Strategic Cost

Management The Master

Budget

Terminologie
s:

• ​Budgets – ​are financial plans for the future and are a key component of planning. They identify
objectives and the actions needed to achieve them.
• ​Strategic plan – ​plots a direction for an organization’s future activities and operations; it generally
covers at least 5 years. The overall strategy is then translated into the long and short term objectives
that form the basis of the budget.
• ​Planning – ​looking ahead to see what actions should be taken to realize particular
goals.
• ​Control – ​looking backward, determining what actually happened and comparing it with the
previously planned outcomes.
• ​Master Budget – ​the comprehensive financial plan for the organization as a whole. Typically, the
master budget is for a 1-year period, corresponding to the fiscal year of the company.
• ​Continuous Budget – ​a moving 12 month budget. As a month expires in the budget, an additional
month in the future is added so that the company always has a 12-month plan on hand. It forces
managers to plan ahead constantly – something especially needed when firms operate in rapidly
changing environments.
• ​Budget committee – ​reviews the budget, provides policy guidelines and budgetary goals,
resolves differences that arise as the budget is prepared, approves the final budget, and
monitors the actual performance of the organization as the year unfolds.
• ​Budget director – ​the controller, the person responsible for directing and coordinating the
organization’s overall budgeting process.

Key
points:

Advantages of
Budgeting

• ​Planning ​– encourages managers to develop an overall direction for the organization, foresee
problems, and develop future policies.
• ​Information for Decision Making ​– For example, a restaurant owner who knows the expected
revenues and the costs of meat, vegetables, cheeses, and so on might make menu changes that
play up the less expensive items and reduce the use of more expensive ingredients.
• ​Standards for Performance Evaluation ​– budget set standards that can control the use of a
company’s resources and motivate employees. A large difference between actual and planned
results is feedback that prompts managers to take corrective actions.
• ​Improved Communication and Coordination ​– the budgets serve to communicate and coordinate
the plans of the organization to each employee. Accordingly, employees can be aware of their
particular role in achieving those objectives.
The Master
Budget

I. Operating budgets – ​describe the income-generating activities of a firm: sales, production,

and
finished goods inventories. The ultimate outcome of the operating budget is a pro forma or
budgeted income statement. ​A. Sales Budget ​– approved by the budget committee and
describes expected sales in units and
dollars. Since it is the basis for all of the other operating budgets and most of the financial
budgets, it is important that it be as accurate as possible. ​B. Production Budget ​– tells
how many units must be produced to meet sales needs and to satisfy
ending inventory requirements. ​Formula: Units to be Produced = Expected Unit Sales +
Units in Desired Ending Inventory (EI) – Units in Beginning Inventory (BI) C. Direct
Materials Purchases Budget ​– tells the amount and cost of raw materials to be purchased
in each time period. ​Formula​: ​Direct Materials Needed for Production + Direct Materials
in Desired Ending Inventory – Direct Materials in Beginning Inventory D. Direct Labor
Budget – ​shows the total direct labor hours and the direct labor cost needed for the
number of units in the production budget. ​E. Overhead Budget – ​shows the expected cost of all
production costs other than direct materials
and direct labor. ​F. Ending Finished Goods Inventory Budget – ​supplies information needed for
the balance sheet
and also serves as an important input for the preparation of the cost of goods sold budget. ​G.
Cost of Goods Sold Budget – ​reveals the expected cost of the goods to be sold. ​H.
Selling and Administrative Expenses Budget – ​outlines planned expenditures for
nonmanufacturing activities. ​I. Budgeted Income Statement – ​With the completion of the budgeted
cost of goods sold schedule and the budgeted selling and administrative expenses budget,
an estimate of the operating income can now be prepared. Take note that operating income
​ quivalent to the net income of a firm. To yield net income, interest expense and taxes
is ​not e
must be subtracted from operating income.
II. Financial Budget or Capital Budget
A. Cash budget – ​one of the most important budgets in the master budget because cash
flow is the
lifeblood of an organization. The basic structure of a cash budget includes cash receipts,
disbursements, any excess or deficiency of cash, and financing. At its simplest, a cash budget
is cash inflows minus cash outflows. ​Terminologies: Cash Available – ​consists of the
beginning cash balance and the expected cash receipts ​Cash Disbursements – ​lists all
planned cash outlays for the period. All expenses that do not require a cash outlay are
excluded from the list (e.g., depreciation is never included in the disbursements section) ​Cash
Excess or Deficiency – ​The cash excess or deficiency line is compared to the minimum cash
balance required by company policy. ​Minimum cash balance – ​the lowest amount of cash on
hand that the firm finds acceptable. ​Borrowings and Repayments – ​If there is a deficiency,
this section shows the necessary amount to be borrowed. When excess cash is available, this
section shows planned repayments, including interest expense. ​Ending Cash Balance – ​the
planned amount of cash to be on hand at the end of the period after all receipts and
disbursements, as well as borrowings and repayments, are considered. ​Formulas: Cash
 Available = Beginning Cash Balance + Expected Cash Receipts Ending Cash Balance =
Cash Available – Expected Cash Disbursements B. Budgeted Balance Sheet C. Budget
for Capital Expenditures ​(to be discussed after midterm)

Illustration: ​(Note that these are interrelated problems. This illustration shows the flow of the
preparation of a master budget.

A. Operating
Budget

1. Sales Budget – ​used to determine units to be sold and forecast prices for the
coming year.

Information: Prepare the sales budget for Texas Rex’s standard t-shirt line. For simplicity, assume
that Texas Rex has only one product: a standard short-sleeved t-shirt with the Texas Rex logo screen
printed on the back. Budgeted units to be sold for each quarter of the year 2014: 1,000, 1,200, 1,500, and
2,000. Selling price is P10 per t-shirt.

Solution
:

Texas Rex Inc. Sales Budget For

the Year Ended December 31, 2020
Quarte
r
x P10
Units Unit P15,00
selling price 0
Budgeted sales 3 ​1,500
x P10
P15,00
0
4
2,000 x
2 P10
1,200 x P20,00
P10 0
P12,00 4
0 2,000 x
2 P10
1,200 x P20,00
P10 0
P12,00 4
0 2,000 x
3 ​1,500 P10
x P10 P20,00
P15,00 0
0 4
3 ​1,500 2,000 x
 P10 5,700 x
P20,00 P10
0 P57,00
Year 0
5,700 x Year
P10 5,700 x
P57,00 P10
0 P57,00
Year 0
5,700 x Year
P10 5,700 x
P57,00 P10
0 P57,00
Year 0

Note: This reveals that Texas Rex’s sales fluctuate seasonally. Most sales take place in the summer and
fall quarters. This is due to the popularity of the t-shirts in the summer and the sales promotions that
Texas Rex puts on for “back to school” and Christmas.

2. Production Budget – ​once a sales budget has been prepared, a production budget tells
managers how many units must be produced to satisfy anticipated sales and ending inventory needs.

Information: Budgeted units to be sold for each quarter: 1,000, 1,200, 1,500, and 2,000. Assume
that company policy requires 20% of the next quarter’s sales in ending inventory and that beginning
inventory of t-shirts for the first quarter of the year was 180. Assume also that sales for the first quarter of
2015 are estimated at 1,000 units.

Require
d:

a. Calculate the desired ending inventory in units for each quarter of the year. What is the
ending
inventory in unit for the year? b. Prepare a production budget for
each quarter and for the year.

Solution
:

a. Ending inventory, Quarter 1 = 0.20 x 1,200 units = 240 Ending

inventory, Quarter 2 = 0.20 x 1,500 units = 300 Ending inventory,
Quarter 3 = 0.20 x 2,000 units = 400 Ending inventory, Quarter 4 = 0.20
x 1,000 units = 200 Ending inventory for the year = Ending inventory for
Quarter 4 = 200 units
b. Production budget
Texas Rex Inc. Production Budget For the Year Ended December 31, 2020
Quarter
Sales in units Desired ending inventory
Total needs Less: Beginning inventory Units to be produced
1
2
3
4 ​1,000
1,200
1,500
2,000 240
300
400
200 1,240
1,500
1,900
2,200 (180)
(240)
(300)
(400) 1,060
1,260
1,600
1,800
Year ​5,700 200 5,900 (180) 5,720
*Beginning inventory for Quarter 1 is given in information. Beginning inventory for the remaining quarters is equal to ending
inventory for the previous quarter.
Note: Consider the first column (Quarter 1) of the budget. Texas Rex anticipates sales of 1,000 t-shirts. In
addition, the company wants 240 t-shirts in ending inventory at the end of the first quarter (0.20 x 1,200).
Thus 1,240 t-shirts are needed during the first quarter. Where will these 1,240 t-shirts come from?
Beginning inventory can provide 180of them, leaving 1,060 to be produced during the quarter. Notice that
the production budget is expressed in terms of units.
Two important points regarding the production budget example should be emphasized:
• The beginning inventory for one quarter is always equal to the ending inventory of the previous quarter.
For Quarter 2, the beginning inventory is 240 t-shirts, which is identical to the desired ending inventory for
Quarter 1.
• The column for the year is not simply the addition of the amounts for the four quarters. Notice that the
desired ending inventory for the year is 200 t-shirts, which is, of course, equal to the desired ending
inventory for the fourth quarter.
3. Direct Materials Purchases Budget – ​shows managers how much must be bought to support
production and ending inventory needs for materials.
Information: Budgeted units to be produced for each quarter: 1,060, 1,260, 1,600, and 1,800. Plain t-shirts
cost P3 each, and ink (for the screen printing) costs P0.20 per ounce. On a per-unit basis, the factory
needs one plain t-shirt and five ounces of ink for each logoed t-shirt that it produces. Texas Rex’s policy is
to have 10% of the following quarter’s production needs in ending inventory. The factory has 58 plain
t-shirts and 390 ounces of ink on hand on January 1. At the end of the year, the desired ending inventory
is 106 plain t-shirts and 530 ounces of ink.
Required:
a. Calculate the ending inventory of plain t-shirts and of ink for Quarters 2 and 3. b. Prepare a direct
materials purchases budget for plain t-shirts and one for ink.
Solution:
a. Ending inventory plain t-shirts, Quarter 2 = 0.10 x (1,600 x 1 t-shirt) = 160 Ending inventory plain
t-shirts, Quarter 3 = 0.10 x (1,800 x 1 t-shirt) = 180 Ending inventory ink, Quarter 2 = 0.10 x (1,600 x 5
ounces) = 800 Ending inventory ink, Quarter 3 = 0.10 x (1,800 x 5 ounces) = 900
b. Direct materials purchases budget
Texas Rex Inc. Direct Materials Purchases Budget For the Year Ended December 31, 2020 Plain
t-shirts Quarter
Units to be produced Direct materials per unit Production needs Desired ending inventory
Total needs Less: Beginning inventory Direct materials to be purchased Cost per t-shirt
Total Purchase cost plain t-shirts
1 ​1,060 x 1 1,060 126 1,186 (58) 1,128 x P3 P3,384
2 ​1,260 x 1 1,260 160 1,420 (126) 1,294 x P3 P3,882
3 ​1,600 x 1 1,600 180 1,780 (160) 1,620 x P3 P4,860
4 ​1,800 x 1 1,800 106 1,906 (180) 1,726 x P3 P5,178
Year ​5,720 x 1 5,720 106 5,826 (58) 5,768 x P3 P17,304
4 Ink
1
2
3 ​Units to be produced
1,060
1,260
1,600
1,800 Direct materials per unit
x5
x5
x5
x 5 Production needs
5,300
6,300
8,000
9,000 Desired ending inventory
630
800
900
530 Total needs
5,930
7,100
8,900
9,530 Less: Beginning inventory
(390)
(630)
(800)
(900) Direct materials to be purchased
5,540
6,470
8,100
8,630 Cost per ounce
x P0.20
x P0.20
x P0.20
x P0.20 Total Purchase cost of ink
P1,108
P1,294
P1,620
P1,726
Total direct materials purchase cost
P4,492
P5,176
P6,480
P6,904
Year ​5,720 x 5 28,600 530 29,130 (390) 28,740 x P0.20 P5,748
P23,052
Note: Notec how similar the direct materials purchases budge is to the production budget. Consider the
first quarter, starting with the plain t-shirts. It takes on plain t-shirt for every log t-shirt, so the 1,060 logo
t-shirts to be produced are multiplied by one to obtain the number of plain t-shirts needed for production.
Next, the desired ending inventory of 126 (10% of the next quarter’s production needs) is added. Thus,
1,186 plain t-shirts are needed during the first quarter. Of this total, 8 are already in beginning inventory,
meaning that the remaining 1,128 must be purchased. Multiplying the 1,128 plain t-shirts by the cost of P3
each gives Texas Rex the P3,384 expected cost of plain t-shirt purchases for the first quarter of the year.
The direct materials purchases budget for ink is done in the same way as t-shirts except that each unit
produced requires 5 ounces of ink. So the total units to be produced must be multiplied by 5 to get the
production needs of ink.
1. ​Direct Labor Budget – ​shows how many hours are required for production in the coming year. The
average wage is multiplied by direct labor hours to determine total anticipated direct labor cost.
Information: Recall that budgeted units to be produced for each quarter are: 1,060, 1,260, 1,600 and
1,800. It takes 0.12 hour to produce one t-shirt. The average wage cost per hour is P10.
Required: Prepare a direct labor budget
Texas Rex Inc. Direct Labor Budget For the Year Ended December 31, 2020
Quarter
Units to be produced Direct labor time per unit in hours
Total hours needed Average wage per hour
Total direct labor cost
1 ​1,060 X 0.12 127.2 X P10 P1,272
2 ​1,260 X 0.12 151.2 X P10 P1,512
3 ​1,600 X 0.12 192.0 X P10 P1,920
4 ​1,800 X 0.12 216.0 X P10 P2,160
Year ​5,720 X 0.12 686.4 X P10 P6,864
2. ​Overhead Budget –​The overhead budget shows forecast variable and fixed overhead costs for the
coming
year. Taken together with the materials and labor budgets, total production cost can be determined.
Information: Refer to the direct labor budget. The variable overhead rate is P5 per direct labor hour. Fixed
overhead is budgeted at P1,645 per quarter (this amount includes P540 per quarter for depreciation).
Required: prepare and overhead budget.
Texas Rex Inc. Overhead Budget For the Year Ended December 31, 2020
Quarter
Budgeted direct labor hours Variable overhead rate Budgeted variable overhead Budgeted fixed
overhead*
Total Overhead
1 ​127.2 X P5 P636 1,645 P2,281
 2 ​151.2 X P 5 756 1,645 P2,401
3 ​192.0 X P 5 960 1,645 P2,605
4 ​216.0 X P 5 1,080 1,645 P2,725
Year ​686.4 X P 5 3,432 6,580 P10,012 *​ Includes P540 of depreciation in each quarter.
3. ​Ending Finished Goods Inventory Budget – ​helps managers determine the predicted unit cost of
production. This amount is used in valuing ending inventory on the budgeted balance sheet.
Information: Refer to the direct materials, direct labor, and overhead budgets.
Required:
a. Calculate the unit product cost. b. Prepare an ending finished goods inventory budget.
Solution:
a. Direct materials
Plain t-shirt P3 Ink (5 oz. @ P0.20) 1 P4.00 Direct Labor (0.12hr @ P10) 1.20 Overhead:
Variable (0.12hr @ P5) 0.60 Fixed (0.12hr @ P9.59*) 1.15** Total unit cost P6.95
*Budgeted Fixed Overhead/ Budgeted Direct Labor Hours = P6,580/686.4 = P9. **Rounded
b. Ending Finished Goods Inventory Budget
Texas Rex Inc. Ending Finished Goods Inventory Budget For the Year Ended December 31, 2020
Logo t-shirts Unit Cost
Total ending inventory
200 X P6.95 P1,390
4. Cost of Goods Sold Budget – ​is used to determine the predicted cost of units to be sold in the coming
year.
It is an input to the budgeted income statement.
Information: Refer to the direct materials, direct labor, overhead, and ending finished goods budgets. The
cost of beginning finished goods inventory is P1,251.
Required: Prepare a cost of goods sold budget.
Solution:
Texas Rex Inc. Cost of Goods Sold Budget For the Year Ended December 31, 2020 ​Direct materials
used Direct labor used Overhead
Budgeted manufacturing costs Beginning finshed goods
Cost of goods available for sale Less: Ending finished goods
Budgeted cost of goods sold
P22,880 6,864 10,012 P39,756 1,251 P41,007 (1,390) P39,617 ​*Production needs = (5,720 plain t-shirts X P3) +
(28,600 oz ink X P0.20)
5. Selling and Administrative Expenses Budget – ​is becoming a larger portion of modern business.
This
budget helps manages determine the amounts to be spent on these nonproduction categories.
Information: Refer to the sales budget. Variable expenses are P0.10 per unit sold. Salaries average
P1,420 per quarter, utilities, P50 per quarter, and depreciation, P150 per quarter. Advertising for Quarters
1 through 4 is P100, P200, P800, and P500, respectively.
Required: Prepare a selling and administrative expenses budget.
Solution:
Texas Rex Inc. Selling and Administrative Expenses Budget For the Year Ended December 31,
2020
Quarter
Planned sales in units Variable S&A expenses per unit
Total variable expenses Fixed S&A expenses
Salaries Utilities Advertising Depreciation Total fixed expenses
Total S&A expenses
 1 ​1,000 X P0.10 P100
P1,420 ​50 100
​ 150 P1,720 P1,820
2 ​1,200 X P0.10 P120
P1,420 ​50 200
​ 150 P1,820 P1,940
3 ​1,500 X P0.10 P150
P1,420 ​50 800
​ 150 P2,420 P2,570
4 ​2,000 X P0.10 P200
P1,420 ​50 500
​ 150 P2,120 P2,320
Year ​5,700 X P0.10 P570
P5,680 200 1,600 600 P8,080 P8,650
Note: Notice how the S&A expenses budget follows a very similar format as that of the overhead budget.
In both cases, variable and fixed expenses are calculated. Notice also that depreciation, a non-cash
expense, is shown separately. This will be important later on when the company prepares the cash
budget.
6. Budgeted Income Statement – ​helps managers determined how profitable the coming year will be. If
budgeted income is not high enough, adjustments to the budgets can be made after this budget has been
completed.
Information: Refer to the sales budget, cost of goods sold budget, the selling and administrative expenses
budget, and the cash budget. Assume that the tax rate is 40%.
Required: Prepare a budgeted income statement.
Solution:
Texas Rex Inc. Budgeted Income Statement For the Year Ended December 31, 2020 ​Sales Less:
Cost of Goods Sold
Gross margin Less: S&A expenses Operating income Less: Interest expense
Income before income taxes Less: Income taxes (0.40 x P8,673)
Net Income
P57,000 (39,617) P17,383 (8,650) P8,733 (60) P8,673 (3,469)* P5,204 ​*Rounded
B. Financial Budget
1. Cash Budget
• ​Preparing a Schedule for Cash Collections on Accounts Receivable – ​predicted collections of cash
on account are an important part of the cash budget.
Information: From past experience, Texas Rex expects that, on average, 25% of total sales are cash and
75% of total sales are on credit. Of the credit sales, Texas Rex expects that 90% will be paid in cash
during the quarter of sale, and the remaining 10% will be paid in the following quarter. Recall from the
sales budget that Texas Rex expects the following total sales:
Quarter 1 P10,000 Quarter 2 P12,000 Quarter 3 P15,000 Quarter 4 P20,000 The balance in accounts
receivable as of the last quarter of 2013 was P1,350. This will be collected in cash during the first quarter
of 2020.
Required:
a. Calculate cash sales expected in each quarter of 2020 b. Prepare a schedule showing cash receipts
from sales expected in each quarter of 2020.
Solution:
a. Cash sales expected in Quarter 1 = P10,000 x 0.25 = P2,500 Cash sales expected in Quarter 2 =
P12,000 x 0.25 = P3,000 Cash sales expected in Quarter 3 = P15,000 x 0.25 = P3,750 Cash sales
expected in Quarter 1 = P20,000 x 0.25 = P5,000
b. Schedule of Cash receipts from sales
Quarter Source 1 2 3 4 ​Cash Sales Received on account from:
Quarter 4, 2019 Quarter 1, 2020 Quarter 2, 2020 Quarter 3, 2020 Quarter 4, 2020
P2,500
1,350 6,750​a
P3,000
750​b ​8,100​c
P3,750
900​d ​10,125​e
P5,000
1,125​f ​13,500​g ​Total cash receipts P10,600 P11,850 P14.775 P19,625
a(10,000 x 0.75)(0.9) b(10,000 x 0.75)(0.1) c(12,000 x 0.75)(0.9)
d(12,000 x 0.75)(0.1) e(15,000 x 0.75)(0.9) f(10,000 x 0.75)(0.1)
g(2,000 x 0.75)(0.9)
Note: While Texas Rex expects no bad debts expense, that may not be the case for all firms. If a firm
expects less than 100% of the credit sales to be received in cash, then it expects some bad debts. For
example, if a firm expected to be repaid 98% of credit sales, then it expects 2% bad debts. In other words,
not everyone pay for
their credit sales. This 2% is ignored for purposes of cash budgeting since it will not be received in cash.
Different firms have different accounts receivable repayment experiences.
• ​Determining Cash Payments on Accounts Payable – ​Cash payments need not be made in the month
that a purchase is made. The ability of a firm to pay over time makes it imperative for it to know just when
the cash will be required.
Information: Texas Rex purchases all raw materials on account. 80% of purchases are paid for in the
quarter purchase; the remaining 20% are paid for in the following quarter. The purchases for the fourth
quarter of 2020 were P5,000. Recall from the direct materials purchases budget that Texas Rex expects
the following purchases of raw materials:
Quarter 1 P4,492 Quarter 2 P5,176 Quarter 3 P6,480 Quarter 4 P6,904
Required: Prepare a schedule showing anticipated payments for accounts payable for materials.
Solution: Cash needed for payments on account:
Quarter Source 1 2 3 4 ​Quarter 4, 2019 Quarter 1, 2020 Quarter 2, 2020 Quarter 3, 2020 Quarter 4, 2020
P1,000​a
3,594​b ​P898​c
4,141​d ​P1,035​e
5,184​f ​P1,296​g ​5,523​h ​Total cash needed P4,594 P5,039 P6.219 P6,819 ​(Note: All footnote calculations are
rounded.)
a(P5,000 x 0.20) b(P4,492 x 0.80) c(P4,492 x 0.20) d(P5,176 x 0.80) e(P5,176 x 0.20) f(P6,480 x 0.80) g(P6,480 x 0.20) h(P6,904 x
0.80)

Note: Notice that it does not allow for less than 100% repayment of accounts payable. The ethical firm
always intends to repay its debts. A disbursement that is typically not included in the disbursements
section is interest on short-term borrowing. This interest expenditure is reserved for the section on loan
repayments.

• ​Preparing a Cash Budget – ​this is critically important to the survival of businesses. It tells
managers how much cash is available to cover anticipated expenses. Shortfalls of cash must be
aniticpated and handled through reduction in expenses or financing.
 Information: Refer to the previous budgets: Direct labor budget, Overhead budget, S&A
expenses budget, Budgeted Income Statement, Schedule showing cash receipts from sales,
schedule showing anticipated payments for accounts payable for materials. Refer as well to the
following details: a. A P1,000 minimum cash balance is required for the end of each quarter.
Money can be borrowed and
repaid in multiples of P1,000. Interest is 12% per year. Interest payments are made only for the
amount of the principal being repaid. All borrowing takes place at the beginning of a quarter, and
all repayment takes place at the end of a quarter. b. Budgeted depreciation is P540 per quarter
for overhead and P150 per quarter for selling and
administrative expenses. c. The capital budget for 2020 revealed plans to purchase additional screen
printing equipment. The cash outlay for the equipment, P6,500, will take place in the first quarter.
The company plans to finance the acquisition of the equipment with operating cash,
supplementing it with short-term loans as necessary. d. Corporate income taxes are
approximately P3,469 and will be paid at the end of the fourth quarter. e. Beginning cash balance
equals 5,200. f. All amounts in the budget are rounded to the nearest dollar.
Required: Prepare a cash budget for
Texas Rex. Solution:
Texas Rex Inc. Cash Budget For
the Year Ended December 31, 2020
Quarter Year Source*

Beginning cash balance Cash

sales and collections on account:
Total cash
available Less
disbursements
Payments for:
Raw materials Direct labor
Overhead S&A expenses
Income taxes Equipment Total
disbursements
Excess(deficiency) of cash
available over needs Financing:
Borrowings
Repayments
Interest**
Total
financing
Ending cash
balance***
1
2
P5,200
P1,023
10,600
1,850
P15,80
P12,87
0
3
 2 (60)
P1,023 P(1,06
11,850 0)
P12,87 P1,611
3 3
2 P1,611
P1,023 14,775
11,850 P16,38
P12,87 6
3 3
P1,611
14,775
P(5,039) P16,38
(1,512) 6
(1,861) 3
(1,790) P1,611
------- 14,775
------- P16,38
P(10,20 6
2) 3
P(5,039) P1,611
(1,512) 14,775
(1,861) P16,38
(1,790) 6
-------
-------
P(10,20 P(6,219)
2) (1,920)
(2,065)
P2,67 (2,420)
1 -------
P2,67 -------
1 P(12,62
4)
------ P(6,219)
(1,000) (1,920)
(60) (2,065)
P(1,06 (2,420)
0) -------
P1,611 -------
------ P(12,62
(1,000) 4)
(60) P(6,219)
P(1,06 (1,920)
0) (2,065)
P1,611 (2,420)
------ -------
(1,000) -------
P(12,62 7
4) 4
P3,762
P3,76 19,625
2 P23,38
P3,76 7
2 4
P3,76 P3,762
2 19,625
P23,38
------ 7
------
------
------ P(6,819)
P3,76 (2,160)
2 (2,185)
------ (2,170)
------ (3,469)
------ -------
------ P(16,80
P3,76 3)
2 P(6,819)
------ (2,160)
------ (2,185)
------ (2,170)
------ (3,469)
P3,76 -------
2 P(16,80
------ 3)
------ P(6,819)
------ (2,160)
------ (2,185)
P3,76 (2,170)
2 (3,469)
4 -------
P3,762 P(16,80
19,625 3)
P23,38 P(6,819)
7 (2,160)
4 (2,185)
P3,762 (2,170)
19,625 (3,469)
P23,38 -------
7 P(16,80
4 3)
P3,762
19,625 P6,58
P23,38 4
P6,58 0
4 P5,200
P6,58 56,850
4 P62,05
P6,58 0
4 P5,200
56,850
------ P62,05
------ 0
------ P5,200
------ 56,850
P6,58 P62,05
4 0
------
------
------ P(22,67
------ 1)
P6,58 (6,864)
4 (7,852)
------ (8,050)
------ (3,469)
------ (6,500)
------ P(55,40
P6,58 6)
4 P(22,67
------ 1)
------ (6,864)
------ (7,852)
------ (8,050)
P6,58 (3,469)
4 (6,500)
------ P(55,40
------ 6)
------ P(22,67
------ 1)
P6,58 (6,864)
4 (7,852)
P5,200 (8,050)
56,850 (3,469)
P62,05 (6,500)
0 P(55,40
P5,200 6)
56,850 P(22,67
P62,05 1)
0 (6,864)
P5,200 (7,852)
56,850 (8,050)
P62,05 (3,469)
(6,500) 1,000
P(55,40 (1,000
6) ) (60)
P(22,67 (60)
1) P6,58
(6,864) 4
(7,852) 1,000
(8,050) (1,000
(3,469) ) (60)
(6,500) (60)
P(55,40 P6,58
6) 4
1
P6,64
4 2
P6,64
3
4
P6,64 4
4
P6,64 5
4
6
P6,64
4 7

1,000 8
(1,000
) (60) 9
(60)
9
P6,58
4 9
1,000 1
(1,000
) (60) 2
(60)
P6,58 3
4
4
1,000
(1,000 5
) (60)
(60) 6
P6,58
7
4
1,000 8
(1,000
) (60) 9
(60)
P6,58 9
4
9 7
1
8
2
9
3
9
4
9
5 1

6 2

7 3

8 4

9 5

9 6

9 7
1
8
2
9
3
9
4
9
5 1

6 2

7 3

8 4

9 5

9 6

9 7
1
8
2
9
3
9
4
9
5 1

6 2
3 9

4 9

5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7

2 8

3 9

4 9

5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7

2 8

3 9

4 9

5 9
1
6
2
7
3
8
4
5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7

2 8

3 9

4 9

5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7

2 8

3 9

4 9

5 9
1
6
2
7
3
8
4
9
5
9
6
7 3

8 4

9 5

9 6

9 7
1
8
2
9
3
9
4
9
5 1

6 2

7 3

8 4

9 5

9 6

9 7
1
8
2
9
3
9
4
9
5 1

6 2

7 3

8 4

9 5

9 6

9 7
1
8
2
 9 6

9 7

9 8
1
9
2
9
3
9
4

5
Source* 1 – e
2 – Schedule for Cash Collections on A/R 3 – Schedule for Cash Payments on A/P 4 – Direct Labor Budget 5 – b, Overhead
Budget 6 – b, S&A Expenses Budget 7 – d, Budgeted Income Statement 8 – c 9 – a
Note: The information reveals that much of the information needed to prepare the cash budget comes
from the operating budgets and from schedules for cash receipts on accounts receivable and cash
payments on accounts payable. It is important to recall that only cash expenditures are included in the
cash budget. The operating budgets for overhead and selling and administrative expenses included
depreciation expense, which is a noncash expense. Therefore, depreciation expense was subtracted from
the totals to yield the cash expenditures for overhead and for selling and administrative expense.
The cash budget underscores the importance of breaking down the annual budget into smaller time
periods. The cash budget for the year gives the impression that sufficient operating cash will be available
to finance the acquisition of the new equipment. Quarterly information, however, shows the need for
short-term borrowing (P1,000) because of both the acquisition of the new equipment and the timing of the
firm’s cash flows. Most firms prepare monthly cash budgets, and some even prepare weekly and daily
budgets.
Texas Rex’s cash budget provides another piece of useful information. By the end of the third quarter, the
firm has more cash (P3,762) than needed to meet operating needs. Management should consider
investing the excess cash in an interest-bearing account. Once plans are finalized for use of the excess
cash, the cash budget should be revised to reflect those plans. Budgeting is a dynamic process. As the
budget is developed, new information becomes available, and better plans can be formulated.
2. ​Budgeted Balance Sheet – ​depends on information contained in the current balance sheet and in the
other budgets in the master budget.
Texas Rex Inc. Balance Sheet December 31, 2019 ​Assets Current Assets:
Cash Accounts Receivable Raw materials inventory Finished goods inventory
Total current assets Property, plant, and equipment (PP&E):
Land Building and equipment Accumulated depreciation
Total PP&E Total Assets
P5,200 1,350 252 1,251
P1,100 30,000 (5,000)
P8,053
26,100 P34,153 Liabilities and Owner’s Equity Current liabilities:
Accounts payable Owner’s equity:
Retained earnings Total Liabilities and Owner’s Equity
P1,000
33,153 P34,153
 Texas Rex Inc. Balance Sheet December 31, 2020 ​Assets Current Assets:
Cash Accounts Receivable Raw materials inventory Finished goods inventory
Total current assets Property, plant, and equipment (PP&E):
Land Building and equipment Accumulated depreciation
Total PP&E Total Assets
P6,584​a ​1,500​b ​424​c ​1,390​d
P1,100​e ​36,500​f ​(7,760)​g
P9,898
29,840 P39,738 Liabilities and Owner’s Equity Current liabilities:
Accounts payable Owner’s equity:
Retained earnings Total Liabilities and Owner’s Equity
P1,381​h
38,357​i ​P39,738
a. Ending balance in the Cash Budget b. Ten percent of fourth-quarter credit sales (0.75 x P20,000) See sales budget and cash
budget c. From Direct Materials Purchases Budget [(106 x P3) + (530 x 0.20)] d. From Ending Finished Goods Inventory Budget e.
From the December 31, 2019, balance sheet f. December 31, 2019, balance (P30,000) plus new equipment acquisition of P6,500 (
see the 2019 ending balance sheet and cash
budget) g. From the December 31, 2019, balance sheet, overhead budget, and S&A expenses budget (P5,000 + P2,160 + P600) h.
Twenty percent of fourth-quarter purchases (0.20 x P6,904) – see direct material purchases budget and cash budget i. P33,153
+P5,204 (December 31, 2019, balance plus net income from budgeted income statement.