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Chapter 9

Financial Planning
and Analysis: The
Master Budget

McGraw-Hill/Irwin

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective 1

9-2

Financial Planning and


Analysis (FP&A) Systems
A financial planning and
analysis (FP&A) system
helps managers assess
the companys future and
know if they are reaching
their performance goals.
A complete FP&A system
includes subsystems for
(1) planning, (2) measuring
and recording results, and
(3) evaluating performance.

The planning component


of the FP&A system is
called the master budget.
It is intended to help
ensure that plans are
consistent and yield a
result that makes sense
for the organization.

9-3

Learning Objective 2

9-4

Purposes of Budgeting Systems


Budget

1. Planning
a detailed plan, expressed
in quantitative terms, that 2. Facilitating
Communication and
specifies how resources
will be acquired and used
Coordination
during a specified period of 3. Allocating Resources
time.
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives
9-5

Types of Budgets
Detail
Budget
Detail
Budget

Covering all
phases of
a companys
operations.

Production

Master
Budget

Detail
Budget

9-6

Types of Budgets
Income
Statement

Budgeted
Financial
Statements

Balance
Sheet

Statement of
Cash Flows
9-7

Types of Budgets

Capital budgets with acquisitions


that normally cover several years.
Financial budgets with financial
resource acquisitions.

Long Range Budgets

Continuous or
2011 Rolling Budget2012

2013

2014

This budget is usually a twelve-month


budget that rolls forward one month
as the current month is completed.

9-8

Learning Objective 3

9-9

Sales of Services or Goods


Ending
Inventory
Budget

Production
Budget

Work in Process
and Finished
Goods

Ending
Inventory
Budget

Direct
Materials
Budget

Direct
Labor
Budget

Overhead
Budget

Direct Materials

Cash Budget

Selling and
Administrative
Budget

Budgeted Income
Statement

Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-10

Learning Objective 4

9-11

Activity-Based Costing versus ActivityBased Budgeting


Resources

Resources
Activity-Based
Costing (ABC)

Activities

Cost objects:
products and services
produced, and
customers served.

Activities

Activity-Based
Budgeting (ABB)

Forecast of products
and services to be
produced and
customers served.
9-12

Learning Objectives 5 & 6

9-13

Sales Budget
Breakers, Inc. is preparing budgets for the quarter

ending June 30.


Budgeted sales for the next five months are:
April
May
June
July
August

20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.

The selling price is $10 per unit.

9-14

Sales Budget
April
Budgeted
sales (units)
20,000
Selling price
per unit
$
10
Total
Revenue
$ 200,000

May

June

50,000
$

10

$ 500,000

Quarter

30,000
$

10

$ 300,000

100,000
$

10

$ 1,000,000

9-15

Production Budget
The management of Breakers, Inc. wants ending
inventory to be equal to 20% of the following
months budgeted sales in units.
On March 31, 4,000 units were on hand.
Lets prepare the production budget.

9-16

From
sales
budget

Production Budget
May sales
Sales in units
Add: desired
end. inventory
Total needed
Less: beg.
inventory
Units to be
produced

April
20,000
10,000
30,000

50,000 units
Desired percent
20%
May
June
Quarter
Desired inventory
10,000 units

50,000

30,000

100,000

Ending inventory becomes


6,000beginning 5,000
5,000
inventory the next
56,000
35,000
105,000
month

4,000

10,000

6,000

4,000

26,000

46,000

29,000

101,000

March 31
ending inventory
9-17

Direct-Material Budget
At Breakers, five pounds of material are required

per unit of product.


Management wants materials on hand at the end of

each month equal to 10% of the following months


production.
On March 31, 13,000 pounds of material are on

hand. Material cost $.40 per pound.


Lets prepare the direct materials budget.
9-18

From our
production
budget

Direct-Material Budget
Production in units
Materials per unit
Production needs
Add: desired
ending inventory
Total needed
Less: beginning
inventory
Materials to be
purchased

April
26,000
5
130,000

May
46,000
5
230,000

June
29,000
5
145,000

Quarter
101,000
5
505,000

23,000
153,000

14,500
244,500

11,500
156,500

11,500
516,500

13,000

23,000

14,500

13,000

140,000

221,500

142,000

503,500

10% of the following


months production

March 31
inventory
9-19

Direct-Material Budget
July Production

April 25,000 May


Sales in units
Add: Production
desired ending
inventory26,000 3,000 46,000
in units
TotalMaterials
units needed
per unit
528,000
5
Less:Production
beginning inventory
needs
130,000 5,000 230,000
Production in units
23,000

June
29,000
5
145,000

Add: desired
ending inventory
23,000
14,500
11,500
Total needed
153,000
244,500
156,500
Less: beginning
June
Ending Inventory
inventory
13,000
23,000
14,500
July
in units
23,000
Materials
toproduction
be
Materials per unit
5142,000
purchased
140,000
221,500
Total units needed
115,000
Inventory percentage
10%
June desired ending inventory
11,500

Quarter
101,000
5
505,000
11,500
516,500
13,000
503,500

9-20

Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hours

of direct labor.
The Company has a no layoff policy so all

employees will be paid for 40 hours of work each


week.
In exchange for the no layoff policy, workers agreed

to a wage rate of $8 per hour regardless of the hours


worked (No overtime pay).
For the next three months, the direct labor workforce

will be paid for a minimum of 3,000 hours per month.


Lets prepare the direct labor budget.
9-21

Direct-Labor Budget
April
26,000
0.10
2,600

Production in units
Direct labor hours
Labor hours required
Guaranteed labor
hours
3,000
Labor hours paid
3,000
Wage rate
$
8
Total direct labot cost $ 24,000

From our
production
budget

May
46,000
0.10
4,600

June
29,000
0.10
2,900

Quarter
101,000
0.10
10,100

3,000
4,600
$
8
$ 36,800

3,000
3,000
$
8
$ 24,000

10,600
$
8
$ 84,800

This is the greater of


labor hours required or
labor hours guaranteed.
9-22

Overhead Budget
Here is Breakers Overhead Budget for the quarter.
April
Indirect labor
Indirect material
Utilities
Rent
Insurance
Maintenance

17,500
7,000
4,200
13,300
5,800
8,200
56,000

May
$

26,500
12,600
8,400
13,300
5,800
9,400
76,000

June
$

17,900
8,600
5,200
13,300
5,800
8,200
59,000

Quarter
$

61,900
28,200
17,800
39,900
17,400
25,800
$ 191,000

9-23

Selling and Administrative Expense


Budget
At Breakers, variable selling and administrative

expenses are $0.50 per unit sold.


Fixed selling and administrative expenses are

$70,000 per month.


The $70,000 fixed expenses include $10,000 in

depreciation expense that does not require a cash


outflow for the month.

9-24

Selling and Administrative Expense


Budget
Sales in units
Variable S&A rate
Variable expense
Fixed S&A
expense
Total expense
Less: noncash
expenses
Cash
disbursements

April
20,000
$ 0.50
$ 10,000

May
50,000
$ 0.50
$ 25,000

June
30,000
$ 0.50
$ 15,000

Quarter
100,000
$
0.50
$ 50,000

70,000
80,000

70,000
95,000

70,000
85,000

210,000
260,000

10,000

10,000

10,000

30,000

$ 70,000

$ 85,000

$ 75,000

$ 230,000

From our
Sales budget
9-25

Cash Receipts Budget


At Breakers, all sales are on account.
The companys collection pattern is:
70% collected in the month of sale,
25% collected in the month following the sale,
5% is uncollected.

The March 31 accounts receivable balance of

$30,000 will be collected in full.

9-26

Cash Receipts Budget


Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections

April
$ 30,000

May

June

140,000

140,000
50,000

$ 50,000
350,000

$ 170,000

$ 400,000

Quarter
$ 30,000

$ 125,000

350,000
125,000

210,000
$ 335,000

210,000
$ 905,000

9-27

Cash Disbursement Budget


Breakers pays $0.40 per pound for its materials.
One-half of a months purchases are paid for in the

month of purchase; the other half is paid in the


following month.
No discounts are available.

The March 31 accounts payable balance is

$12,000.

9-28

Cash Disbursement Budget


Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash payments
for materials

April
$ 12,000

May

June

28,000

28,000
28,000

$ 28,000
44,300

$ 40,000

$ 72,300

Quarter
$ 12,000

$ 44,300

44,300
44,300

28,400

28,400

$ 72,700

$ 185,000

140,000 lbs. $.40/lb. = $56,000


9-29

Cash Disbursement Budget


Breakers:
Maintains a 12% open line of credit for $75,000.
Maintains a minimum cash balance of $30,000.
Borrows and repays loans on the last day of the month.
Pays a cash dividend of $25,000 in April.
Purchases $143,700 of equipment in May and $48,300 in

June paid in cash.


Has an April 1 cash balance of $40,000.

9-30

From our Cash


Receipts Budget
(Collections and Disbursements)

Cash Budget

April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May

June

Quarter

From our Cash Disbursements


Budget
From our Direct Labor Budget
From our Overhead Budget
From our Selling and
Administrative Expense
Budget

To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
9-31

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000
72,300
36,800
76,000
85,000
143,700
413,800

June

Quarter

Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.

$ 16,200
9-32

Cash Budget
(Collections and Disbursements)
April
May
Beginning
$ 40,000
At thecash
endbalance
of June,
Breakers$ 30,000
Add: cash collections
has enough cash170,000
to repay 400,000
Total cash available
210,000
430,000
the $48,800 loan plus interest
Less: disbursements
at 12%. 40,000
Materials
72,300
Direct labor
24,000
36,800
Mfg. overhead
56,000
76,000
Selling and admin.
70,000
85,000
Equipment purchase
143,700
Dividends
25,000
Total disbursements
215,000
413,800
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
$ 16,200

June
$ 30,000
335,000
365,000

Quarter

72,700
24,000
59,000
75,000
48,300
279,000

$ 86,000
9-33

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000

June
$ 30,000
335,000
365,000

Quarter
$ 40,000
905,000
945,000

72,300
36,800
76,000
85,000
143,700
413,800

72,700
24,000
59,000
75,000
48,300
279,000

185,000
84,800
191,000
230,000
192,000
25,000
907,800

$ 16,200

$ 86,000

$ 37,200
9-34

Ending cash balance for


April
is the beginning May
balance.

Cash Budget
(Financing and Repayment)

Excess (deficiency) of
Cash available over
disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance

Interest
Rate
12% / 12 = 1%
12% / 12 = 1%

April

May

June

Quarter

$ (5,000)

$ 16,200

$ 86,000

$ 37,200

35,000
35,000
$ 30,000

13,800
13,800
$ 30,000

(48,800)
(838)
(49,638)
$ 36,362

48,800
(48,800)
(838)
(838)
$ 36,362

Borrowing
$35,000
$13,800

Monthly
Interest Rate

1%

1%

Months
Outstanding
2
1

Interest
Expense
=
$700
=
138
$
838
9-35

Cost of Goods Manufactured


April
Direct material:
Beg.material inventory
$ 5,200
Add: Materials purchases
56,000
Material available for use
61,200
Deduct: End. material inventory
9,200
Direct material used
52,000
Direct labor
24,000
Manufacturing overhead
56,000
Total manufacturing costs
132,000
Add: Beg. Work-in-process inventory
3,800
Subtotal
135,800
Deduct: End.Work-in-process inventory
16,200
Cost of goods manufactured
$ 119,600

May
$

9,200
88,600
97,800
5,800
92,000
36,800
76,000
204,800
16,200
221,000
9,400
$ 211,600

June
$

5,800
56,800
62,600
4,600
58,000
24,000
59,000
141,000
9,400
150,400
17,000
$ 133,400

Quarter
$

5,200
201,400
206,600
4,600
202,000
84,800
191,000
477,800
3,800
481,600
17,000
$ 464,600

9-36

Cost of Goods Sold


Cost of goods manufactured
Add: Beg. finished-goods inventory
Cost of goods available for sale
Deduct: End. finished-goods inventory
Cost of goods sold

April
May
$ 119,600 $ 211,600 $
18,400
46,000
138,000
257,600
46,000
27,600
$ 92,000 $ 230,000 $

June
Quarter
133,400 $ 464,600
27,600
18,400
161,000
483,000
23,000
23,000
138,000 $ 460,000

9-37

Budgeted Income Statement


Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
Revenue (100,000 $10)
Cost of goods sold
Gross margin
Operating expenses:
Selling and admin. expenses
Interest expense
Total operating expenses
Net income

$ 1,000,000
460,000
540,000
$ 260,000
838
$

260,838
279,162

9-38

Budgeted Statement of Cash Flows


April
Cash flows from operating activities:
Cash receipts from customers
Cash payments:
To suppliers of raw material
For direct labor
For manufacturing-overhead expenditures
For selling and administrative expenses
For interest

May

$ 170,000 $

Total cash payments


Net cash flow from operating activities
Cash flows from investing activities:
Purchase of equipment

Net cash used by investing activities


Cash flows from financing activities:
Payment of dividends
Principle of bank loan
Repayment of bank loan

Net cash provided by financing activities

Net increase in cash


Balance in cash, beginning
Balance in cash. end of month

June

Quarter

400,000 $

335,000 $

(40,000)
(24,000)
(56,000)
(70,000)
-

(72,300)
(36,800)
(76,000)
(85,000)
-

(72,700)
(24,000)
(59,000)
(75,000)
(838)

(185,000)
(84,800)
(191,000)
(230,000)
(838)

(190,000)

(270,100)

(231,538)

(691,638)

(20,000) $
-

129,900 $
(143,700)

- $ (143,700) $
(25,000)
35,000
-

103,462 $

905,000

213,362

(48,300)

(192,000)

(48,300) $

(192,000)

13,800
-

(48,800)

(25,000)
48,800
(48,800)

10,000 $

13,800 $

(48,800) $

(25,000)

(10,000) $
40,000

- $
30,000

6,362 $
30,000

(3,638)
40,000

30,000 $

30,000 $

36,362 $

36,362
9-39

Budgeted Balance Sheet


Breakers reports the following account balances
on March 31 prior to preparing its budgeted
financial statements for June 30:
Land - $50,000
Building (net) - $148,000

Common stock - $217,000


Retained earnings - $46,400

9-40

25%of June
sales of
$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at
$4.60 per unit.
50% of June
purchases
of $56,800
Beginning balance
Add: net income
Deduct: dividends
Ending balance

$ 46,400
279,162
(25,000)
$300,562

Breakers, Inc.
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities

$
$

36,362
75,000
4,600
17,000
23,000
155,962
50,000
148,000
192,000
390,000
545,962
28,400
217,000
300,562
545,962
9-41

Learning Objective 7

9-42

Sales of Services or Goods


Ending
Inventory
Budget

Production
Budget

Work in Process
and Finished
Goods

When the interactions of the elements


Ending
Direct budget
Directare expressedSelling
of the master
as and
Overhead
Inventory
Materials
Labor
Administrative
Budget
a
set
of
mathematical
relations,
it Budget
Budget
Budget
Budget
Direct Materials
becomes a financial planning model
that can be used to answer what if
Cash Budget
questions about unknown variables.
Budgeted Income
Statement

Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-43

Learning Objective 8

9-44

Budget Administration
The Budget Committee is a standing
committee responsible for . . .
overall policy matters relating to the budget.
coordinating the preparation of the budget.

9-45

International Aspects of Budgeting


Firms with international operations face special problems
when preparing a budget.
1. Fluctuations in foreign currency exchange rates.
2. High inflation rates in some foreign countries.
3. Differences in local economic conditions.

9-46

Learning Objective 9

9-47

Behavioral Impact of Budgets


Budgetary Slack: Padding the Budget
People often perceive that their performance will look
better in their superiors eyes if they can beat the
budget.

9-48

Participative Budgeting
Top Management

Middle
Management

Supervisor

Supervisor

Middle
Management

Supervisor

Supervisor

Flow of Budget Data


9-49

End of Chapter 9

9-50