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TM 9-1

COMPREHENSIVE BUDGETING EXAMPLE


Royal Company is preparing budgets for the second quarter
ending June 30.
Budgeted sales of the companys only product for the next five
months are:
20,000
units
50,000
units
30,000
units
25,000
units
15,000
units

April.....
May......
June......
July.......
August.

The selling price is $10 per unit.


The following elements of the master budget will be prepared in
this example:
1. Sales budget (with a schedule of expected cash
collections).
2. Production budget.
3. Direct materials budget (with a schedule of expected cash
disbursements for materials).
4. Direct labor budget.
5. Manufacturing overhead budget.
6. Ending finished goods inventory budget.
7. Selling and administrative expense budget.
8. Cash budget.
9. Budgeted income statement.
10. Budgeted balance sheet.

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TM 9-2
SALES BUDGET
April
Budgeted sales
(units)
Selling price per unit..
Total sales..................

20,000
$10
$200,00
0

May
50,000
$10
$500,00
0

June

Quarter
100,000

30,000
$10
$10
$300,00 $1,000,00
0
0

SCHEDULE OF EXPECTED CASH COLLECTIONS


Additional data:

All sales are on account.

The company collects 70% of these credit sales in the month


of the sale; 25% are collected in the month following sale; and
the remaining 5% are uncollectible.

The accounts receivable balance on March 31 was $30,000.


All of this balance was collectible.

Accounts receivable
beginning balance......
April sales
70% $200,000.........
25% $200,000.........
May sales
70% $500,000.........

April
$ 30,00
0

May

140,000
$ 50,000
350,000

350,000
$125,00
0

$170,00
0

Quarter
$ 30,00
0
140,000
50,000

25% $500,000.........
June sales
70% $300,000.........
Total cash collections....

June

$400,00
0

210,000
$335,00
0

125,000
210,00
0
$905,00
0

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TM 9-3
PRODUCTION BUDGET
Additional data:
The company desires to have inventory on hand at the end of
each month equal to 20% of the following months budgeted
unit sales.
On March 31, 4,000 units were on hand.
Budgeted sales [TM 9-4]......
Add desired ending
inventory.........................
Total needs.........................
Less beginning inventory. . .
Required production...........

April
20,000

May
50,000

10,000
30,000
4,000
26,000

6,000
56,000
10,000
46,000

June
July
30,000 25,000
3,000*
5,000
35,000 28,000
6,000 5,000
29,000 23,000

* Budgeted sales in August = 15,000 units.


Desired ending inventory in July = 15,000 units 20% = 3,000
units.

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TM 9-4
DIRECT MATERIALS BUDGET
Additional data:

5 pounds of material are required per unit of product.

Management desires to have materials on hand at the end of


each month equal to 10% of the following months production
needs.

The beginning materials inventory was 13,000 pounds.

The material costs $0.40 per pound.


April

May

June

Quarter

26,000

5
130,00
0
23,00
0
153,00
0
13,00
0
140,00
0

46,000

5
230,00
0
14,50
0
244,50
0
23,00
0
221,50
0

29,000

5
145,00
0
11,50
0
156,50
0
14,50
0
142,00
0

101,000

Required production in units


[TM 9-6]...............................

Raw materials per unit


(pounds)............................
Production needs (pounds)...
Add desired ending
inventory (pounds)*...........

5
505,000
11,500

Total needs (pounds)............


516,500
Less beginning inventory
(pounds)............................
13,000
Raw materials to be
purchased (pounds)...........
503,500
Cost of raw materials to be
purchased at $0.40 per
$56,00 $88,60 $56,80 $201,40
pound................................
0
0
0
0
* For June: 23,000 units produced in July [TM 9-6] 5 pounds per
unit = 115,000 pounds; 115,000 pounds 10% = 11,500
pounds

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TM 9-5
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR
MATERIAL
Additional data:
Half of a months purchases are paid for in the month of
purchase; the other half is paid for in the following month.
No discounts are given for early payment.
The accounts payable balance on March 31 was $12,000.
Accounts payable
beginning balance........
April purchases
50% $56,000.............
50% $56,000.............
May purchases
50% $88,600.............
50% $88,600.............
June purchases
50% $56,800.............
Total cash disbursements
for materials.................

$12,00
0

$
12,000

28,000

28,000
$28,00
0

28,000

44,300

44,300
$44,30
0

44,300

28,40
28,40
0
0
$40,00 $72,30 $72,70 $185,00
0
0
0
0

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TM 9-6
DIRECT LABOR BUDGET
Additional data:
Each unit produced requires 0.05 hour of direct labor.
Each hour of direct labor costs the company $10.
Management fully adjusts the workforce to the workload each
month.
April
Units to be produced
26,000
[TM 9-6]........................
Direct labor-hours per
unit.............................
0.05
Total hours of direct
labor time needed.......
1,300
Direct labor cost per
hour............................
$10
Total direct labor cost.... $13,000

May

June

Quarter

46,000

29,000

101,000

0.05

0.05

0.05

2,300

1,450

5,050

$10
$23,000

$10
$14,500

$10
$50,500

Note: Many companies do not fully adjust their direct labor work
force every month and in such companies direct labor behaves
more like a fixed cost, with additional cost if overtime is
necessary.

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TM 9-7
MANUFACTURING OVERHEAD BUDGET
Additional data:
Variable manufacturing overhead is $20 per direct labor-hour.
Fixed manufacturing overhead is $50,500 per month. This
includes $20,500 in depreciation, which is not a cash outflow.
April

May

June

Budgeted direct laborhours [TM 9-9]...................


1,300
2,300
1,450
Variable manufacturing
overhead rate.................. $20 $20 $20
Variable manufacturing
$26,00 $46,00 $29,00
overhead.........................
0
0
0
Fixed manufacturing
50,50
50,50
50,50
overhead.........................
0
0
0
Total manufacturing
overhead......................... 76,500 96,500 79,500
20,50
20,50
20,50
Less depreciation...............
0
0
0
Cash disbursements for
$56,00 $76,00 $59,00
manufacturing overhead..
0
0
0

Quarter
5,050
$20
$101,00
0
151,50
0
252,500
61,50
0
$191,00
0

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TM 9-8
ENDING FINISHED GOODS INVENTORY BUDGET
Additional data:
Royal Company uses absorption costing in its budgeted income
statement and balance sheet.
Manufacturing overhead is applied to units of product on the
basis of direct labor-hours.
The company has no work in process inventories.
Computation of absorption unit product cost:

Direct materials..........

Quantity
pound
5s

Direct labor................. 0.05 hours


Manufacturing
overhead.................. 0.05 hours

Cost
per
$0.40 pound
$10.0
0 per hour
$50.0
0 per hour*

Unit product cost.........

Tota
l
$2.0
0
0.50
2.50
$5.0
0

* Predetermined
Total manufacturing overhead
=
overhead rate
Total direct labor hours
=

$252,500
= $50.00 per hour
5,050 hours

Budgeted ending finished goods inventory:


Ending finished goods inventory in units [TM

5,000
Unit product cost [see above].......................
$5
Ending finished goods inventory in dollars.... $25,000
9-6]

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TM 9-9
SELLING AND ADMINISTRATIVE EXPENSE BUDGET
Additional data:
Variable selling and administrative expenses are $0.50 per unit
sold.
Fixed selling and administrative expenses are $70,000 per
month and include $10,000 in depreciation.
April
Budgeted sales in units
[TM 9-4].......................... 20,000
Variable selling and
administrative expense

per unit.........................
$0.50
Variable selling and
$10,00
administrative expense.
0
Fixed selling and
70,00
administrative expense.
0
Total selling and
administrative expense. 80,000
10,00
Less depreciation............
0
Cash disbursements for
selling and
administrative
$70,00
expenses......................
0

May

June

Quarter

50,000

30,000

100,000

$0.50
$0.50
$25,00 $15,00
0
0
70,00
70,00
0
0

$0.50
$ 50,00
0
210,00
0

95,000 85,000
10,00
10,00
0
0

260,000
30,00
0

$85,00 $75,00
0
0

$230,00
0

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TM 9-10
CASH BUDGET
Additional data:
1.

A line of credit is available at a local bank that allows the


company to borrow up to $75,000.
a. All borrowing occurs at the beginning of the month, and all
repayments occur at the end of the month.
b. Any interest incurred during the second quarter will be
paid at the end of the quarter. The interest rate is 16% per
year.

2.

Royal Company desires a cash balance of at least $30,000 at


the end of each month. The cash balance at the beginning of
April was $40,000.

3.

Cash dividends of $51,000 are to be paid to stockholders in


April.

4.

Equipment purchases of $143,700 are scheduled for May and


$48,800 for June. This equipment will be installed and tested
during the second quarter and will not become operational
until July, when depreciation charges will commence.

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TM 9-11
CASH BUDGET
Royal Company
Cash Budget
For the Quarter Ending June 30
April
$ 40,00
Cash balance, beginning. .
0
Add receipts:
170,00
Cash collections [TM 9-5].
0
210,00
Total cash available..........
0

May
June
$ 30,00 $ 30,00
0
0
400,00
0
430,00
0

Quarter
$ 40,00
0

335,00
0
365,00
0

905,00
0
945,00
0

72,700
14,500

185,00
0
50,500

Less disbursements:
Direct materials [TM 9-8].
Direct labor [TM 9-9].........
Manufacturing overhead

40,000
13,000

[TM 9-10]...........................

56,000

76,000

59,000

[TM 9-12]...........................

70,000

75,000

Equipment purchases....

Total disbursements.........

0
51,00
0
230,00
0

85,000
143,70
0
0
400,00
0

0
270,00
0

191,00
0
230,00
0
192,50
0
51,00
0
900,00
0

Excess (deficiency) of
cash available over
disbursements...............

(20,000
)

30,00
0

95,00
0

45,00
0

Financing:
Borrowings.....................
Repayments...................

50,000
0

Selling & administrative

Dividends.......................

Interest*........................
Total financing..................

0
50,00
0

72,300
23,000

48,800

0
0
50,000
0 (50,000) (50,000)
0
0

( 2,000)
(52,000
)

( 2,000)
( 2,000)

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TM 9-12
$ 30,00
Cash balance, ending.......
0

$ 30,00
0

$
43,000

$ 43,00
0

* $50,000 16% (3 months/12 months) = $2,000.

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TM 9-13
BUDGETED INCOME STATEMENT
Royal Company
Budgeted Income Statement
For the Quarter Ending June 30
Net sales [see below]....................................
Less cost of goods sold [see below]..............
Gross margin.................................................
Less selling & administrative expenses [TM
9-12]

Net operating income...................................


Less interest expense [TM 9-14]......................
Net income...................................................

$950,000
500,000
450,000
260,000
190,000
2,000
$188,000

Computation of net sales:


$1,000,00
Sales..........................................
0
50,00
Less uncollectible amounts (5%)
0
$ 950,00
Net sales....................................
0
Computation of cost of goods sold:
Budgeted sales (units)...............
100,000
Unit product cost........................
$5
Cost of goods sold...................... $500,000

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TM 9-14
BEGINNING BALANCE SHEET
Royal Company
Balance Sheet
March 31
Current assets:
Cash........................................... $ 40,000 (a)
Accounts receivable....................
30,000 (b)
Raw materials inventory.............
5,200 (c)
$
Finished goods inventory............
20,000
Plant and equipment:
Land............................................
400,000
Buildings and equipment............ 1,610,000
(750,000
Accumulated depreciation..........
)
Total assets...................................

(d)

95,20
0

(e)
(f)
1,260,00
(g)
0
$1,355,20
0

Liabilities:
$
Accounts payable........................
Stockholders equity:
Common stock............................
Retained earnings.......................
Total liabilities and stockholders
equity.........................................
(a)

See TM 9-13

(b)

See TM 9-5

(c)
(d)
(e)

Given
Given
Given

(f)
(g
)
(h
)
(i)
(j)

$ 200,00
0 (i)
1,143,20
0 (j)

12,00
0 (h)

1,343,20
0
$1,355,20
0

Given
Given
See TM 9-8
Given
Given

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TM 9-15
BUDGETED BALANCE SHEET
Royal Company
Budgeted Balance Sheet
June 30
Current assets:
$
Cash...........................................
Accounts receivable....................
Raw materials inventory.............

43,00
0 (a)
75,000 (b)
4,600 (c)

Finished goods inventory............


25,000
Plant and equipment:
Land............................................
400,000
Buildings and equipment............ 1,802,500
(841,500
Accumulated depreciation..........
)

(d)

$ 147,60
0

(e)
(f)
(g)

Total assets...................................

1,361,00
0
$1,508,60
0

Liabilities:
$
Accounts payable........................
Stockholders equity:
Common stock............................
Retained earnings.......................
Total liabilities and stockholders
equity.........................................

(a)

See TM 9-14

(b)
(c)

$300,000 sales 25%


11,500 pounds $0.40
per pound
See TM 9-11
See TM 9-16

(d)
(e)

$ 200,00
0 (i)
1,280,20
0 (j)

28,40
0 (h)

1,480,20
0
$1,508,60
0

$1,610,000+ $143,700+
(f) $48,800
(g $750,000 + $61,500 +
)
$30,000
(h $56,800 purchases 50%
)
(i) See TM 9-16
(j) $1,143,200 + $188,000

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TM 9-16
$51,000

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