C09 Instr PPT Mowen4Ce

POWERPOINT PRESENTATION TO
ACCOMPANY
CORNERSTONES
OF MANAGERIAL
ACCOUNTING
FOURTH CANADIAN EDITION
BY
MOWEN/HANSEN/HEITGER/McCONOMY/WITT
Presentation Revised by
Robert G. Ducharme
University of Waterloo
9-1 Copyright © 2022 Cengage Canada

Chapter 9
Budgeting, Production, Cash,
and Master Budget

Learning Objectives
After studying this chapter, you should be able to:
1. Define budgeting, and discuss its role in planning,
control, and decision making.
2. Define and prepare the operating budget, identify its
major components, and explain the interrelationships of
its various components.
3. Define and prepare the financial budget, identify its
major components, and explain the interrelationship of
its various components.
4. Describe the behavioural dimension of budgeting.

CPA Competencies
CPA Competencies included in this chapter:
3.1.1 Evaluates management information requirements

3.2.1 Develops or evaluates data and information inputs
for operational plans, budgets, and forecasts
3.2.2 Prepares, analyzes, or evaluates operational plans,
budgets, and forecasts
3.6.1 Evaluates performance using accepted
frameworks

Description of Budgeting
• All businesses should prepare budgets.

• Budgets help business owners and managers
to plan ahead, and later, exercise control by
comparing what actually happened to what
was expected in the budget.
• Budgets formalize managers’ expectations
regarding sales, prices, and costs.
• Even small businesses and nonprofit entities
can benefit from the planning and control
provided by budgets.

Strategic Plan
• A strategic plan identifies strategies for future
activities and operations, generally covering at
least five years.
• The plan is then translated into long- and short-
term objectives.
• Strategic plans and budgets are tightly linked.

Budgeting and Planning and Control
• Planning and control are linked.

• Planning is looking ahead to see what actions
should be taken to realize particular goals.
• Control is looking backward, determining
what actually happened and comparing it
with the previously planned outcomes.
• Budgets are financial plans for the future and
are a key component of planning. They
identify objectives and the actions needed to
achieve them.

Budgeting and Planning and Control
• Before preparing a budget, an organization

should develop a strategic plan.
• The strategic plan plots a direction for an
organization’s future activities and
operations; it generally covers at least 5
years.

Budgeting, Planning, and Control

Advantages of Budgeting
A budgetary system gives an organization

several advantages.
Information for
Planning Decision
Making
Standards for Improved

Performance Communication
Evaluation & Coordination
The Master Budget
• The master budget is the comprehensive
financial plan for the organization as a whole.
• Typically for a one-year period, corresponding
to the fiscal year of the company
• Yearly budgets are broken down into quarterly
and monthly budgets.
• The use of smaller time periods allows
managers to compare actual data with
budgeted data more frequently, so problems
may be noticed and resolved sooner.

The Master Budget
• Some organizations have developed a

continuous budgeting philosophy.
• A continuous budget is 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.
• Proponents of continuous budgeting maintain
that it forces managers to plan ahead
constantly.
Continuous Budget
• Illustration of a continuous budget, a moving 12-
month budget
January February December January

2022 2022 ……………. 2022 2023

Master Budget:
Directing and Coordinating
• Most organizations prepare the master budget for the
coming year during the last four or five months of the
current year.
• The budget committee
• reviews the budget
• provides policy guidelines and budgetary goals
• resolves differences that arise as the budget is prepared
• approves the final budget
• monitors the actual performance of the organization as the year
unfolds
• The controller usually serves as the budget director,
the person responsible for directing and coordinating
the organization’s overall budgeting process.

Master Budget:
Major Components
• A master budget can be divided into operating and financial
budgets:
• Operating budgets describe the income-generating
activities of a firm: sales, production, and finished
goods inventories. Outcome is a pro forma or
budgeted income statement.
• Financial budgets detail the inflows and outflows of
cash and the overall financial position.
• Planned cash inflows and outflows appear in the
cash budget. The expected financial position at the
end of the budget period is shown in a budgeted, or
pro forma, balance sheet.

Master Budget:
Major Components
• Since many of the financing activities are not
known until the operating budgets are
known, the operating budget is prepared
first.

Major Components of
the Master Budget
Operating • Describes the income-

Budget generating activities of a firm
• Details the inflows and

Financial outflows of cash and the
Budget overall financial position

The Master Budget and
Its Interrelationships

Preparing the Operating Budget
• The operating budget consists of a budgeted

income statement accompanied by the
following supporting schedules:
• Sales budget
• Production budget
• Direct materials purchases budget
• Direct labour budget
• Overhead budget
• Selling and administrative expenses budget
• Ending finished goods inventory budget
• Cost of goods sold budget

Sales Budget
• The sales budget is approved by the budget

committee and describes expected sales in units and
dollars.
• The sales budget 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.
• The first step in creating a sales budget is to develop
the sales forecast.
• The sales forecast is just the initial estimate, and it is
often adjusted by the budget committee.

CORNERSTONE 9.1
Preparing a Sales Budget

Information: Moose Patties Inc.
• Budgeted units to be sold for each quarter of
2020 are:
Q1 =1,000; Q2 =1,200; Q3=1,500; Q4 =2,000
• Selling price is $10 per T-shirt.
Required:
Prepare a sales budget for each quarter and for the
year.

CORNERSTONE 9.1 • SOLUTION
Preparing a Sales Budget

Moose Patties Inc.
Sales Budget
For the Year Ending December 31, 2020
Quarter
1 2 3 4 Year
Units 1,000 1,200 1,500 2,000 5,700
Unit selling × $10 × $10 × $10 × $10 × $10
price
Budgeted $10,000 $12,000 $15,000 $20,000 $57,000
sales
Notice that sales fluctuate seasonally.

Production Budget
• The production budget tells how many units

must be produced to meet sales needs and to
satisfy ending inventory requirements.
• To compute the units to be produced, both
unit sales and units of beginning and ending
finished goods inventory are needed:
Units in Units in
Units to be Expected + ending − beginning
produced = unit sales
inventory inventory
CORNERSTONE 9.2
Preparing a Production Budget

• Sales budget:
• 1st quarter = 1,000 units
• 2nd quarter = 1,200 units
• 3rd quarter = 1,500 units
• 4th quarter = 2,000 units
• Beginning inventory is 180 T-shirts.

CORNERSTONE 9.2

Information, continued:
• Ending inventory:
• Desired quantity = 20% of the following quarter’s sales.
• Sales for the first quarter of 2018 = 1,000 units.
Required:
Prepare a production budget for each quarter and
for the year.


Moose Patties Inc.
Production Budget
From the sales budget Quarter
1 2 3 4 Year
Sales 1,000 1,200 1,500 2,000 5,700
Desired ending 240 300 400 200 200
inventory
20% of 2nd 20% of 3rd 20% of the next year’s

quarter’s sales, quarter’s sales, 1st-quarter sales,
20% × 1,200 units 20% × 1,500 units 20% × 1,000 units


Moose Patties Inc.
Production Budget
Quarter
1 2 3 4 Year
Sales 1,000 1,200 1,500 2,000 5,700
Desired ending inv. 240 300 400 200 200
Total needs 1,240 1,500 1,900 2,200 5,900
Less: Beginning inv. (180) (240) (300) (400) (180)
1st quarter’s ending inventory is Beginning inventory
2nd quarter’s beginning inventory as of January 1, 2017

Moose Patties Inc.
Production Budget
Quarter
1 2 3 4 Year
Sales 1,000 1,200 1,500 2,000 5,700
Total needs 1,240 1,500 1,900 2,200 5,900
Units to be produced 1,060 1,260 1,600 1,800 5,720
All four quarters’
1,240 needed; we already have 180,
production added together
so we need to produce 1,060 units
Merchandise Purchasing Budget
• Used for retail firms instead of a production
budget.
• Details how many units must be purchased to
meet sales needs and to satisfy ending inventory
requirements.
• Firms must plan for both expected unit sales and
desired inventory levels.
Units to be purchased = Expected unit sales
+ Units in desired ending inventory (EI)
– Units in beginning inventory (BI)

CORNERSTONE 9.3
Preparing a Merchandise Purchasing Budget

Information:
Budgeted units to be sold for each quarter of 2020:
2,000, 2,400, 3,000, and 4,000. Assume that company
policy requires 15 percent of the next quarter’s sales
in ending inventory and that beginning inventory for
the first quarter of the year was 360 units. Assume also
that sales for the first quarter of 2022 are estimated at
2,000 units.

CORNERSTONE 9.3

Required:
1. Calculate the desired ending inventory in units for
each quarter of the year. What is the ending
inventory in units for the year?
2. Prepare a merchandise budget for each quarter and
for the year.


1. Merchandise purchasing budget:
Ending inventory, quarter 1 = 0.15 × 2,400 units =
360 units
450 units
600 units
300 units
Ending inventory for the year = Ending inventory for
quarter 4 = 300 units


2. Retail Firm
Merchandise Purchasing Budget
Quarter
1 2 3 4 Year
Sales in units 2,000 2,400 3,000 4,000 11,400
Desired EI* 360 450 600 300 300
Total needs 2,360 2,850 3,600 4,300 11,700
Less: BI** (360) (360) (450) (600) (360)
Units to be 2,000 2,490 3,150 3,700 11,340
produced

Direct Materials Purchases Budget
• After the production budget is completed,

the budgets for direct materials, direct
labour, and overhead can be prepared.
• The direct materials purchases budget tells
the amount and cost of raw materials to be
purchased in each time period.
• The formula used for calculating purchases is
as follows:

CORNERSTONE 9.4
Preparing a Direct Materials Purchases Budget

Information:
• Moose Patties Inc. production budget for 2020:
• Q1 = 1,060 units
• Q2 = 1,260 units
• Q3 = 1,600 units
• Q4 = 1,800 units
• Total for the year = 5,720 units

CORNERSTONE 9.4
Preparing a Direct Materials Purchases Budget

• Cost per unit
• One plain T-shirt, $3 each
• 5 grams of ink, $0.20 per gram
• Beginning inventory
• 58 plain T-shirts and 390 grams of ink
• Ending inventory
• 10 percent of the following quarter’s production needs
• At the end of the year, the desired ending inventory is
106 plain T-shirts and 530 grams of ink.

CORNERSTONE 9.4
Direct Materials Purchases Budget Example

Required:
1. Calculate the ending inventory of plain T-shirts
and of ink for quarters 2 and 3.
2. Prepare a direct materials purchases budget for
plain T-shirts and for ink.


1. Calculate ending inventory:
Ending inventory plain T-shirts:
Quarter 2 = 0.10 × (1,600 units × 1 T-shirt) = 160
Quarter 3 = 0.10 × (1,800 units × 1 T-shirt) = 180
Ending inventory ink:
Quarter 2 = 0.10 × (1,600 units × 5 grams) = 800
Quarter 3 = 0.10 × (1,800 units × 5 grams) = 900


2.
Dec 31, 2020 Quarter
Plain T-shirts 1 2 3 4 Year
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Direct mat. per unit ×1 ×1 ×1 ×1 ×1
Production needs 1,060 1,260 1,600 1,800 5,720
Desired ending inv. 126
10% of next
From production quarter’s Each unit required
budget production needs 1 plain T-shirt.


2.
DM purchases Quarter
Dec 31, 2020
Units to be prod. 1,060 1,260 1,600 1,800 5,720
10% of the next year’s 1st-

quarter production needs


2.
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Total needs 1,186 1,420 1,780 1,906 5,826
Less: Beginning inv. (58) (126)
1st quarter’s ending inventory is 2nd quarter’s beginning inventory


2.
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Total needs 1,186 1,420 1,780 1,906 5,826
Beginning-of-the-year inventory

2.
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Total needs 1,186 1,420 1,780 1,906 5,826
Qty. to be purchased 1,128 1,294 1,620 1,726 5,768
Cost per T-shirt × $3 Turning no. of T-shirts into $
amount

2. DM purchases Quarter
Units to be prod. 1,060 1,260 1,600 1,800 5,720

Total needs 1,186 1,420 1,780 1,906 5,826
Cost per T-shirt × $3 × $3 × $3 × $3 × $3
Total cost $3,384 $3,882 $4,860 $5,178 $17,304

2.
Ink 1 2 3 4 Year
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Direct mat. per unit × _ _ _ _
5
Each T-shirt takes

5 grams of ink.
We can repeat the same process for ink.


2.
Ink 1 2 3 4 Year
Units to be prod. 1,060 1,260 1,600 1,800 5,720

Total needs 5,930 7,100 8,900 9,530 29,130
Cost per gram ×$0.20 ×$0.20 ×$0.20 ×$0.20 ×$0.20
Total cost of ink $1,108 $1,294 $1,620 $1,726 $5,748


2.
All purchases 1 2 3 4 Year
Total purchase $3,384 $3,882 $4,860 $5,178 $17,304
cost of t-shirt
Total purchase 1,108 1,294 1,620 1,726 5,748
cost of ink
Total direct $4,492 $5,176 $6,480 $6,904 $23,052
materials
purchase cost

Direct Labour Budget
• The direct labour budget shows the total

direct labour hours and the direct labour
cost needed for the number of units in the
production budget.
• The budgeted hours of direct labour are
determined by the relationship between
labour and output.
LO-2
CORNERSTONE 9.5
Preparing a Direct Labour Budget

• Recall from Cornerstone 9.2 that budgeted units
to be produced for each quarter of 2020 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 $11.50.
Required:
Prepare a direct labour budget.

Preparing a Direct Labour Budget

Moose Patties Inc.
DL budget Quarter
Dec. 31, 2020 1 2 3 4 Year
Units to be prod. 1,060 1,260 1,600 1,800 5,720
Dir. labour hours × 0.12 × 0.12 × 0.12 × 0.12 × 0.12
per unit
Total hrs. needed 127.2 151.2 192.0 216.0 686.4
Avg. wage per hr. $11.50 $11.50 $11.50 $11.50 $11.50
Total direct labour $1,463 $1,739 $2,208 $2,484 $7,894
cost

Overhead Budget
• The overhead budget shows the expected

cost of all production costs other than direct
materials and direct labour.
• Many companies use direct labour hours as
the driver for overhead.
• Then, costs that vary with direct labour
hours are pooled and called variable
overhead.
• The remaining overhead items are pooled
into fixed overhead.
CORNERSTONE 9.6
Preparing an Overhead Budget

• Recall from Cornerstone 9.5 that budgeted direct
labour hours per quarter and for the whole year
are
Q1 Q2 Q3 Q4 Year
127.2 151.2 192.0 216.0 686.4
• Variable overhead rate: $5 per direct labour hour
• Fixed overhead budgeted at $1,645 per quarter
(includes $540 per quarter for depreciation)
Required:
Prepare an overhead budget.
Preparing an Overhead Budget

Moose Patties bases its variable
overhead on direct labour hours.
Quarter
Overhead budget 1 2 3 4 Year
Budgeted direct 127.2 151.2 192.0 216.0 686.4
labour hours
Var. over. rate × $5 × $5 × × $5 × $5
$5
Var. overhead $ 636 $ 756 $ 960 $1,080 $3,432
Budgeted fixed 1,645 1,645 1,645 1,645 6,580
overhead*
Total overhead $2,281 $2,401 $2,605 $2,725 $10,012
Ending Finished Goods Inventory
Budget
• The ending finished goods inventory budget
• supplies information needed for the balance
sheet
• serves as an important input for the preparation
of the cost of goods sold budget
• To prepare this budget, the unit cost of
producing finished goods must be calculated
by using information from the direct
materials, direct labour, and overhead
budgets.
CORNERSTONE 9.7
Preparing an Ending Finished Goods Inventory Budget

Information:
• Refer to data in Cornerstones 9.4, 9.5, and 9.6.
• Each finished shirt requires one plain T-shirt and
5 grams of ink.
• Cost per T-shirt is $3.00; ink costs $0.20 per gram.
• 0.12 hours are needed to produce one T-shirt.
• Employees are paid an average of $11.50 per hour.
• The variable overhead rate is $5 per direct labour
hour.
• Fixed overhead is budgeted at $1,645 per quarter.

CORNERSTONE 9.7

Required:
1. Calculate the unit product cost.
2. Prepare an ending finished goods inventory budget.


1. Unit cost:
Direct materials $4.00
Direct labour 1.38
T-shirt + Ink =
$3.00 + (5 grams @ $0.20) = $4.00
0.12 hours of direct labour ×

$11.50 per hour


1. Unit cost:
Direct labour 1.38
Overhead: $5 per direct labour hour
Variable × 0.12 hours 0.60
Fixed 1.15
Total unit cost $7.13
Budgeted fixed overhead of $6,580 ÷ 686.4

budgeted direct labour hours = $9.59 per hour;
$9.59 × 0.12 hours


2. Total ending inventory:
Unit cost computation:
Direct labour 1.38
Overhead:
Variable 0.60
Fixed 1.15
Total unit cost $7.13
Total ending inventory = 200 shirts × $7.13 = $1,426
Cost of Goods Sold Budget
• Assuming that the beginning finished goods

inventory is valued at $1,251, the budgeted
cost of goods sold schedule can be prepared
using information from Cornerstones 9.3 to
9.6.
• The cost of goods sold budget reveals the
expected cost of the goods to be sold.

CORNERSTONE 9.8
Preparing a Cost of Goods Sold Budget

Information:
• Refer to Cornerstones 9.4 to 9.7 for information
regarding direct materials, direct labour, overhead,
and ending inventory.
• Assume that the beginning finished goods inventory
is valued at $1,251.
Required:
Prepare a cost of goods sold budget.

Preparing a Cost of Goods Sold Budget

Moose Patties Inc.
Cost of Goods Sold Budget
Direct materials used (Cornerstone 9.4)* $22,880
Direct labour used (Cornerstone 9.5) 7,894
Overhead (Cornerstone 9.6) 10,012
Budgeted manufacturing costs $40,786
Beginning finished goods 1,251
Goods available for sale $42,037
Less: Ending finished goods (Cornerstone 9.7) (1,426)
Budgeted cost of goods sold $40,611
Selling and Administrative
Expenses Budget
• The selling and administrative expenses
budget outlines planned expenditures for
nonmanufacturing activities.
• Selling and administrative expenses can be
broken down into fixed and variable
components.
• Items as sales commissions, freight, and
supplies vary with sales activity.

CORNERSTONE 9.9
Preparing a Selling and Administrative Expenses Budget

Information:
• Refer to Cornerstone 9.1 for the sales budget.
• Variable expenses are $0.10 per unit sold.
• Salaries average $1,420 per quarter.
• Utilities average $50 per quarter.
• Depreciation averages $150 per quarter.
• Advertising for quarters 1 through 4 is $100, $200,
$800, and $500, respectively.

CORNERSTONE 9.9

Required:
Prepare a selling and administrative expenses
budget.


Moose Patties Inc.
Selling and Administrative Expenses Budget Quarter
1 2 3 4 Year
Plan. sales in units 1,000 1,200 1,500 2,000 5,700
Variable expenses × $0.10 × $0.10 × $0.10 × $0.10 × $0.10
Total variable exp. $ 100 $ 120 $ 150 $ 200 $ 570
Fixed expenses:
Salaries $1,420 1,420 1,420 1,420 5,680
Utilities 50 50 50 50 200
Advertising 100 200 800 500 1,600
Depreciation 150 150 150 150 600
Total fixed exp. $1,720 $1,820 $2,420 $2,120 $8,080
Total sell. & admin. $1,820 $1,940 $2,570 $2,320 $8,650

Budgeted Income Statement
• With the completion of the budgeted cost of

goods sold schedule and the budgeted
selling and administrative expenses budget, a
company has all the operating budgets
needed to prepare an estimate of operating
income.

CORNERSTONE 9.10
Preparing a Budgeted Income Statement

Information:
• Refer to Cornerstones 9.1, 9.8, 9.9, and 9.13.
• Sales budget: $57,000
• Cost of goods sold: $40,611
• Selling and administrative expenses: $8,650
($600 is depreciation), interest expense is $70
(Cornerstone 9.13)
• Income tax rate: 40 percent
Required:
Prepare a budgeted income statement.

Preparing a Budgeted Income Statement

Moose Patties Inc.
Budgeted Income Statement
Sales $57,000
Less: Cost of Goods Sold (40,611)
Gross Margin $16,389
Less: Selling and Admin. Expenses (8,650)
Operating Income $7,739
Less: Interest Expense (70)
Income Before Taxes $7,669
Less: Income Taxes (3,068)
Net Income Income before taxes of $4,601
$7,669 × 40% tax rate
Preparing the Financial Budget
• The remaining budgets found in the master

budget are the financial budgets.
• The usual financial budgets prepared are the
• cash budget
• budgeted balance sheet
• budget for capital expenditures

Cash Budget
• Understanding cash flows is critical in

managing a business.
• Often, a business successfully produces and
sells products but fails because of timing
problems associated with cash inflows and
outflows.
• Because cash flow is the lifeblood of an
organization, the cash budget is one of the
most important budgets in the master
budget.

Cash Budget
• The basic structure of a cash budget includes

cash receipts, disbursements, any excess or
deficiency of cash, and financing, as shown
below:

Cash Budget: Cash Available
• Cash available consists of the beginning cash

balance and the expected cash receipts.
Expected cash receipts include all sources of
cash for the period being considered.
• The principal source of cash is from sales.
• Since a large proportion of sales is usually on
account, a major task of an organization is to
determine the pattern of collection for its
accounts receivable.

Cash Budget: Cash Available
• If a company has been in business for a

while, it can use past experience to
determine what percentage of credit sales
are paid in the month of and months
following sales.
• This is used to create a schedule of cash
collections on accounts receivable.

CORNERSTONE 9.11
Preparing an Accounts Receivable Collections Schedule

Information:
• 25 percent of total sales are cash sales.
• 75 percent of total sales are credit sales.
• 90 percent of these are paid during the quarter of sale, and
10% are paid in the following quarter.
• 2020 sales: Q1 $10,000; Q2 $12,000; Q3 $15,000;
Q4 $20,000

CORNERSTONE 9.11

• Balance in Accounts Receivable at the end of 2019:
$1,350
• Will be collected in cash during the first quarter of 2020
Required:
1. Calculate cash sales expected in each quarter of
2020.
2. Prepare a schedule showing cash receipts from
sales expected in each quarter of 2020.


1. Cash receipts from sales Quarters
Dec. 31, 2020 1 2 3 4
Cash sales $2,500
1st-quarter sales × 25%
Received on account from: $10,000 × 25%
Quarter 4, 2019 1,350
All of 4th quarter 2019’s A/R

balance will be collected in 1st
quarter of 2020


Dec. 31, 2020 1 2 3 4
Cash sales $2,500
Received on account from:
Quarter 4, 2019 1,350

Quarter 1, 2020 6,750
90% of this quarter’s credit sales


Dec. 31, 2020 1 2 3 4
Cash sales $2,500 $3,000 25% of 2nd
Received on account from quarter’s sales
Q4, 2019 1,350 Remainder of 1st

quarter’s credit
Q1, 2020 6,750 750
sales are collected
Q2, 2020 8,100 along with 90% of
Q3, 2020 2nd quarter’s credit
Q4, 2020 _ sales
Total cash receipts $10,600


Dec. 31, 2020 1 2 3 4
Cash sales $2,500 $3,000 $3,750 $5,000
Received on acc. from
Q4, 2019 1,350
Q1, 2020 6,750a 750b
Q2, 2020 8,100c 900d
Q3, 2020 10,125e 1,125f
Q4, 2020 _ _ _ 13,500g
Total cash receipts $10,600 $11,850 $14,775 $19,625
Cash Budget:
Cash Disbursements
• The cash disbursements section 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).
• Just as sources of cash may require a schedule
of cash collections on accounts receivable to
calculate cash expected from credit sales, the
disbursements section may require care in
handling payments on account.

CORNERSTONE 9.12
Determining Cash Payments on Accounts Payable

Information:
• All raw materials purchases on account
• 80 percent paid for in the quarter of purchase
• 20 percent paid for in the following quarter
• Quarter 4 2019 purchases, $5,000

CORNERSTONE 9.12

• Expected raw material purchases for 2020
(Cornerstones 9.4):
• Quarter 1, $4,492
• Quarter 2, $5,176
• Quarter 3, $6,480
• Quarter 4, $6,904
Required:
Prepare a schedule showing anticipated payments
for accounts payable for materials.


Cash payment on A/P Quarter
Source 1 2 3 4
Q4, 2019 1,000a
Q1, 2020 3,594b 898c
Q2, 2020 4,141d 1,035e
Q3, 2020 5,184f 1,296g
Q4, 2020 _ _ _ 5,523h
Total cash payments $4,594 $5,039 $6,219 $6,819

Cash Budget:
Cash Excess or Deficiency
• Some companies expand the basic cash budget
format by adding lines to show any borrowing
or repayment necessary to achieve a minimum
desired cash amount.
• When this is done, the preliminary ending cash
balance is called cash excess or deficiency.
• The cash excess or deficiency line is compared
to the minimum cash balance (or lowest
amount of cash acceptable as noted by
company policy).

Cash Budget:
Cash Excess or Deficiency
• If a cash deficiency exists with less cash on
hand than is needed, the company usually
obtains a short-term loan.
• A cash excess is usually used to repay loans
or used to make temporary investments.

Cash Budget: Borrowings and
Repayments, Ending Cash Balance
• Borrowings and repayments: If a company
converts its preliminary cash balance line to
a cash excess (deficiency) line, it may be
borrowing or repaying money. 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.

Cash Budget: Borrowings and
Repayments, Ending Cash Balance
• Ending cash balance: The last line of the cash
budget is the ending cash balance.
• This is 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.

CORNERSTONE 9.13
Preparing a Cash Budget

Information:
• Refer to Cornerstones 9.5, 9.6, 9.9, 9.10, 9.11,
and 9.12.
• Refer to all previous budgets and the following
specific details:
• A $1,000 minimum cash balance is required for the end of
each quarter.
• Money can be borrowed and repaid in multiples of $1,000.

CORNERSTONE 9.13

• Interest is 12 percent 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.

CORNERSTONE 9.13

• Budgeted per quarter depreciation is $540 for
overhead and $150 for selling and administrative
expenses.
• The capital budget for 2020 revealed plans to
purchase additional screen-printing equipment.
The cash outlay for the equipment, $6,500, will
take place in Q1. The acquisition of the equipment
is to be financed with operating cash,
supplementing it with short-term loans as
necessary.

CORNERSTONE 9.13

• Corporate income taxes are $3,068 and will be
paid at the end of the fourth quarter
(Cornerstone 9.9).
• Beginning cash balance equals $5,200.
• All amounts in the budget are to be rounded to
the nearest dollar.
Required:
Prepare a cash budget for Moose Patties Inc.


Moose Patties Inc. Quarter
Cash Budget
For the Year Ending December 31, 2020 1 2 3 4 Year
Begin. cash balance $ 5,200 Calculated in
Cash sales and 10,600 Cornerstone 9.11
collect. on account:
Total cash available $15,800
Less disbursements:
Calculated in
Payments for:
Cornerstone 9.12
Raw materials $(4,594)
Direct labour (1,463) Calculated in
Cornerstone 9.5


Moose Patties Inc.
Cash Budget
Quarter
(cont’d) 1 2 3 4 Year
Begin. cash balance $ 5,200 Budgeted overhead minus
Cash sales and collect. 10,600 $540 depreciation per quarter.
on account: Depreciation is removed
Total cash available $15,800 because it does not involve a
Less disbursements: cash disbursement.
Payments for:
Direct labour (1,463)
Budgeted selling and
Overhead (1,741) administrative expenses minus
Selling & admin. (1,670) $150 depreciation per quarter

Moose Patties Inc.
Cash Budget
Quarter
Sell. & admin. (1,670)
Income taxes will be paid
Income taxes —
only in the 4th quarter.
Equipment (6,500) Equipment will be purchased
Total $(15,968) only in the 1st quarter.
disbursements
Excess of cash $ (168)
available over Cash available – Cash needs
needs


Moose Patties Inc.
Cash Budget
(cont’d) Quarter
1 2 3 4 Year
Sell. & admin. (1,670)
Income taxes —
Equipment (6,500)
Total disbursements $(15,968)
Excess of cash $ (168) Moose Patties Inc. must borrow
available over needs $1,168 to meet the minimum
Financing: ending cash balance of $1,000.
Borrowings 1,168
Repayments —


Moose Patties Inc.
Cash Budget
Quarter
(cont’d)
1 2 3 4 Year
Financing:
Borrowings 1,168
Repayments —
Interest —
Total financing 1,168
Ending cash $1,000
balance


Moose Patties Inc.
Cash Budget Quarter
Begin. cash bal. $ 5,200 $ 1,000
Cash sales and coll. 10,600 1st quarter’s ending cash
on account: balance is 2nd quarter’s
Total cash avail. $15,800 beginning balance
Less disbursements
Payments for:
Direct labour (1,463)
Overhead (1,741)
Selling and (1,670)
9-98
administrative Copyright © 2022 Cengage Canada

Moose Patties Inc.
Cash Budget Quarter
Begin. cash bal. $ 5,200 $ 1,000
Cash sales and coll. 10,600 11,850
on account:
Total cash avail. $15,800 $12,850
Less disbursements
Payments for:
Raw materials $(4,594) $(5,039)
Direct labour (1,463) (1,739)
Overhead (1,741) (1,861)
Selling and (1,670) (1,790)
9-99
administrative
Copyright © 2022 Cengage Canada

Moose Patties Inc.
Cash Budget
Quarter
Sell. & admin. (1,670) (1,790)
Income taxes — —
Equipment (6,500) —
Total $(15,968) $(10,429)
disbursements
Excess of cash $(168) $ 2,421
available over Excess cash is used to
needs repay $1,168 borrowed
Financing: at end of Q1.
Borrowings 1,168 —
Repayments — (1,168)

Moose Patties Inc.
Cash Budget
Quarter
(cont’d)
1 2 3 4 Year
Financing:
Borrowings 1,168 —
Repayments — (1,168)
Interest** — (70)
Total financing 1,168 (1,238)
Ending cash $1,000 $1,183
balance


Moose Patties Inc.
Cash Budget Quarter
Begin. cash bal. $ 5,200 $ 1,000 $ 1,183
Cash sales and coll. 10,600 11,850 14,775
on account:
Total cash avail. $15,800 $12,850 $15,958
Less disbursements
Payments for:
Raw materials $(4,594) $(5,039) $(6,219)
Direct labour (1,463) (1,739) (2,208)
Overhead (1,741) (1,861) (2,065)
Selling and (1,670) (1,790) (2,420)
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administrative Copyright © 2022 Cengage Canada

Moose Patties Inc.
Cash Budget Quarter
Sell. & admin. (1,670) (1,790) (2,420)
Income taxes — — —
Equipment (6,500) — —
Total $(15,968) $(10,429) $(12,912)
disbursements
Excess of cash $ (168) $ 2,421 $ 3,046
available over There is enough
needs cash, so none is
Financing: borrowed.
Borrowings 1,168 — —
Repayments — (1,168) —

Moose Patties Inc.
Cash Budget
(cont’d) Quarter
1 2 3 4 Year
Financing:
Borrowings 1,168 — —
Repayments — (1,168) —
Interest — (70) —
Total financing 1,168 (1,238) —
Ending cash $1,000 $1,183 $3,046
balance


Moose Patties Inc.
Cash Budget
Quarter
Begin. cash bal. $ 5,200 $ 1,000 $ 1,183 $ 3,046
Cash sales and coll. 10,600 11,850 14,775 19,625
on account:
Total cash avail. $15,800 $12,850 $15,958 $22,671
Less disbursements
Payments for:
Raw materials $(4,594) $(5,039) $(6,219) $(6,819)
Direct labour (1,463) (1,739) (2,208) (2,484)
Overhead (1,741) (1,861) (2,065) (2,185)
Selling and (1,670) (1,790) (2,420) (2,170)
9-105 administrative Copyright © 2022 Cengage Canada

Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2020 Quarter
Sell. & Admin. (1,670) (1,790) (2,420) (2,170)
Income Taxes — — — (3,068)
Equipment (6,500) — — —
Total $(15,968) $(10,429) $(12,912) $(16,726)
Disbursements
Excess of Cash $ (168) $ 2,421 $ 3,046 $ 5,945
Available over
Needs
Financing:
Borrowings 1,168 — — —
Repayments — (1,168) — —

Moose Patties Inc.
Cash Budget
(cont’d)
1 2 3 4 Year
Financing:
Borrowings 1,168 — — —
Repayments — (1,168) — —
Interest — (70) — —
Total financing 1,168 (1,238) — —
Ending cash $1,000 $1,183 $3,046 $5,945

balance


Moose Patties Inc.
Cash Budget
(cont’d)
1 2 3 4 Year
Begin. cash bal. $ 5,200 $ 1,000 $ 1,183 $ 3,046 $ 5,200
Cash sales and coll. 10,600 11,850 14,775 19,625 56,850
on account:
Total cash avail. $15,800 $12,850 $15,958 $22,671 $62,050
Less disbursements
Payments for:
Raw materials $(4,594) $(5,039) $(6,219) $(6,819) (22,671)
Direct labour (1,463) (1,739) (2,208) (2,484) (7,894)
Overhead (1,741) (1,861) (2,065) (2,185) (7,852)
Selling and (1,670) (1,790) (2,420) (2,170) (8,050)
administrative

Moose Patties Inc.
Cash Budget
(cont’d)
1 2 3 4 Year
Sell. & admin. (1,670) (1,790) (2,420) (2,170) (8,050)
Income taxes — — — (3,068) (3,068)
Equipment (6,500) — — — (6,500)
Total $(15,968) $(10,429) $(12,912) $(16,726) (56,035)
disbursements
Excess of cash $ (168) $ 2,421 $ 3,046 $ 5,945 6,015
available over
needs
Financing:
Borrowings 1,168 — — — 1,168
Repayments — (1,168) — — (1,168)

Moose Patties Inc.
Cash Budget
(cont’d) Quarter
1 2 3 4 Year
Financing:
Borrowings 1,168 — — — 1,168
Repayments — (1,168) — — (1,168)
Interest — (70) — — (70)
Total financing 1,168 (1,238) — — (70)
Ending cash $1,000 $1,183 $3,046 $5,945 $5,945
balance

Budgeted Balance Sheet
• The budgeted balance sheet depends on

information contained in the current balance
sheet and in the other budgets in the master
budget.
• Explanations for the budgeted figures are
typically provided in the footnotes.

• Information from last year’s balance sheet:
Moose Patties Inc.
Balance Sheet
December 31, 2019
Assets
Current assets:
Cash $5,200
Accounts receivable 1,350
Raw materials inventory 252
Finished goods inventory 1,251
Total current assets $ 8,053
Assets (cont’d)
Property, plant, and equipment (PP&E):
Land $ 1,100
Building and equipment 30,000
Accumulated depreciation (5,000)
Total PP&E 26,100
Total assets $34,153

Liabilities and Shareholder’s Equity
Current liabilities:
Accounts payable $1,000
Shareholder’s equity:
Retained earnings 33,153
Total shareholder’s equity 33,153
Total liabilities and shareholder’s $34,153
equity

Moose Patties Inc.
December 31, 2020
Assets
Current assets:
Cash $ 5,945a
Accounts receivable 1,500b
Raw materials inventory 424c
Finished goods inventory 1,426d
Total current assets $ 9,295

Assets (cont’d)
Property, plant, and equipment (PP&E):
Land $ 1,100e
Building and equipment 36,500f
Accumulated depreciation (7,760)g
Total PP&E 29,840
Total assets $39,135

Liabilities and Shareholder’s Equity
Current liabilities:
Accounts payable $1,381h
Shareholder’s equity:
Retained earnings 37,754i
Total liabilities and shareholder’s $39,135
equity

Using Budgets for Performance
Evaluation
• Budgets are often used to judge the
performance of managers.
• Bonuses, salary increases, and promotions
are all affected by a manager’s ability to
achieve or beat budgeted goals.
• Positive behaviour occurs when the goals of
each manager are aligned with the goals of
the organization and each manager has the
drive to achieve them.

Using Budgets for Performance
Evaluation
• The alignment of managerial and
organizational goals is often referred to as
goal congruence.
• If the budget is improperly administered,
subordinate managers may subvert the
organization’s goals.
• Dysfunctional behaviour is individual
behaviour that is in basic conflict with the
goals of the organization.

Positive Behaviour
• Key features that promote a reasonable

degree of positive behaviour include
• frequent feedback on performance
• monetary and nonmonetary incentives
• participative budgeting
• realistic standards
• controllability of costs
• multiple measures of performance

Frequent Feedback on
Performance
• Managers need to know how they are doing
as the year progresses.
• Frequent, timely performance reports allow
managers to know how successful their
efforts have been, to take corrective actions,
and to change plans as necessary.

Monetary and Nonmonetary
Incentives
• Incentives are the means an organization
uses to influence a manager to exert effort to
achieve an organization’s goal.
• Traditional organizational theory assumes
that employees are primarily motivated by
monetary rewards, they resist work, and
they are inefficient and wasteful.

Monetary and Nonmonetary
Incentives
• Monetary incentives are used to control a
manager’s tendency to shirk and waste
resources by relating budgetary performance
to salary increases, bonuses, and
promotions.
• Nonmonetary incentives, including job
enrichment, increased responsibility and
autonomy, and recognition programs, can be
used to enhance a budgetary control system.

Participative Budgeting
• Rather than imposing budgets on

subordinate managers, participative
budgeting allows subordinate managers
considerable say in how the budgets are
established.
• The increased responsibility and challenge
inherent in the process provide
nonmonetary incentives that lead to a higher
level of performance.

Participative Budgeting
• However, participative budgeting has three

potential problems:
• Setting standards that are either too high or too
low
• Building slack into the budget (often referred to
as padding the budget)
• Pseudoparticipation

Standard Setting
• Some managers may tend to set the budget

either too loose or too tight.
• Since budgeted goals tend to become the
manager’s goals when participation is
allowed, making this mistake in setting the
budget can result in decreased performance
levels.
• The trick is to get managers in a participative
setting to set high but achievable goals.

Budgetary Slack
• The second problem with participative

budgeting is the opportunity for managers to
build slack into the budget.
• Budgetary slack (or padding the budget)
exists when a manager deliberately
underestimates revenues or overestimates
costs in an effort to make the future period
appear less attractive in the budget than
they think it will be in reality.

Budgetary Slack
• Either approach increases the likelihood that

the manager will achieve the budget and
consequently reduces the risk that the
manager faces.
• The act of padding the budget is
questionable when considering what is
viewed as ethical professional practice.
• It it not communicating information fairly
and objectively and constitutes a violation of
the credibility standard.

Pseudoparticipation
• The third problem with participation occurs

when top management assumes total
control of the budgeting process, seeking
only superficial participation from lower-
level managers.
• This practice is termed pseudoparticipation.
• Top management is simply obtaining formal
acceptance of the budget from subordinate
managers, not seeking real input.

Realistic Standards
• Budgets should reflect operating realities,

including the following:
• Actual levels of activity: Flexible budgets are
used to ensure that budgeted costs can be
realistically compared with costs for actual levels
of activity.
• Seasonal variations: Interim budgets should
reflect seasonal effects. Toys “R” Us, for
example, would expect much higher sales in the
quarter that includes Christmas than in other
quarters.
Realistic Standards
• Efficiencies: Budgetary cuts should be based on

planned increases in efficiency and not simply
arbitrary across-the-board reductions. Across-
the-board cuts without any formal evaluation
may impair the ability of some units to carry out
their missions.
• General economic trends: General economic
conditions also need to be considered.
Budgeting for a significant increase in sales
when a recession is projected is not only foolish
but also potentially dangerous.

Controllability of Costs
• Ideally, managers are held accountable only

for costs that they can control.
• Controllable costs are costs whose level a
manager can influence.
• If noncontrollable costs are put in the
budgets of subordinate managers to help
them understand that these costs also need
to be covered, then they should be
separated from controllable costs and
labeled as noncontrollable.

Multiple Measures of Performance
• Often, organizations make the mistake of

using budgets as their only measure of
managerial performance.
• While financial measures of performance are
important, overemphasis can lead to a form
of dysfunctional behaviour called milking the
firm or myopia.

Multiple Measures of Performance
• Myopic behaviour occurs when a manager

takes actions that improve budgetary
performance in the short run but bring long-
run harm to the firm.
• Budgetary measures alone cannot prevent
myopic behaviour.

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POWERPOINT PRESENTATION TO

9-1 Copyright © 2022 Cengage Canada

9-2 Copyright © 2022 Cengage Canada

9-3 Copyright © 2022 Cengage Canada

3.1.1 Evaluates management information requirements

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• All businesses should prepare budgets.

9-5 Copyright © 2022 Cengage Canada

9-6 Copyright © 2022 Cengage Canada

• Planning and control are linked.

9-7 Copyright © 2022 Cengage Canada

• Before preparing a budget, an organization

9-8 Copyright © 2022 Cengage Canada

9-9 Copyright © 2022 Cengage Canada

A budgetary system gives an organization

Standards for Improved

9-11 Copyright © 2022 Cengage Canada

• Some organizations have developed a

January February December January

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9-14 Copyright © 2022 Cengage Canada

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Operating • Describes the income-

• Details the inflows and

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• The operating budget consists of a budgeted

9-19 Copyright © 2022 Cengage Canada

• The sales budget is approved by the budget

9-20 Copyright © 2022 Cengage Canada

Preparing a Sales Budget

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Preparing a Sales Budget

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• The production budget tells how many units

Preparing a Production Budget

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Preparing a Production Budget

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Preparing a Production Budget

20% of 2nd 20% of 3rd 20% of the next year’s

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Preparing a Production Budget

Preparing a Production Budget

9-29 Copyright © 2022 Cengage Canada

Preparing a Merchandise Purchasing Budget

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Preparing a Merchandise Purchasing Budget

9-31 Copyright © 2022 Cengage Canada

Preparing a Merchandise Purchasing Budget

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Preparing a Merchandise Purchasing Budget

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• After the production budget is completed,

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Preparing a Direct Materials Purchases Budget

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Preparing a Direct Materials Purchases Budget

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Direct Materials Purchases Budget Example

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Direct Materials Purchases Budget Example

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