Chapter 1

THE MASTER BUDGET

Dr. Le Hoang Oanh

Division of management accounting
School of accounting - UEH
The Master Budget

A comprehensive set of budgets, budgetary

schedules, and pro forma organizational financial
statements
For a specific period of time
Static – based on a single level of output demand
Interactive – departments generate and consume
information
The Master Budget
Budget

Operating Budgets Financial Budgets

Sales Budget Cash Budget
Production Budget Capital Expenditures
Purchases Budget Budget
Direct Labor Budget Balance Sheet
Production Overhead Income Statement
Budget Statement of Cash
Flows
Selling & Administrative Statement of Retained
Budget Earnings
 Benefits Derived from Budgeting

Budget Problems Solution

§ Perceived unfair or § Reasonable and
unrealistic goals. achievable budgets.
§ Poor management- § Employee participation
employee in budgeting process.
communications.
 Benefits Derived from Budgeting

Enhanced management
responsibility

Coordination Performance
of activities Benefits evaluation

Assignment of decision-
making responsibilities
Participation in Budget Process

Top Management

Middle Middle
Management Management

Supervisor Supervisor Supervisor Supervisor

Flow of Budget Data

Learning Objective

To discuss
how to set standards?

LO2
Setting Standards

Analysis of What DID

Used in a mature
historical the product
production process
data cost?

What Analyze the process

Task
SHOULD the of manufacturing
analysis product
cost? the product

Analyze the process for the step that

Combined
has changed, but use historical data
approach
for the steps that have not changed
16-8
Participation in Setting Standards

Accountants, engineers, personnel administrators, and

production managers combine efforts to set standards
based on experience and expectations.

16-9
Perfection versus Practical Standards: A
Behavioral Issue
PRACTICAL OR
PERFECTION
ATTAINABLE
STANDARDS
STANDARDS
Can only be attained Tight as practical,
under near perfect
but still expected to
conditions
be attained

• Peak efficiency •Occasional machine

• Lowest possible breakdowns
input prices
•Normal amounts
• Best-quality material
of raw material
• No disruption in
waste
production 16-10
Perfection versus Practical Standards: A
Behavioral Issue
Practical standards
should be set at levels
that are currently
attainable with
reasonable and
Should we use
practical standards efficient effort.
or perfection
standards?

16-11
Perfection versus Practical Standards: A
Behavioral Issue

I agree. Perfection
standards are
unattainable and
therefore discouraging
to most employees.

16-12
Learning Objective

To describe the elements

of a master budget.

LO4
THE MASTER BUDGET RELATIONSHIPS
(1)
Sales budget

(6) (7)
(2)
Ending Selling & admin.
inventory Production budget
Exp budget
budget
(3) (4) (5)
Direct materials Direct labor Manufacturing
budget budget overhead budget

Cash budget
(9) (8)
(10)
Budgeted income Budgeted balance
statement sheet
Learning Objective

To prepare the budgets and

supporting schedules
included in a
master budget.

LO5
SALES BUDGET

Contents
Budgeted sales in units and in $
Expected cash collection
Preparing the Master Budget

Sales
Budget

Estimated Estimated
Unit Sales Unit Price

Analysis of economic and market conditions

+
Forecasts of customer needs from marketing personnel
 SALES BUDGET

Example 1:
Victory company is preparing budgets for the year ending
December 20x9. Budgeted sales in units are 200 in the year,
with 10% in 1st quarter, 20% in 2nd quarter, 30% in 3rd quarter
and 40% in 4th quarter. The selling price is $100 per unit.
All sales are on account
60% collected in the quarter of sale
40% collected in the quarter following sale
Accounts receivable balance on December 31, 20x8: $2,800
The Production Budget

Sales Production
Budget Budgets

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PRODUCTION BUDGET
Content
Total units to be produced

Total units Budgeted Desired Estimated

to be = sales in + units in - units in
produced units ending Beginning
inventory inventory

Total units needed

PRODUCTION BUDGET

Example 2:

The management at Victory wants ending inventory to

be equal to 30% of the following quarter’s budgeted
sales in units.
At the end of the year 20x9, Victory desires 9 units in
inventory.
Let’s get started on the production budget.
Units purchases Budget
(for Merchandise company)

Units
purchases
Budget
UNITS PURCHASES BUDGET
Contents
Total units to be purchased
Expected cash disbursement

Desired Estimated
Total units units in Beginning
Budgeted
to be = sales in units + ending - in
purchased inventory beginning
inventory

Total needs
Direct materials budget

Production
Budget Direct
Units Materials
t e d Budget
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DIRECT MATERIALS BUDGET

Contents
Budgeted direct materials costs
Expected cash disbursement for materials
DIRECT MATERIALS BUDGET

Budgeted direct materials costs

Budgeted Materials needed for Standard price

= x
production per unit of D.M
D.M costs

Standard Standard
= Total units x quantity x
to be Price per
per
produced unit of D.M
unit of D.M

Total units Standard

= to be x Direct materials
produced costs
DIRECT MATERIALS BUDGET

Standard Standard
Standard
Quantity per price per unit
D.M costs = x
Unit D.M of D.M

The amount of direct The price that

materials or raw should be paid for a
materials that should single unit of
be required to materials, including
complete a single unit
allowances for
of product, including
quality, quantity
allowances for normal
waste, spoilage, purchased,
rejects, and similar shipping, receiving,
inefficiencies. and other such
costs, net of any
discounts allowed.
DIRECT MATERIALS BUDGET

Expected cash disbursement for materials

Materials Materials Desired Estimated

to be = needed for + ending - beginning
purchased productions materials materials
inventory inventory

Materials Standard
Total direct
= to be x Price per
Materials purchased unit of D.M
purchases
Belongs to cash disbursement pattern
DIRECT MATERIALS BUDGET

Standard direct materials costs for product N as follows:

Standard quantity per unit Standard price per unit

(kg/unit) ($/kg)
Materials requirement per unit Purchase price: 8
as specified in the bill of Freight by truck: 2.2
materials: 1.5
Receiving and handling: 0.6
Allowance for wastage and
Less Purchase discount: (0.8)
spoilage: 0.3
Allowance for rejects: 0.2
……. kgs/unit $........ /kg

Standard D.M costs = ……. kgs/unit x $...... /kg = $......./unit.

DIRECT MATERIALS BUDGET

Example:
Management wants materials on hand at the end of each
quarter equal to 20% of the following quarter’s production.
On December 31, 20x9, 12kgs of materials are estimated
to be on hand.
One-half of a quarter’s purchases is paid for in the quarter
of purchase; the other half is paid in the following quarter.
The December 31, 20x8 account payable balance is $500
Let’s prepare direct materials budget.
Direct labor budget

Direct Direct
Materials Labor
budget budget
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DIRECT LABOUR BUDGET

Contents
Budgeted direct labour costs
DIRECT LABOR BUDGET
Budgeted Total hours required Standard rate
D.L costs = for production x per D.L hour

Standard Standard
= Total units x labor hours x
to be rate per D.L
produced per unit hour

Total units Standard

= to be x
Direct labor
produced
costs
DIRECT LABOR BUDGET
Standard Standard
Standard
= labor hours x rate per D.L
D.L costs per unit hour

The number of direct The price that

labor hours that should be paid for a
should be required direct labor hour,
to complete a single including;
unit of product,
including allowances - Wages
for breaks, personal - Fringe benefit
needs of
employees, cleanup, - Other labor costs
and machine
downtime
DIRECT LABOR BUDGET
Standard direct labor costs for product N as follows:
Standard labor hours per unit Standard rate per D.L hour
Basic labor time per unit: 3.5 Wages: $1.5 /hr
hrs/unit Fringe benefit: $0.375/hr
Allowance for breaks and (25% wages)
personal needed: 0.1 hrs/unit Retirement and Insurance:
Allowance for cleanup and $0.625/hr
machine downtime: 0.2 hrs/unit:
Allow. for rejection 0.2 hrs/unit
Standard labor hour: … hrs/unit Standard rate: $...... /hour

Standard D.L costs= …… hrs/unit x $....../hr x = $....../u.

Let’s prepare direct labor budget.
Manufacturing overhead Budget

Direct labour Manufacturing

budget Overhead
budget
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MFG OVERHEAD BUDGET

Contents
Budgeted manufacturing overhead costs
Expected cash disbursements for manufacturing overhead
MFG OVERHEAD BUDGET

For budgeted variable manufacturing overhead costs.

Budgeted Budgeted direct Standard
= labour hours x
variable variable
mfg.OH (machine mfg. OH
costs hours) rate
Standard Standard
= Total units
to be x labor hrs x variable
produced (machine hrs) mfg. OH
per unit rate

Total units Standard

= to be x Variable mfg.OH
produced costs
MFG OVERHEAD BUDGET

Budgeted variable mfg.OH costs

Standard variable
=
mfg. OH rate
Budgeted direct labor hrs (machine hrs)
MANUFACTURING OVERHEAD BUDGET

For budgeted fixed manufacturing overhead costs.

Total Fixed mfg overhead is estimated in

relevant range (unchanged in that range)
MANUFACTURING OVERHEAD BUDGET

Example:

At Victory, manufacturing overhead applied to units of

product on the basis of direct labor hours.

The standard variable manufacturing overhead rate is

$2.5 per direct labor hour.

Fixed manufacturing overhead is $1,218 per quarter and

includes $700 of deprecation of plant assets).

Let’s prepare the manufacturing overhead budget.

ENDING FINISHED GOODS INVENTORY BUDGET

MFG Ending
Overhead finished goods
budget Inventory
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ENDING FINISHED GOODS INVENTORY BUDGET

Contents
Budgeted ending finished goods inventory budget

Standard Standard
= Standard + Standard +
product D.M costs D.L costs mfg. OH
costs costs
Selling and Administrative
(S&A) Expense Budget

Ending Selling
Finished and
Goods Administrative
Inventory ed Expense
t
p le Budget
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SELLING & ADMINISTRATIVE EXPENSE
BUDGET
Contents
Budgeted Selling and administrative expense
Expected cash disbursements for selling and
administrative expense
SELLING AND ADMINISTRATIVE EXP.BUDGET

For budgeted variable selling and

administrative Exp.

Budgeted Standard
variable Budgeted Sales
= in units x variable selling
selling & & adm.Exp
adm.Exp

For budgeted fixed selling and

administrative Expense.

Total fixed selling & administrative exp is estimated in

relevant range (unchanged in that range)
SELLING AND ADMINISTRATIVE EXP. BUDGET

At Victory, the selling and administrative exp budget is divided

into variable and fixed components
The variable selling & administrative exp are $4 per unit sold.
The fixed selling and administrative exp as follows:
Advertisement: $40 (1st quarter), $60 (2nd quarter), $80 (3rd
quarter), $100 (4th quarter).
Selling and Administrative labor costs: $170/quarter
Insurance expenses: $60 (3rd quarter), $80 (4th quarter)
Warehouse rent expenses: $90/quarter
Depreciation: $40/quarter
Cash budget

Selling
and
Administrative Cash budget
Expense d
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CASH BUDGET

Contents
Beginning cash balance
Cash receipts listing all cash inflows excluding
borrowing
Cash disbursements listing all payments excluding
repayments of principal and interest.
Cash excess and deficiency
The financing section listing all borrowings,
repayments and interest
CASH BUDGET
Victory:
Maintains a minimum cash balance of $550
Has a January 1 cash balance of $600.
Equipment purchases: $2,500 (1st quarter), $2,000 (2nd
quarter), $3,000 (4th quarter)
Income tax: 960/year, equally divided for each quarter.
Pay a cash dividend of $80 in each quarter
If Victory does not have enough money to maintain the
minimum cash balance as well as to repay principal borrowed on
the line of credit and the interest, it has to borrow with the interest
of 6% and in each quarter it has to repay 60% of its last quarter
borrowing.
The borrowing balance on Dec 31, 20x8 is zero.
The Budgeted
Income Statement

Cash Budgeted
Budget Income
d Statement
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THE BUDGETED INCOME STATEMENT

Contents
Budgeted profit (loss)
The Budgeted Balance Sheet

Budgeted Budgeted
Income Balance
Statement Sheet
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THE BUDGETED BALANCE SHEET
Contents
Budgeted assets
Budgeted liabilities and equities

HW: 8.1-8.5; 8.16; 8.21

ASç
End of The Chapter

I’m ready to process

some leisure time.