budget
42
From the Merchandise Purchases Budget
Exh. 23-14
43
Exh. 23-14
From the SellingExpense Budget
44
Exh. 23-14
45
Exh. 23-14
From the Cash Budget
46
Exh. 23-14
71,672 .40
47
Budgeted Balance Sheet
Budgeted Balance Sheet
Budgeted Income Statement
Completed
Lets prepare the budgeted balancesheet for
Hockey Den.
48
Preparing a BudgetedBalance Sheet

• Hockey Den reports the following account
  balances on September 30 prior to preparing its
  budgeted financial statements
• Equipment 200,000
• Accumulated depreciation 36,000
• Common stock 150,000
• Retained earnings 41,800

Lets prepare the budgeted balancesheet for
Hockey Den.
49
Exh. 23-15
50
Exh. 23-15
From the Cash Budget
51
Exh. 23-15
From the Cash Receipts Budget
52
Exh. 23-15
From the Merchandise Purchases Budget8,100 units
_at_ 6
53
Exh. 23-15
200,000 September 30 balance plus the 25,000
December acquisition
54
Exh. 23-15
36,000 September 30 balance plus the 4,500 from
the General andAdministrative Expense Budget
55
Exh. 23-15
From the MerchandisePurchases Budget
56
Exh. 23-15
From the Budgeted Income Statement
57
Exh. 23-15
From the Cash Budget
58
Exh. 23-15
59
Activity-Based Budgeting
Exh. 23-16

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

60
End of Chapter 23