2-1

Agenda for this Evening

u Quiz CHAPTER 7
u Mid-Term follow-up.
u Next assignment à Chapter 7 Budgeting
u Chapters remaining à Ch. 7 (Budgeting), Ch. 8 (Cost-
Volume-Profit Relationships), and Ch. 11 (Standard Costs
and Variance Analysis).
u Some longer chapters, exercise sessions, and more time
for review.
Prepared by
u If we do not finish a chapter during one class, it will roll
Heather Cornish,
over into the next session. CPA-CA, MBA
NAIT JR Shaw
School of Business

© 2017 McGraw-Hill Education 1 © 2017 McGraw-Hill Education

Learning Objectives Planning and Control

1. Understand the concept of budgets and budgeting. Planning Control

2. Prepare each component budget of the master q involves developing q involves the steps
budget.
objectives and taken by
3. Develop budgeted financial statements from the preparing various management that
component budgets of the master budget.
budgets to achieve attempt to ensure
4. Understand the budgeting process and the role of these objectives. the objectives are
the beyond budgeting model.
attained.

The budget is the key element of

both planning and control.
© 2017 McGraw-Hill Education 3 © 2017 McGraw-Hill Education 4

Advantages of Budgeting

Define goal
and objectives
Communicating
plans Think about and
plan for the future
Advantages
Coordinate
activities Means of allocating
resources
Uncover potential
bottlenecks

© 2017 McGraw-Hill Education 5 © 2017 McGraw-Hill Education 6

 2-2

Choosing the Budget Period

Zero-Based Budgeting

u Zero-based budgeting is an alternate

Operating Budget
2013
The annual operating budget
may be divided into quarterly
or monthly budgets.
approach to budgeting.
u Particularly used in governmental and
not-for-profit sectors.
2014 2015 2016 u Managers are required to justify all
budgeted expenditures, not just changes
from the previous year.

© 2017 McGraw-Hill Education 7 © 2017 McGraw-Hill Education 8

Preparing the Master Budget The Sales Budget

The master budget includes:
1. A sales budget, including a schedule of expected cash collections.
2. A production budget (a merchandises purchases budget is used for
a merchandising company). Detailed schedule showing expected
3. A direct materials budget, including a schedule of expected cash sales for the coming periods
disbursements for raw materials (not required for a merchandising
company). expressed in units and dollars.
4. A direct labor budget (not required for a merchandising company).
5. A manufacturing overhead budget.
6. An ending finished goods inventory budget.
7. A selling and administrative expenses budget.
8. A cash budget.
9. A budgeted income statement.
10. A budgeted balance sheet.
© 2017 McGraw-Hill Education 9 © 2017 McGraw-Hill Education 10

Budgeting Example The Sales Budget Example

ΠRoyal Company is preparing budgets Part 1
for the quarter ending June 30. April May June Quarter
 Budgeted sales for the next five Budgeted
months are:   sales (units) 20,000 50,000 30,000 100,000
April 20,000 units
Selling price
May 50,000 units   per unit
June 30,000 units Total sales
July 25,000 units
August 15,000 units.

Ž The selling price is $10 per unit.

© 2017 McGraw-Hill Education 11 © 2017 McGraw-Hill Education 12

 2-3

Expected Cash Collections

The Sales Budget Example
Example Part 1
Part 2
April May June Quarter q All sales are on account.
Budgeted q Royal’s collection pattern is:
  sales (units) 20,000 50,000 30,000 100,000 q 70% collected in the month of sale,
Selling price q 25% collected in the month following sale,
  per unit $ 10 $ 10 $ 10 $ 10
q 5% is uncollectible.
Total sales $ 200,000 $ 500,000 $ 300,000 $ 1,000,000
q The March 31 accounts receivable balance
of $30,000 will be collected in full.

© 2017 McGraw-Hill Education 13 © 2017 McGraw-Hill Education 14

Expected Cash Collections Expected Cash Collections

Example Part 2 Example Part 3
April May June Quarter
April May June Quarter Accounts rec. - 3/31 $ 30,000 $ 30,000
Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000

Total cash collections

Total cash collections $ 170,000 ?

© 2017 McGraw-Hill Education 15 © 2017 McGraw-Hill Education 16

Quick Check ü Quick Check Solution ü

What will be the total cash

collections for the quarter?
a. $700,000
What will be the total cash
b. $220,000
collections for the quarter?
c. $190,000 d. $905,000

d. $905,000

© 2017 McGraw-Hill Education 17 © 2017 McGraw-Hill Education 18

 2-4

Expected Cash Collections Expected Cash Collections

Example Part 4 Example Part 4
April May June Quarter
April May June Quarter
Accounts rec. - 3/31 $ 30,000 $ 30,000
Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales April sales
70% x $200,000 140,000 140,000 70% x $200,000 140,000 140,000
25% x $200,000 $ 50,000 50,000 25% x $200,000 $ 50,000 50,000
May sales May sales
70% x $500,000 350,000 350,000 70% x $500,000 350,000 350,000
25% x $500,000 $ 125,000 125,000 25% x $500,000 $ 125,000 125,000
June sales
70% x $300,000 210,000 210,000
Total cash collections $ 170,000 $ 400,000 Total cash collections $ 170,000 $ 400,000 $ 335,000 $ 905,000

© 2017 McGraw-Hill Education 19 © 2017 McGraw-Hill Education 20

The Production Budget The Production Budget

Format
Sales Production
Budget Budget Budgeted sales in units XXX
Add: desired ending inventory XXX
Total needs XXX
Less: beginning inventory XXX
Required XXX

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.

© 2017 McGraw-Hill Education 21 © 2017 McGraw-Hill Education 22

The Production Budget

The Production Budget
Example Part 2
Example Part 1
April May June Quarter
u Royal Company wants ending inventory to be equal to Budgeted sales 20,000 50,000 30,000 100,000
20% of the following month’s budgeted sales in units.
Add desired ending
u On March 31, 4,000 units were on hand.   inventory 10,000
Total needed 30,000
Let’s prepare the Less beginning
production budget.   inventory 4,000
Required production 26,000
Budgeted sales 50,000
Desired percent 20%
Desired inventory 10,000

© 2017 McGraw-Hill Education 23 © 2017 McGraw-Hill Education 24

 2-5

The Production Budget

Quick Check ü
Example Part 3
April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000 What is the required production for
Add desired ending May?
inventory 10,000 a. 56,000 units

Total needed 30,000 b. 46,000 units

c. 62,000 units
Less beginning
d. 52,000 units
inventory 4,000
Required production 26,000 ?

March 31
ending inventory
© 2017 McGraw-Hill Education 25 © 2017 McGraw-Hill Education 26

The Production Budget

Quick Check Solutionü
Example Part 4
What is the required production for April May June Quarter
May? Budgeted sales 20,000 50,000 30,000 100,000
b. 46,000 units Add desired ending
  inventory 10,000 6,000
Total needed 30,000 56,000
Less beginning
  inventory 4,000
Required production 26,000

© 2017 McGraw-Hill Education 27 © 2017 McGraw-Hill Education 28

The Production Budget The Production Budget

Example Part 5 Example Part 6
April May June Quarter April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000 Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending Add desired ending
  inventory 10,000 6,000   inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 Total needed 30,000 56,000 35,000 105,000
Less beginning Less beginning
  inventory 4,000 10,000   inventory 4,000 10,000 6,000 4,000
Required production 26,000 46,000 Required production 26,000 46,000 29,000 101,000

Assumed
© 2017 McGraw-Hill Education 29 © 2017 McGraw-Hill Education 30
 2-6

The Direct Materials Budget The Direct Materials Budget

Format Example Part 1

u At Royal Company, 5/lb of material are required

Raw materials needed to meet the XXX
production schedule
per unit of product.
Add: desired ending inventory of raw XXX u Management wants materials on hand at the end
materials of each month equal to 10% of the following
month’s production.
Total raw material needs XXX
Less: beginning inventory of raw materials XXX
u On March 31, 13,000 lb of material are on
hand. Material cost is $0.40 per lb.
Raw materials to be purchased XXX

Let’s prepare the direct materials budget.

© 2017 McGraw-Hill Education 31 © 2017 McGraw-Hill Education 32

The Direct Materials Budget The Direct Materials Budget

Example Part 2 Example Part 3
April May June Quarter April May June Quarter
Production 26,000 46,000 29,000 101,000 Production 26,000 46,000 29,000 101,000
Materials per unit Materials per unit 5 5 5 5
Production needs Production needs 130,000 230,000 145,000 505,000
Add desired
Add desired
  ending inventory
  ending inventory
Total needed
Total needed
Less beginning
Less beginning
  inventory
  inventory
Materials to be
Materials to be
  purchased
  purchased

From production budget

© 2017 McGraw-Hill Education 33 © 2017 McGraw-Hill Education 34

The Direct Materials Budget The Direct Materials Budget

Example Part 4 Example Part 5
April May June Quarter
April May June Quarter Production 26,000 46,000 29,000 101,000
Production 26,000 46,000 29,000 101,000 Materials per unit 5 5 5 5
Materials per unit 5 5 5 5 Production needs 130,000 230,000 145,000 505,000
Production needs 130,000 230,000 145,000 505,000 Add desired
Add desired   ending inventory 23,000
  ending inventory 23,000 Total needed 153,000 March 31
Total needed 153,000 Less beginning inventory
Less beginning   inventory 13,000
  inventory Materials to be
Materials to be
  purchased 140,000 ?
  purchased

10% of the following month’s production

© 2017 McGraw-Hill Education 35 © 2017 McGraw-Hill Education 36

 2-7

Quick Check ü Quick Check Solution ü

How much material should be How much material should be

purchased in May? purchased in May?
a. 221,500lb a. 221,500lb
b. 240,000lb
c. 230,000lb
d. 211,500lb

© 2017 McGraw-Hill Education 37 © 2017 McGraw-Hill Education 38

Expected Cash Disbursement

The Direct Materials Budget
for Materials Part 1
Example Part 6
April May June Quarter u Royal pays $0.40 per lb for its materials.
Production 26,000 46,000 29,000 101,000
u One-half of a month’s purchases are paid for in the
Materials per unit 5 5 5 5
month of purchase; the other half is paid in the
Production needs 130,000 230,000 145,000 505,000 following month.
Add desired u The March 31 accounts payable balance is $12,000.
  ending inventory 23,000 14,500 11,500 11,500
Total needed
Less beginning
153,000 244,500 156,500 516,500 Let’s calculate expected
  inventory 13,000 23,000 14,500 13,000 cash disbursements.
Materials to be
  purchased 140,000 221,500 142,000 503,500

Assumed

© 2017 McGraw-Hill Education 39 © 2017 McGraw-Hill Education 40

Expected Cash Disbursement Expected Cash Disbursement

for Materials Example Part 2 for Materials Example Part 3
April May June Quarter April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000 Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases May purchases

June purchases June purchases

Total cash Total cash

disbursements disbursements $ 40,000 ?

140,000 kgs. × $.40/kg. = $56,000

© 2017 McGraw-Hill Education 41 © 2017 McGraw-Hill Education 42

 2-8

Quick Check ü Quick Check Solution ü

What are the total cash What are the total cash
disbursements for the quarter? disbursements for the quarter?
a. $185,000 a. $185,000
b. $ 68,000
c. $ 56,000
d. $201,400

© 2017 McGraw-Hill Education 43 © 2017 McGraw-Hill Education 44

Expected Cash Disbursement Expected Cash Disbursement

for Materials Example Part 4 for Materials Example Part 5
April May June Quarter April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000 Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases April purchases
50% x $56,000 28,000 28,000 50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000 50% x $56,000 $ 28,000 28,000
May purchases May purchases
50% x $88,600 44,300 44,300 50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
June purchases
50% x $56,800 28,400 28,400
Total cash
Total cash
disbursements $ 40,000 $ 72,300
disbursements $ 40,000 $ 72,300 $ 72,700 $ 185,000

© 2017 McGraw-Hill Education 45 © 2017 McGraw-Hill Education 46

The Direct Labour Budget

The Direct Labour Budget
Example Part 1
Example Part 3
q At Royal, each unit of product requires 0.05 hours of April May June Quarter
direct labour. Production 26,000 46,000 29,000 101,000
q The Company has a “no layoff” policy so all employees Direct labour hours
will be paid for 40 hours of work each week.
Labour hours required
q In exchange for the “no layoff” policy, workers agreed to a
wage rate of $10 per hour regardless of the hours worked Guaranteed labour hours
(No overtime pay). Labour hours paid
q For the next three months, the direct labour workforce Wage rate
will be paid for a minimum of 1,500 hours per month. From production
Total direct labour cost
Let’s prepare the direct labour budget. budget

© 2017 McGraw-Hill Education 47 © 2017 McGraw-Hill Education 48

 2-9

The Direct Labour Budget The Direct Labour Budget

Example Part 4 Example Part 5
April May June Quarter April May June Quarter
Production 26,000 46,000 29,000 101,000 Production 26,000 46,000 29,000 101,000
Direct labour hours 0.05 0.05 0.05 0.05 Direct labour hours 0.05 0.05 0.05 0.05
Labour hours required 1,300 2,300 1,450 5,050 Labour hours required 1,300 2,300 1,450 5,050
Guaranteed labour hours Guaranteed labour hours 1,500 1,500 1,500
Labour hours paid Labour hours paid 1,500 2,300 1,500 5,300
Wage rate Wage rate
Total direct labour cost Total direct labour cost
Higher of labour hours required
or labour hours guaranteed.

© 2017 McGraw-Hill Education 49 © 2017 McGraw-Hill Education 50

The Direct Labour Budget Quick Check ü

Example Part 6
What would be the total direct
April May June Quarter labour cost for the quarter if the
Production 26,000 46,000 29,000 101,000 company follows its no lay-off
Direct labour hours 0.05 0.05 0.05 0.05 policy, but pays $15 (time-and-a-
Labour hours required 1,300 2,300 1,450 5,050 half) for every hour worked in
excess of 1,500 hours in a month?
Guaranteed labour hours 1,500 1,500 1,500
a. $79,500
Labour hours paid 1,500 2,300 1,500 5,300 b. $64,500
Wage rate $ 10 $ 10 $ 10 $ 10 c. $61,000
d. $57,000
Total direct labour cost $ 15,000 $ 23,000 $ 15,000 $ 53,000

© 2017 McGraw-Hill Education 51 © 2017 McGraw-Hill Education 52

Manufacturing Overhead
Quick Check Solution ü Budget Example Part 1
What would be the total direct labour
cost for the quarter if the company
follows its no lay-off policy, but pays $15
u Royal Company uses a variable
manufacturing overhead rate of $1 per
(time-and-a-half) for every hour worked
in excess of 1,500 hours in a month?
unit produced.
d. $57,000 April May June Quarter u Fixed manufacturing overhead is $50,000
Labour hours required
Regular hours paid
1,300
1,500
2,300
1,500
1,450
1,500 4,500
per month and includes $20,000 of non-
Overtime hours paid - 800 - 800 cash costs (primarily amortization of
plant assets).
Total regular hours 4,500 $10 $ 45,000
Total overtime hours 800 $15 $ 12,000
Total pay $ 57,000 Let’s prepare the manufacturing overhead
budget.

© 2017 McGraw-Hill Education 53 © 2017 McGraw-Hill Education 54

 2-10

Manufacturing Overhead Manufacturing Overhead

Budget Example Part 2 Budget Example Part 3
April May June Quarter
Production in units 26,000 46,000 29,000 101,000 April May June Quarter
Variable mfg. OH rate $ 1 $ 1 $ 1 $ 1 Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH costs $26,000 $46,000 $29,000 $ 101,000 Variable mfg. OH rate $ 1 $ 1 $ 1 $ 1
Fixed mfg. OH costs Variable mfg. OH costs $ 26,000 $ 46,000 $ 29,000 $ 101,000
Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs
Total mfg. OH costs 76,000 96,000 79,000 251,000
Less noncash costs
Less noncash costs
Cash disbursements
Cash disbursements
  for manufacturing OH
  for manufacturing OH
From production
budget

© 2017 McGraw-Hill Education 55 © 2017 McGraw-Hill Education 56

Manufacturing Overhead Ending Finished Goods Inventory

Budget Example Part 4 Budget Example Part 1
April May June Quarter
Production in units 26,000 46,000 29,000 101,000
Variable mfg. OH rate $ 1 $ 1 $ 1 $ 1
u Now, Royal can complete the ending
finished goods inventory budget.
Variable mfg. OH costs $ 26,000 $ 46,000 $ 29,000 $ 101,000
Fixed mfg. OH costs 50,000 50,000 50,000 150,000
Total mfg. OH costs 76,000 96,000 79,000 251,000 u At Royal, manufacturing overhead is
Less noncash costs 20,000 20,000 20,000 60,000 applied to units of product on the basis
Cash disbursements of direct labour hours.
  for manufacturing OH $ 56,000 $ 76,000 $ 59,000 $ 191,000
Let’s calculate ending finished
goods inventory.
Amortization is a non-cash charge.

© 2017 McGraw-Hill Education 57 © 2017 McGraw-Hill Education 58

Ending Finished Goods Inventory Ending Finished Goods Inventory

Budget Example Part 2 Budget Example Part 3

Production costs per unit Quantity Cost Total Production costs per unit Quantity Cost Total
Direct materials 5.00 kilos $ 0.40 $ 2.00 Direct materials 5.00 kilos $ 0.40 $ 2.00
Direct labour Direct labour 0.05 hrs. $ 10.00 0.50
Manufacturing overhead Manufacturing overhead

Budgeted finished goods inventory Budgeted finished goods inventory

Ending inventory in units Ending inventory in units
Unit product cost Unit product cost
Ending finished goods inventory Ending finished goods inventory

Direct materials
budget and information Direct labour
budget
© 2017 McGraw-Hill Education 59 © 2017 McGraw-Hill Education 60
 2-11

Ending Finished Goods Inventory

Budget Example Part 4 Quick Check ü

Production costs per unit Quantity Cost Total

Direct materials 5.00 kg $ 0.40 $ 2.00 What is the value of the ending
Direct labour 0.05 hrs. $ 10.00 0.50 finished goods inventory?
Manufacturing overhead 0.05 hrs. $ 49.70 2.49 a. $ 9,980
$ 4.99
b. $24,950
Budgeted finished goods inventory
c. $57,385
Ending inventory in units
d. $49,900
Unit product cost $ 4.99
Ending finished goods inventory ?

Total mfg. OH for quarter $251,000 = $49.70 per hr.*

Total labour hours required 5,050 hrs.
*rounded

© 2017 McGraw-Hill Education 61 © 2017 McGraw-Hill Education 62

Ending Finished Goods Inventory

Quick Check Solutionü Budget Example Part 5

What is the value of the ending Production costs per unit Quantity Cost Total
Direct materials 5.00 kilos $ 0.40 $ 2.00
finished goods inventory? Direct labour 0.05 hrs. $ 10.00 0.50
b. $24,950 Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950

Production
Budget

© 2017 McGraw-Hill Education 63 © 2017 McGraw-Hill Education 64

Selling and Administrative Selling and Administrative

Expense Budget Example Part 1 Expense Budget Example Part 2
April May June Quarter
u At Royal, variable selling and administrative Budgeted sales 20,000
expenses are $0.50 per unit sold. Variable selling
u Fixed selling and administrative expenses are   and admin. rate $ 0.50
$70,000 per month. Variable expense $ 10,000
Fixed selling and
u The fixed selling and administrative expenses   admin. expense 70,000
include $10,000 in costs – primarily amortization – Total expense 80,000
that are not cash outflows of the current month. Less noncash
  expenses 10,000
Let’s prepare the company’s selling and Cash disburse-
administrative expense budget.   ments for
  selling & admin. $ 70,000 ?

© 2017 McGraw-Hill Education 65 © 2017 McGraw-Hill Education 66

 2-12

Quick Check ü Quick Check Solution ü

What are the total cash What are the total cash
disbursements for selling and disbursements for selling and
administrative expenses for the administrative expenses for the
quarter? quarter?
a. $180,000
b. $230,000 b. $230,000
c. $110,000
d. $ 70,000

© 2017 McGraw-Hill Education 67 © 2017 McGraw-Hill Education 68

Selling and Administrative

The Cash Budget
Expense Budget Example Part 3
April May June Quarter u Composed of four major sections:
Budgeted sales 20,000 50,000 30,000 100,000
1. Receipts
Variable selling
and admin. rate $ 0.50 $ 0.50 $ 0.50 $ 0.50 2. Disbursements
Variable expense $ 10,000 $ 25,000 $ 15,000 $ 50,000 3. Cash excess or deficiency
Fixed selling and
4. Financing
admin. expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000 Cash balance, beginning XXX
Less noncash Add: receipts XXX
expenses 10,000 10,000 10,000 30,000 Total cash available before financing XXX
Cash disburse-
Less: disbursements XXX
ments for
Excess (deficiency) of cash available over XXX
selling & admin. $ 70,000 $ 85,000 $ 75,000 $ 230,000
disbursements

© 2017 McGraw-Hill Education 69 © 2017 McGraw-Hill Education 70

The Cash Budget Example Part 1

The Cash Budget Example
Part 2
Royal: April May June Quarter
Beginning cash balance $ 40,000
q Maintains a 16% open line of credit for
Add cash collections 170,000
$75,000. Total cash available 210,000
q Maintains a minimum cash balance of Less disbursements
Materials 40,000
$30,000. Direct labour
q Borrows on the first day of the month and Mfg. overhead
repays loans on the last day of the month. Selling and admin.
Equipment purchase
Schedule of Expected
q Pays a cash dividend of $49,000 in April. Dividends Cash Disbursements
Total disbursements
q Purchases $143,700 of equipment in May Excess (deficiency) of
and $48,300 in June paid in cash. Schedule of Expected
  cash available over
  disbursements Cash Collections
q Has an April 1 cash balance of $40,000.

© 2017 McGraw-Hill Education 71 © 2017 McGraw-Hill Education 72

 2-13

The Cash Budget Example Part 3 The Cash Budget Example Part 4
April May June Quarter April May June Quarter
Beginning cash balance $ 40,000 Direct Labour Beginning cash balance $ 40,000
Add cash collections 170,000 Budget Add cash collections 170,000
Total cash available 210,000 Total cash available 210,000
Less disbursements Less disbursements
Because Royal maintains
Materials 40,000 Materials 40,000
Direct labour 15,000 Direct labour 15,000 a cash balance of $30,000,
Manufacturing
Mfg. overhead 56,000 Mfg. overhead 56,000 the company must
Overhead Budget
Selling and admin. 70,000 Selling and admin. 70,000 borrow on its
Equipment purchase Equipment purchase - line of credit
Dividends Dividends 49,000
Total disbursements Total disbursements 230,000
Selling and Administrative Excess (deficiency) of
Excess (deficiency) of
Expense Budget   cash available over
  cash available over
  disbursements $ (20,000)
  disbursements

© 2017 McGraw-Hill Education 73 © 2017 McGraw-Hill Education 74

The Cash Budget Example Part 5: The Cash Budget Example

Financing and Repayment
Part 6
April May June Quarter April May June Quarter
Excess (deficiency)   of Beginning cash balance $ 40,000 $ 30,000
Cash available   over Add cash collections 170,000 400,000
disbursements $(20,000) Total cash available 210,000 430,000
Financing: Less disbursements
Borrowing 50,000 Materials 40,000 72,300
Repayments - Direct labour 15,000 23,000
Interest - Mfg. overhead 56,000 76,000
Total financing 50,000 Selling and admin. 70,000 85,000
Ending cash balance $ 30,000 $ 30,000 $ - $ - Equipment purchase - 143,700
Dividends 49,000 -
Total disbursements 230,000 400,000
Excess (deficiency) of
Ending cash balance for April   cash available over
is the beginning May balance.   disbursements $ (20,000) $ 30,000

© 2017 McGraw-Hill Education 75 © 2017 McGraw-Hill Education 76

The Cash Budget Example Part 7:

Financing and Repayment Quick Check ü
April May June Quarter
Excess (deficiency)   of
Cash available   over
What is the excess (deficiency) of
disbursements $ (20,000) $ 30,000 cash available over disbursements
Financing:
Borrowing 50,000 -
for June?
Repayments - - a. $ 85,000
Interest - - b. $(10,000)
Total financing 50,000 -
c. $ 75,000
Ending cash balance $ 30,000 $ 30,000
d. $ 95,000

Because the ending cash balance is

exactly $30,000, Royal will not repay
the loan this month.

© 2017 McGraw-Hill Education 77 © 2017 McGraw-Hill Education 78

 2-14

The Cash Budget Example

Quick Check Solution ü Part 8
April May June Quarter
Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
What is the excess (deficiency) of Add cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
cash available over disbursements Less disbursements
for June? Materials 40,000 72,300 72,700 185,000
d. $ 95,000 Direct labour 15,000 23,000 15,000 53,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
Total disbursements 230,000 400,000 270,000 900,000
Excess (deficiency) of
  cash available over
  disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000

© 2017 McGraw-Hill Education 79 © 2017 McGraw-Hill Education 80

The Cash Budget Example The Cash Budget Example Part 10:
Financing and Repayment
Part 9
April May June Quarter
April May June Quarter
Excess (deficiency)   of
Beginning cash balance $ 40,000 $ 30,000 $ 30,000 $ 40,000
Cash available   over
Add cash collections 170,000 400,000 335,000 905,000
disbursements $(20,000) $ 30,000 $ 95,000 $ 45,000
Total cash available 210,000 430,000 365,000 945,000 Financing:
Less disbursements Borrowing 50,000 - - 50,000
Materials 40,000 72,300 72,700 185,000 Repayments - - (50,000) (50,000)
Direct labour 15,000 23,000 15,000 53,000 Interest - - (2,000) (2,000)
Mfg. overhead At the end of76,000
56,000 June, Royal
59,000has191,000
enough cash Total financing 50,000 - (52,000) (2,000)
to repay70,000
Selling and admin. the $50,000
85,000 loan plus interest
75,000 230,000 at 16%. Ending cash balance $ 30,000 $ 30,000 $ 43,000 $ 43,000
Equipment purchase - 143,700 48,300 192,000
Dividends 49,000 - - 49,000
$50,000 × 16% × 3/12 = $2,000
Total disbursements 230,000 400,000 270,000 900,000
Excess (deficiency) of Borrowings on April 1 and
  cash available over repayment of June 30.
  disbursements $ (20,000) $ 30,000 $ 95,000 $ 45,000
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The Budgeted Income

The Budgeted Income
Statement Example
Statement
Royal Company
Budgeted Income Statement
Cash Budgeted For the Three Months Ended June 30
Budget Income
Statement Sales (100,000 units @ $10) $ 1,000,000
Cost of goods sold (100,000 @ $4.99) 499,000
Gross margin 501,000
Selling and administrative expenses 260,000
Operating income 241,000
After we complete the cash budget, Interest expense 2,000
we can prepare the budgeted income Net income $ 239,000
statement for Royal.
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 2-15

The Budgeted Balance Sheet The Budgeted Balance

Example Part 1 Sheet Example Part 2 25%of June
Royal Company
Budgeted Balance Sheet
sales of
June 30 $300,000
Royal reported the following account Current assets
balances prior to preparing its budgeted Cash $ 43,000
11,500kg
Accounts receivable 75,000
financial statements: Raw materials inventory 4,600 at $0.40/kg
Finished goods inventory 24,950
q Land: $50,000 Total current assets 147,550
Property and equipment 5,000 units
q Common shares: $200,000 Land 50,000
Equipment (assumed) 367,000
at $4.99 each
q Retained earnings: $146,150 Total property and equipment 417,000
Total assets $ 564,550

Accounts payable $ 28,400 50% of June

Common stock 200,000 purchases
Retained earnings 336,150
Total liabilities and equities $ 564,550 of $56,800

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Royal Company
Budgeted Balance Sheet
June 30
The Self-Imposed Budget
Current assets
Cash $ 43,000
Accounts receivable 75,000
Beginning balance $ 146,150 u A self-imposed or participatory
Raw materials inventory Add: net income
4,600 239,000
Deduct: dividends (49,000) budget is a budget that is prepared
Finished goods inventory 24,950
Total current assets
Ending balance
147,550
$ 336,150 with the full cooperation and
Property and equipment participation of managers at all
Land 50,000 levels.
Equipment (assumed) 367,000
Total property and equipment 417,000
Total assets $ 564,550

Accounts payable $ 28,400

Common stock 200,000
Retained earnings 336,150
Total liabilities and equities $ 564,550

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Participative Budget Responsibility Accounting

System
Top Management
Managers should be held responsible for
those items — and only those items — that
Middle Middle the manager can actually control
Management Management to a significant extent.

Supervisor Supervisor Supervisor Supervisor

Flow of Budget Data

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The Budget Committee Beyond Budgeting

A standing committee responsible for u The Beyond Budgeting Round Table

u overall policy matters relating to the
budget
u coordinating the preparation of the budget
(BBRT) has recommended a model that
uses relative performance targets and
emphasizes the principles of strategic
management and empowering
employees.

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Beyond Budgeting Chapter Summary

Key Principles: q Budgets help communicate plans, force
managers to think about the future, allocate
1. Set challenging relative performance targets.
resources and evaluate performance.
2. Adopt continuous and inclusive planning.
q Each budget in the master budget helps
3. Use rolling forecasts. managers throughout the organization work
4. Use market-like structures for coordination. towards the same vision.
5. Decentralize resource management. q The cash budget helps identify cash shortfalls
6. Control through self-regulation and transparent and encourages managers to plan for them.
information. q The budgeted income statement and balance
7. Use low-powered incentives lined to group or sheet are constructed from the master
organizational performance. budget.
q Involving managers in the budgeting process
help to create a successful budget.
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Budgeting
Exercise

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