Chapter 9

Financial Planning
and Analysis: The
Master Budget

McGraw-Hill/Irwin

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective 1

9-2

Financial Planning and
Analysis (FP&A) Systems
A financial planning and
analysis (FP&A) system
helps managers assess
the company’s future and
know if they are reaching
their performance goals.
A complete FP&A system
includes subsystems for
(1) planning, (2) measuring
and recording results, and
(3) evaluating performance.

The planning component
of the FP&A system is
called the master budget.
It is intended to help
ensure that plans are
consistent and yield a
result that makes sense
for the organization.

9-3

Learning Objective 2

9-4

Purposes of Budgeting Systems
Budget

1. Planning
a detailed plan, expressed
in quantitative terms, that 2. Facilitating
Communication and
specifies how resources
will be acquired and used
Coordination
during a specified period of 3. Allocating Resources
time.
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives
9-5

Production Master Budget Detail Budget 9-6 .Types of Budgets Detail Budget Detail Budget Covering all phases of a company’s operations.

Types of Budgets Income Statement Budgeted Financial Statements Balance Sheet Statement of Cash Flows 9-7 .

Long Range Budgets Continuous or 2011 Rolling Budget2012 2013 2014 This budget is usually a twelve-month budget that rolls forward one month as the current month is completed. Financial budgets with financial resource acquisitions. 9-8 .Types of Budgets Capital budgets with acquisitions that normally cover several years.

Learning Objective 3 9-9 .

Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods Ending Inventory Budget Direct Materials Budget Direct Labor Budget Overhead Budget Direct Materials Cash Budget Selling and Administrative Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9-10 .

Learning Objective 4 9-11 .

Activity-Based Costing versus ActivityBased Budgeting Resources Resources Activity-Based Costing (ABC) Activities Cost objects: products and services produced. 9-12 . Activities Activity-Based Budgeting (ABB) Forecast of products and services to be produced and customers served. and customers served.

Learning Objectives 5 & 6 9-13 .

Budgeted sales for the next five months are: April May June July August 20. 9-14 . Inc.Sales Budget Breakers.000 units.000 units 50. The selling price is $10 per unit. is preparing budgets for the quarter ending June 30.000 units 25.000 units 30.000 units 15.

000 Selling price per unit $ 10 Total Revenue $ 200.000 $ 10 $ 300.000.000 9-15 .000 $ 10 $ 500.000 Quarter 30.000 100.Sales Budget April Budgeted sales (units) 20.000 May June 50.000 $ 10 $ 1.

Let’s prepare the production budget. Inc. wants ending inventory to be equal to 20% of the following month’s budgeted sales in units. 9-16 . 4. On March 31.000 units were on hand.Production Budget The management of Breakers.

inventory Total needed Less: beg.000 105.000 month 4.000beginning 5.From sales budget Production Budget May sales Sales in units Add: desired end.000 6.000 Ending inventory becomes 6.000 46.000 March 31 ending inventory 9-17 .000 35.000 inventory the next 56.000 50.000 101. inventory Units to be produced April 20.000 10.000 units Desired percent 20% May June Quarter Desired inventory 10.000 26.000 30.000 10.000 5.000 29.000 30.000 4.000 100.000 units 50.

40 per pound. Material cost $.Direct-Material Budget  At Breakers. five pounds of material are required per unit of product.  On March 31. 13.000 pounds of material are on hand. Let’s prepare the direct materials budget. 9-18 .  Management wants materials on hand at the end of each month equal to 10% of the following month’s production.

000 5 505.000 May 46.500 516.500 13.000 140.000 Quarter 101.000 5 145.000 23.500 142.500 11.000 503.000 14.500 156.000 23.500 244.From our production budget Direct-Material Budget Production in units Materials per unit Production needs Add: desired ending inventory Total needed Less: beginning inventory Materials to be purchased April 26.000 5 230.500 13.000 June 29.500 11.500 10% of the following month’s production March 31 inventory 9-19 .000 221.000 14.000 153.000 5 130.

500 Quarter 101.000 purchased 140.000 230.000 5 505.500 9-20 .000 11.000 Add: desired ending inventory 23.000 3.500 11.000 46.500 156.000 221.000 14.Direct-Material Budget July Production April 25.000 5 Less:Production beginning inventory needs 130.000 May Sales in units Add: Production desired ending inventory26.500 Less: beginning June Ending Inventory inventory 13.500 Total units needed 115.000 503.500 516.000 5 145.000 Materials toproduction be Materials per unit 5142.500 Total needed 153.500 13.500 July in units 23.000 244.000 Production in units 23.000 14.000 23.000 Inventory percentage 10% June desired ending inventory 11.000 5.000 June 29.000 in units TotalMaterials units needed per unit 528.

 The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week.Direct-Labor Budget  At Breakers. Let’s prepare the direct labor budget.  For the next three months.  In exchange for the “no layoff” policy. the direct labor workforce will be paid for a minimum of 3. workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). each unit of product requires 0. 9-21 .000 hours per month.1 hours of direct labor.

000 0.600 Production in units Direct labor hours Labor hours required Guaranteed labor hours 3.800 3.000 Wage rate $ 8 Total direct labot cost $ 24.600 $ 8 $ 84.Direct-Labor Budget April 26.000 From our production budget May 46.000 10. 9-22 .600 $ 8 $ 36.800 This is the greater of labor hours required or labor hours guaranteed.10 2.10 10.000 4.000 Labor hours paid 3.000 $ 8 $ 24.000 0.600 June 29.10 2.900 Quarter 101.000 0.100 3.10 4.000 0.000 3.

800 9.600 8. April Indirect labor Indirect material Utilities Rent Insurance Maintenance $ $ 17.800 39.000 Quarter $ 61.000 4.Overhead Budget Here is Breakers’ Overhead Budget for the quarter.400 25.200 59.300 5.000 June $ $ 17.200 17.000 9-23 .500 7.300 5.200 13.500 12.600 5.900 17.900 8.200 13.800 8.400 13.300 5.900 28.000 May $ $ 26.800 $ 191.800 8.400 76.200 56.

 Fixed selling and administrative expenses are $70.000 per month.000 fixed expenses include $10. variable selling and administrative expenses are $0.50 per unit sold.  The $70.000 in depreciation expense that does not require a cash outflow for the month.Selling and Administrative Expense Budget  At Breakers. 9-24 .

000 $ 0.000 June 30.000 85.000 10.000 From our Sales budget 9-25 .000 80.000 $ 0.50 $ 50.000 260.000 $ 70.Selling and Administrative Expense Budget Sales in units Variable S&A rate Variable expense Fixed S&A expense Total expense Less: noncash expenses Cash disbursements April 20.000 95.000 $ 85.000 $ 75.000 May 50.000 30.000 Quarter 100.50 $ 10.000 210.000 70.000 70.50 $ 15.000 $ 0.50 $ 25.000 10.000 70.000 $ 230.000 $ 0.000 10.

all sales are on account. 25% collected in the month following the sale. 9-26 .000 will be collected in full.  The March 31 accounts receivable balance of $30.Cash Receipts Budget  At Breakers. 5% is uncollected.  The company’s collection pattern is: 70% collected in the month of sale.

000 50.3/31 April sales 70% x $200.000 25% x $200.000 $ 400.000 125.000 May sales 70% x $500.000 9-27 .000 $ 905.000 140.000 $ 170.000 May June 140.000 $ 125.000 350.000 210.000 $ 335.000 June sales 70% x $300.000 25% x $500. .000 Quarter $ 30.000 Total cash collections April $ 30.000 210.000 $ 50.000 350.Cash Receipts Budget Accounts rec.

9-28 .40 per pound for its materials.  No discounts are available. the other half is paid in the following month.  The March 31 accounts payable balance is $12.000.  One-half of a month’s purchases are paid for in the month of purchase.Cash Disbursement Budget  Breakers pays $0.

3/31 April purchases 50% x $56.000 May purchases 50% x $88.000 28.300 44.300 $ 40.000 $ 28.400 $ 72.700 $ 185.000 44. × $.000 50% x $56.400 28.000 140.40/lb.000 $ 72.000 $ 44.800 Total cash payments for materials April $ 12. = $56.300 28.600 June purchases 50% x $56.Cash Disbursement Budget Accounts pay.300 44.000 lbs.000 9-29 .000 28.300 Quarter $ 12.000 May June 28.600 50% x $88.

000.  Maintains a minimum cash balance of $30.000 in April.  Borrows and repays loans on the last day of the month.000.  Purchases $143.300 in June paid in cash.Cash Disbursement Budget Breakers:  Maintains a 12% open line of credit for $75. 9-30 .  Pays a cash dividend of $25.000.  Has an April 1 cash balance of $40.700 of equipment in May and $48.

000 Excess (deficiency) of Cash available over disbursements $ (5.000 Add: cash collections 170.000 Selling and admin.000 Less: disbursements Materials 40.000.From our Cash Receipts Budget (Collections and Disbursements) Cash Budget April Beginning cash balance $ 40.000 Equipment purchase Dividends 25.000 Total cash available 210. Breakers must borrow $35. 9-31 .000 Direct labor 24.000 Mfg. 70.000 on its line of credit.000) May June Quarter From our Cash Disbursements Budget From our Direct Labor Budget From our Overhead Budget From our Selling and Administrative Expense Budget To maintain a cash balance of $30.000 Total disbursements 215. overhead 56.

70.000 Excess (deficiency) of Cash available over disbursements $ (5.000 430.Cash Budget (Collections and Disbursements) April Beginning cash balance $ 40.000 Selling and admin.200 9-32 .000 Less: disbursements Materials 40.000 143.000 Equipment purchase Dividends 25.000 Add: cash collections 170. $ 16.000) May $ 30.800 76.300 36.000 Mfg.000 Total disbursements 215.000.000 Total cash available 210.000 Direct labor 24.000 85.700 413.800 to maintain a cash balance of $30. overhead 56.000 400.800 June Quarter Breakers must borrow an addition $13.000 72.

000 48.000 the $48.000 Selling and admin.000 59.000 76.000 Total cash available 210.000 $ 86.300 Direct labor 24.700 24.800 Excess (deficiency) of Cash available over disbursements $ (5.000 36.000) $ 16.700 Dividends 25.300 279. Breakers$ 30.000 Equipment purchase 143.000 85.000 413. overhead 56.000 75.800 Mfg.000 335.000 Quarter 72. 40.200 June $ 30.000 365.000 9-33 .000 to repay 400.000 430.000 Total disbursements 215.000 At thecash endbalance of June. 70.800 loan plus interest Less: disbursements at 12%.Cash Budget (Collections and Disbursements) April May Beginning $ 40.000 Materials 72.000 Add: cash collections has enough cash170.

000 907.000 Quarter $ 40.700 413.000 Add: cash collections 170.000 335.000 85.000 Total cash available 210.000 400.000 230. 70.000 48.000 June $ 30.000 Less: disbursements Materials 40.Cash Budget (Collections and Disbursements) April Beginning cash balance $ 40.000) May $ 30.200 9-34 .000 905.000 Equipment purchase Dividends 25.000 Excess (deficiency) of Cash available over disbursements $ (5.000 Total disbursements 215.000 75.000 Selling and admin.000 $ 37.800 76. overhead 56.000 Direct labor 24.000 84.800 191.000 Mfg.000 192.000 185.000 945.300 279.300 36.200 $ 86.800 $ 16.000 72.000 59.000 430.000 143.000 25.700 24.000 365.800 72.

362 Borrowing $35.800) (838) (838) $ 36.800 (48.Ending cash balance for April is the beginning May balance.000 (48.800) (838) (49.200 35.800 13.000) $ 16.000 35.000 $ 30.638) $ 36.000 13.000 $13.362 48.000 $ 37.200 $ 86.800 Monthly Interest Rate × 1% × 1% × × Months Outstanding 2 1 Interest Expense = $700 = 138 $ 838 9-35 . Cash Budget (Financing and Repayment) Excess (deficiency) of Cash available over disbursements Financing: Borrowing Repayments Interest Total financing Ending cash balance Interest Rate 12% / 12 = 1% 12% / 12 = 1% April May June Quarter $ (5.800 $ 30.

600 4.400 $ 211.200 Add: Materials purchases 56.800 191.000 Material available for use 61.000 24.000 84.600 202.000 59.000 $ 133.400 Quarter $ 5.800 76. material inventory 9.200 Cost of goods manufactured $ 119.200 Deduct: End.400 206.600 58.800 16.200 88.200 Direct material used 52.800 Deduct: End.Work-in-process inventory 16.000 204.000 141.000 Manufacturing overhead 56.800 3.600 4.000 Add: Beg.000 Total manufacturing costs 132. Work-in-process inventory 3.000 9.000 Direct labor 24.400 17.Cost of Goods Manufactured April Direct material: Beg.600 17.600 May $ 9.400 150.800 92.000 36.200 201.000 9.000 477.800 5.800 56.800 62.800 Subtotal 135.600 9-36 .200 221.600 June $ 5.800 481.600 97.material inventory $ 5.000 $ 464.

Cost of Goods Sold Cost of goods manufactured Add: Beg.600 $ 211.600 46. finished-goods inventory Cost of goods available for sale Deduct: End.600 $ 18.000 23.000 483.000 $ 460.000 27.400 $ 464.400 161.600 27.000 $ 230.000 $ June Quarter 133.000 138.000 257. finished-goods inventory Cost of goods sold April May $ 119.000 23.000 9-37 .400 46.600 $ 92.600 18.000 138.

000 × $10) Cost of goods sold Gross margin Operating expenses: Selling and admin.000 838 $ 260. Budgeted Income Statement For the Three Months Ended June 30 Revenue (100.000 540.000.162 9-38 .Budgeted Income Statement Breakers.000 $ 260.838 279. expenses Interest expense Total operating expenses Net income $ 1. Inc.000 460.

000) 35.000 213.800) 10.000 $ (40.700) $ (25.000) (48.000) (838) (190.000) (75.362 $ 36.000 - 103.800) $ (25.000 $ 30. beginning Balance in cash.362 9-39 .000) (70.700) .000) (84.000) 48.000) $ - 129.000 $ Total cash payments Net cash flow from operating activities Cash flows from investing activities: Purchase of equipment $ Net cash used by investing activities Cash flows from financing activities: Payment of dividends Principle of bank loan Repayment of bank loan $ Net cash provided by financing activities $ Net increase in cash Balance in cash.000) $ (10.000 $ 36.900 $ (143.000 (3.800 (48.100) (231.000) (85.000) (838) (185.800) (25.638) 40.638) (20.000) - (72.462 $ 905.000) (230.300) (192.362 $ 30.000 $ 335.362 (48. end of month June Quarter 400.$ 30.800) (191.000) 13.300) $ (192.Budgeted Statement of Cash Flows April Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers of raw material For direct labor For manufacturing-overhead expenditures For selling and administrative expenses For interest May $ 170.000 .$ (143.000) (59.000 $ 13.000) (56.700) (24.800 - (48.000) - (72.800) (76.300) (36.000) $ 40.000 $ 30.000) (24.000 6.800 $ (48.000) (270.538) (691.

$148.000 • Common stock .000 • Retained earnings .400 9-40 .Budgeted Balance Sheet Breakers reports the following account balances on March 31 prior to preparing its budgeted financial statements for June 30: • Land .000 • Building (net) .$46.$50.$217.

500 lbs. Inc.40 per lb.60 per unit. 50% of June purchases of $56.962 28.962 50.000 11.400 217.400 279.000 545. Budgeted Balance Sheet June 30 Current assets Cash Accounts receivable Raw materials inventory Work-in-process inventory Finished goods inventory Total current assets Property and equipment Land Building Equipment Total property and equipment Total assets Accounts payable Common stock Retained earnings Total liabilities and equities $ $ $ $ 36.000 23.362 75.25%of June sales of $300.600 17.000 148.800 Beginning balance Add: net income Deduct: dividends Ending balance $ 46.000 300. 5.962 9-41 .562 545.000 390.000 192.162 (25.562 Breakers.000 units at $4. at $.000 4.000 155.000) $300.

Learning Objective 7 9-42 .

Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows 9-43 . it Budget Budget Budget Budget Direct Materials becomes a financial planning model that can be used to answer “what if” Cash Budget questions about unknown variables.Sales of Services or Goods Ending Inventory Budget Production Budget Work in Process and Finished Goods When the interactions of the elements Ending Direct budget Directare expressedSelling of the master as and Overhead Inventory Materials Labor Administrative Budget a set of mathematical relations.

Learning Objective 8 9-44 .

.Budget Administration The Budget Committee is a standing committee responsible for . overall policy matters relating to the budget. .  9-45 .  coordinating the preparation of the budget.

High inflation rates in some foreign countries. Fluctuations in foreign currency exchange rates. 9-46 . 2. 1. 3. Differences in local economic conditions.International Aspects of Budgeting Firms with international operations face special problems when preparing a budget.

Learning Objective 9 9-47 .

” 9-48 .Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.

Participative Budgeting Top Management Middle Management Supervisor Supervisor Middle Management Supervisor Supervisor Flow of Budget Data 9-49 .

End of Chapter 9 9-50 .