MASTER BUDGETS AND PLANNING

Topic 11

2009 The McGraw-Hill Companies, Inc., All Rights Reserved

LEARNING OBJECTIVES
1.

2.

3.

4.

Describe the importance, benefits of budgeting. Describe a master budget and the process of preparing it. Prepare each component of a master budget and link each to the budgeting process. Link both operating and capital expenditures budgets to budgeted financial statements
Slide 2

McGraw-Hill/Irwin

C1

Enhances coordination so that activities of all units contribute to meeting the companys overall goals. Promotes analysis and a focus on the future.

Provides a benchmark for evaluating performance.

Converts long-term strategic plans into short-term financial plans.

Budget Process

Communicates management plans throughout the organization.

Motivates employees through participation in the budgeting process and the establishment of attainable goals.
McGraw-Hill/Irwin
Slide 3

C2

BUDGET COMMITTEE

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

McGraw-Hill/Irwin

Slide 4

C2

BUDGET COMMITTEE
Top Management Middle Management Supervisor Supervisor Middle Management Supervisor Supervisor

Flow of Budget Data is a bottom-up process.

McGraw-Hill/Irwin
Slide 5

C2

BUDGET TIMING
Operating Budget

2009

2010

2011

2012

The annual operating budget may be divided into quarterly or monthly budgets.

A continuous or rolling budget is a twelve-month budget that rolls forward one month as the current month is completed.
McGraw-Hill/Irwin
Slide 6

C3

MASTER BUDGET COMPONENTS

Sales budget

Merchandise Purchases

Prepare financial budgets:  cash  income  balance sheet

McGraw-Hill/Irwin

Prepare capital expenditure budget

Prepare selling and general administrative budgets

Slide 7

P1

SALES BUDGET
Sales Budget
Estimated Unit Sales Estimated Unit Price

Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel
McGraw-Hill/Irwin
Slide 8

P1

SALES BUDGET

In September 2009, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months:

McGraw-Hill/Irwin

Slide 9

P1

SALES BUDGET
HOCKEY DEN Sales B et October 2009 January 2010 Budgeted Unit Sales 700 Budgeted Budgeted Unit Price Total Sales $ 100 $ 70,000 100 $ 100 100 100 $ 100 $ 100,000 80,000 140,000 320,000 90,000
Slide 10

September 2009 (actual) October 2009 November 2009 December 2009 Total January 2010
McGraw-Hill/Irwin

1,000 $ 800 1,400 3,200 $ 900 $

P1

MERCHANDISE PURCHASES BUDGET

The quantity purchased will be 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.

McGraw-Hill/Irwin

Slide 11

P1

MERCHANDISE PURCHASES BUDGET

Budgeted ending inventory Budgeted cost of sales for the period Budgeted beginning inventory

Inventory to be purchased

Hockey Den buys hockey sticks for $60 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.
Lets prepare the purchases budget for Hockey Den.
McGraw-Hill/Irwin
Slide 12

P1

MERCHANDISE PURCHASES BUDGET

HOCKEY DEN e Purchases Budget es Merchandise Pur Mer Oct er October 2009 December 2009

Next month's unit sales Ending inventor percentage Budgeted ending inventor units Add current month's unit sales Total units needed Deduct beginning inventor units Number of units to be purchased Budgeted cost per unit Budgeted cost of purchases

October Oct ber 800 90% 720 1,000 1,720 900 820 $ 60 $ 49,200

November 1,400 90% 1,260 800 2,060 720 1,340 $ 60 $ 80,400

December 900 90% 810 1,400 2,210 1,260 950 $ 60 $ 57,000

Beginning inventor is last month's ending inventor

McGraw-Hill/Irwin
Slide 13

P1

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 selling expense budget for Hockey Den.

McGraw-Hill/Irwin
Slide 14

P1

SELLING EXPENSE BUDGET

HOCKEY DEN Selling Expense Budget October 2009 December 2009 Budgeted sales Sales commission % Sales commission Sales manager salary Total selling expenses October $ 100,000 10% $ 10,000 2,000 $ 12,000 November $ 80,000 10% $ 8,000 2,000 $ 10,000 December $ 140,000 10% $ 14,000 2,000 $ 16,000 $ $ $ Total 320,000 10% 32,000 6,000 38,000

From Hockey Dens sales budget

McGraw-Hill/Irwin
Slide 15

P1

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 administrative expense budget for Hockey Den.
McGraw-Hill/Irwin
Slide 16

P1

GENERAL AND ADMINISTRATIVE EXPENSE BUDGET

HOCKEY DEN General and Administrative Expense budget October 2009 December 2009 October Administrative salaries $ 4,500 Equipment depreciation 1,500 Total $ 6,000 November $ 4,500 1,500 $ 6,000 December $ 4,500 1,500 $ 6,000 Total $ 13,500 4,500 $ 18,000

McGraw-Hill/Irwin

Slide 17

P1

CAPITAL EXPENDITURES BUDGET

 Hockey Den does not anticipate

disposal of any plant assets through December 2009, but they plan to acquire additional equipment for $25,000 cash in December 2009.  Since this is the only budgeted capital expenditure for the quarter, no separate budget is shown
McGraw-Hill/Irwin

Slide 18

P2

FINANCIAL BUDGETS

Cash Budget Expected Receipts and Disbursements

Budgeted Income Statement

Budgeted Balance Sheet

McGraw-Hill/Irwin

Slide 19

P2

BUDGETED CASH RECEIPTS

 Forty percent of Hockey Dens sales are for cash.  The remaining 60 percent are credit sales that are collected in full in the month following sale.

Lets prepare the cash receipts budget for Hockey Den.

McGraw-Hill/Irwin
Slide 20

P2

BUDGETED CASH RECEIPTS

60 percent of September sales are collected in October
HOCKEY DEN Cash Receipts Budget October 2009 December 2009

Budgeted sales Accounts receivable Cash receipts from: Cash sales Collection of receivables Total cash receipts

September $ 70,000 $ 42,000

October $ 100,000 $ 60,000 $ $ 40,000 42,000 82,000

November $ 80,000 $ 48,000 $ $ 32,000 60,000 92,000

December $ 140,000 $ 84,000 $ 56,000 48,000 $ 104,000

From Hockey Dens sales budget 60% of sales

McGraw-Hill/Irwin

40% of sales
Slide 21

P2

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 disbursements for purchases for Hockey Den.

McGraw-Hill/Irwin

Slide 22

P2

CASH DISBURSEMENTS FOR PURCHASES

HOCKEY DEN Cash Disbursements for Purchases October 2009 - December 2009 October payments (September 30 balance) November payments (October purchases) December payments (November purchases) $ 58,200 49,200 80,400

From merchandise purchases budget

McGraw-Hill/Irwin
Slide 23

P2

CASH BUDGET
 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.
Continue

Hockey Den:

McGraw-Hill/Irwin

Slide 24

P2

CASH BUDGET
 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.

Hockey Den:

McGraw-Hill/Irwin

Slide 25

P2

HOCKEY DEN Cash Budget October 2009 - December 2009 Beginning cash balance Because Hockey Den Receipts from customers 92,000 104,000 maintains a minimum Total cash available cash balance of $20,000, Disbursements Payments for merchandise $ 58,200 the 49,200 $ company must $ 80,400 Sales commissions 10,000 8,000 14,000 borrow $12,800. Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 20,000 Income taxes From Cash Disbursements Dividends From Cash Receipts and .01 $10,000 for Purchases Budget From General From Selling Expense Budget 100 Interest Administrative Expense Budget Equipment purchase Depreciation is a $ 94,800 Total disbursements $ non-cash expense. 7,200 Preliminary balance October $ 20,000 82,000 $ 102,000 November December

McGraw-Hill/Irwin

Slide 26

P2

CASH BUDGET CONTINUED

HOCKEY EN Cash October ecember October 7, 12, $ 20,000 $ 22, 00 November December

Prelimi ary balance itional borrowing Loan repayment Ending cash balance Ending loan balance

Ending cash balance for October is the beginning November balance.

McGraw-Hill/Irwin
Slide 27

P2

t B R Di y l l i t l r t l ri i i tr ti t x i i t l r il t r r i i l ri t l r

H CK D N B t C r D t , 8 , , i 8, , , , , r

r N , , , , 8, , , 3, 8 r D , r

8 , , , ,

I Di i I t r t i T t l i r li i
McGraw-Hill/Irwin

.01
t r ry r t l

,800
94,8 ,

66,9 8 45,

C l i i i t yt t r ,800 l .

Slide 28

P2

CASH BUDGET CONTINUED

HO as Bu et er 200 - ece er 200 Oct er $ 7,200 12, 00 $ 20,000 $ 22, 00 e $ er ,072 ece er

Oct

reli i ary ala ce rr wi A iti al L a re ay e t i cas ala ce i l a ala ce

(22, 00) $ 22,272 $ 0

i cas ala ce f r e er is t e e i i ece er ala ce.

McGraw-Hill/Irwin
Slide 29

P2

HOCKEY DEN Cash Budget October 2009 - December 2009 Beginning cash balance Receipts from customers Total cash available Disbursements Payments for merchandise Sales commissions Sales salaries Administrative salaries Income taxes Dividends Interest Equipment purchase Total disbursements Preliminary balance October $ 20,000 82,000 $ 102,000 $ 58,200 10,000 2,000 4,500 20,000 100 $ 94,800 $ 7,200 November $ 20,000 92,000 $ 112,000 $ 49,200 8,000 2,000 4,500 ,000 228 $ ,928 $ 45,072 25,000 $ 125,900 $ 72
Slide 30

December $ 22,272 104,000 $ 12 ,272 $ 80,400 14,000 2,000 4,500

McGraw-Hill/Irwin

P2

CASH BUDGET CONTINUED

HO B O t r O t r limi r l A iti l rr i r m t L i l i l l , , 2 , 22,

N t m r

r N m 5, r D m ,6 (22, 22,272 2 , ,62 r

McGraw-Hill/Irwin

Slide 31

P2

BUDGETED INCOME STATEMENT

Cash Budget

Budgeted Income Statement

Lets prepare the budgeted income statement for Hockey Den.

McGraw-Hill/Irwin
Slide 32

From the Sales Budget

P2

HOCKEY DEN Budgeted Income St tement Statement For Three Months Ended December 31, 2009 Sales (3,200 units @ $100) $ 320,000 Cost of goods sold (3,200 units @ $60) 192,000 Gross profit $ 128,000 Operating expenses: From the Merchandise Sales commissions $ 32,000 Purchases Budget Sales salaries 6,000 Administrative salaries 13,500 Equipment depreciation 4,500 Interest expense 328 56,328 From the General and Administrative $ 71,672 Net income before taxes From the Selling Income tax expense Expense Budget 28,669 $71,672 .40 From the non-cash expense. $ 43,003 Net incomeDepreciation is Expense Budget a Cash Budget
McGraw-Hill/Irwin
Slide 33

P2

BUDGETED BALANCE SHEET

Budgeted Income Statement

Budgeted Balance Sheet

Lets prepare the budgeted balance sheet for Hockey Den.

McGraw-Hill/Irwin
Slide 34

P2

PREPARING A BUDGETED BALANCE 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 balance sheet for Hockey Den.

   

McGraw-Hill/Irwin

Slide 35

P2

$200,000 September 30 balance plus From theSeptember 30 Purchases $36,000 Merchandise balance plus Assets From theDecemberets $60) and Cash Receipts Budget the $25,000 810 units General the $4,500 from the @Budget Budget acquisition Cash From the Cash Administrative Expense Budget Accounts recei able ccounts receivable
Inventory Equipment Equi ment Less accumulated depreciation ess otal assets $ 225,000 40,500

HOCKEY DEN EN Budgeted Balance Sheet S eet December 31, 2009 3 ,

$ 20,000 84,000 48,600 184,500 84,500 $33 , 00 337,100

iabilities Liabilities and Equity Liabilities Accounts payable ccounts Income taxes payable Bank loan payable Stockholders' equity Common stock Retained earnings otal liabilities and equity
McGraw-Hill/Irwin

$ 57,000 28,669 28,66 19,628 $ 150,000 81,803

$105,297

231,803 $337,100
Slide 36

P2

$200,000 September 30 balance plus From theSeptember 30 Purchases $36,000 Merchandise balance plus Assets From theDecember General and Cash Receipts Budget the $25,000 810 units @Budget the $4,500 from the acquisition Budget Cash From the Cash $60) Administrative Expense Budget Accounts receivable
Inventory Equipment From the Merchandise Less accumulated depreciation From the Budgeted Purchases Budget otal assets $ 225,000 40,500

HOCKEY DEN Budgeted Balance Sheet December 31, 2009

$ 20,000 84,000 48,600 184,500 $337,100

Income Statement Beginning retained Budget From the Cash earnings Liabilities and Equity
Add net income

Liabilities Deduct dividends Accounts payable Ending retained Income taxes payable earnings Bank loan payable Stockholders' equity Common stock Retained earnings otal liabilities and equity
McGraw-Hill/Irwin

$ 41,800 43,003 $ 57,000 (3,000) $ 28,669 81,803

19,628 $ 150,000 81,803 $105,297

231,803 $337,100
Slide 37

END OF TOPIC 11

McGraw-Hill/Irwin

Slide 38