Title: Master Budgets and Performance Planning
1Chapter 20
- Master Budgets and Performance Planning
2Conceptual Learning Objectives
- C1 Describe the importance and benefits of
budgeting. Self-Study gt QUIZ - C2 Explain the process of budget administration.
Self-Study gt QUIZ - C3 Describe a master budget and the process of
preparing it. gt Quiz
3Analytical Learning Objectives
- A1 Analyze expense planning using activity-based
budgeting.
4Procedural Learning Objectives
- P1 Prepare each component of a master budget and
link each to the budgeting process. - P2 Link both operating and capital expenditures
budgets to budgeted financial statements. - P3 Appendix 20A Prepare production and
manufacturing budgets.
5Budget Process
C 1
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
6Budget Timing
Many companies apply continuous budgeting by
preparing rolling budgets. As each budget period
passes New monthly or quarterly budgets are
prepared to replace those that have lapsed.
Entire set of budgets for months or quarters
that remain is revised. Management is
continuously planning ahead.
7Budget Timing
C 2
Continuous or Rolling Budget
2009
2010
2011
2012
The budget may be a twelve-month budget that
rolls forward one month as the current month is
completed.
8The Master Budget
Formal, comprehensive plan for a companys
future. Contains several individual budgets that
are sequentially linked with each other to
provide a coordinated plan for the company.
Typically includes individual budgets for
sales, purchases, production, various expenses,
capital expenditures, and cash.
9Master Budget Components
A Operating Budgets Four major types 1.
Sales budget 2. Merchandiser Merchandise
Purchases Budget Manufacturer Production
and Manufacturing Budgets. 3. Selling expense
budget 4. General and administrative expense
budget Each component linked to budgeting
process.
10Master Budget Components
B. Capital Expenditures Budget C. Financial
Budgets (Three major types) 1. Cash
Budget 2. Budgeted Income Statement
3. Budgeted Balance Sheet
11Master Budget Components
C 3
12EXAMPLE
Hockey Den (HD)A retailer of youth Hockey
Sticks Preparation of Master Budget Reference
Point Balance Sheet at the start of the
Budgeting Period(Exhibit 20.5 Page 831)
13Sales budget
First step in preparing master budget. Requires
careful analysis of forecasted economic and
market conditions, plant capacity, proposed
selling expenses, and predictions of unit
sales. Participatory budgeting approach ensures
greater commitment to goals, and draws on
knowledge and experience of people involved in
activity.
14Sales Budget
P1
15Quick Study 20 - 10
16Merchandise Purchases Budget
Sales budget used as a basis for merchandise
purchases budget. Inventory to be purchased is
determined by adding budgeted ending inventory
to budgeted sales, and then subtracting
beginning inventory. Multiply by budgeted cost
per unit to obtain budgeted cost of merchandise
purchases.
17Merchandise Purchases Budget
P1
-
- 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.
18Merchandise Purchases Budget
P1
19Selling Expense Budget
Types and amounts of selling expenses expected
during budget period. Created to provide
sufficient selling expenses to meet sales goals
reflected in sales budget. For HD, Selling
expenses consist of -10 Commissions paid
to sales personnel based on month's sale
-2,000 monthly salary paid to the sales
manager.
20Selling Expense Budget
P1
From Hockey Dens sales budget
21Quick Study 20 - 11
22General and Administrative Expense Budget
Plan showing predicted operating expenses not
included in selling expenses budget. Consists of
items variable or fixed in terms of sales
volume. Interest expense and income tax expense
cannot be planned at this stage of budgeting
process.
23General and Administrative Expense Budget
Salaries of 54,000 per year gt 4,500 per
month Using Balance Sheet information form
Exhibit 20.5, the depreciation on equipment is
computed as 1,500/per month. gt( 200,000
20,0000) / 10 Years / 12 Months
24General and Administrative Expense Budget
P1
25Problem 1A
26Capital Expenditures Budget
1. Includes amounts to be received from
disposing of equipment, and to be spent on
purchasing additional equipment assumes
proposed production program is carried
out. 2. Affected by long-range plans for
business instead of short-term sales
budgets. 3. Capital budgeting is process of
evaluating and planning for capital (plant
and equipment) expenditures, which involve
long-run commitments of large amounts.
27Capital Expenditures Budget
1. Hockey Den does not anticipate disposal of
any plant assets through December 2009. 2.
But it plan to acquire 25,000 of equipment for
cash near the end of December 2009. 3. Since
this is the only budgeted capital
expenditure from Oct Dec, 2009, no separate
budget is shown. 4. The Cash Budget will
reflect this 25,000 planned expenditure.
28Capital Expenditures Budget
1. Hockey Den does not anticipate disposal of
any plant assets through December 2009. 2.
But it plan to acquire 25,000 of equipment for
cash near the end of December 2009. 3. Since
this is the only budgeted capital
expenditure from Oct Dec, 2009, no separate
budget is shown. 4. The Cash Budget will
reflect this 25,000 planned expenditure.
29Financial Budgets
P2
30Cash Budget
Shows expected cash inflows and outflows during
budget period Beginning cash balance plus
Expected receipts less Expected
expenditures equals Expected final cash
balanceCash Budget may include Planned
receipts from short-term loans (if expected final
cash balance is inadequate), ORUse of cash to
repay loans or acquire short-term investments (if
expected final cash balance is in excess of
requirements).
31Cash Budget
Budgeted cash receipts -Expected cash
sales -Expected cash collections of accounts
receivable.
32Budgeted Cash Receipts
P2
- 40 of Hockey Dens sales are for cash.
- 60 are credit sales (collected in full in the
month following sale).
Lets prepare the cash receipts budget for Hockey
Den.
33Budgeted Cash Receipts
P2
From Hockey Dens sales budget
60 percent of September sales are collected in
October
40 of sales
60 of sales
34Budgeted Cash Receipts
P2
35Cash Budget
Budgeted cash disbursements from -Selling
expense budget, and -General administrative
expense budget. Expected cash disbursements for
-Interest expense and -Income
taxes. Expected cash purchases Expected cash
payments on accounts payable.
Budgeted cash disbursements
36Cash Disbursements for Purchases
P2
- 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.
37Cash Disbursements for Purchases
P2
From merchandise purchases budget
38Cash Budget
P2
- 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.
39Cash Budget
P2
- 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.
40P2
From Cash Receipts Budget
From Cash Disbursementsfor Purchases
41P2
From Selling Expense Budget
42P2
Because Hockey Denmaintains a minimumcash
balance of 20,000, the company must borrow
12,800.
.01 10,000
43Cash Budget Continued
P2
Ending cash balance for October is the beginning
November balance.
44P2
Cash balanceis sufficientto repay the22,800
loan.
.01 22,800
45P2
46Cash Budget Continued
P2
47EXERCISE 2 EXERCISE 3
48Budgeted Income Statement
Managerial accounting report showing predicted
amounts of -Sales -Expenses. Information
comes from already prepared budgets. Income tax
expense predicted at this level.
49From the Sales Budget
P2
From the Merchandise Purchases Budget
50P2
From the SellingExpense Budget
51P2
52P2
From the Cash Budget
53P2
71,672 .40
54Budgeted Balance Sheet
Final step in preparing master budget. Shows
predicted amounts for -Assets, -Liabilities,
-Stockholders equity as of end of budget
period. Prepared using information from other
budgets.See notes to budgeted balance sheet for
sources of amounts.
55Preparing a BudgetedBalance Sheet
P2
- 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.
56P2
From the Cash Budget
57P2
From the MerchandisePurchases Budget
58P2
From the Budgeted Income Statement
59P2
From the Cash Budget
60P2
61Activity-Based Budgeting
A1
- Activity-based budgeting is based on
activities rather than traditional items such as
salaries, supplies, depreciation, and utilities.
62End of Chapter 20