TOPIC 2: ACCOUNTING 202:

MASTER BUDGET (PROFIT PLAN) STRATEGIC BUSINESS ANALYSIS

MASTER BUDGET
Consists of a number of separate but interdependent budgets that formally lay out
the company’s sales, production, financial goals.
It culminates in a cash budget, a budgeted income statement, and a budgeted
balance sheet.
IMPORTANCE OF MASTER BUDGET IN A
COMPANY’S OPERATIONS
It is used as a tool for financial planning and allows everyone in the organization to
manage financial situations more effectively and efficiently.
Allows the company management to see how the actions of different departments
feed throughout the organization.
Allows the company to realistically project future cash flows which would help in
getting certain types of financing.
It maps out budget targets and can be used to identify areas of a business
operations which need to be adjusted in order to bring them in line with the budget.
 COMPONENTS OF A MASTER BUDGET
Operating Budget
SALES BUDGET Comprise of the individual
budgets that result in the
PRODUCTION BUDGET preparation of the budgeted
income statement. They
DIRECT MATERIALS DIRECT LABOR MANUFACTURING establish goals for the
BUDGET BUDGET OVERHEAD BUDGET company’s sales and
SELLING AND ADMINISTRATIVE production personnel.
EXPENSE BUDGET
Financial Budget
BUDGETED INCOME STATEMENT Focuses primarily on the cash
resources needed to fund
expected operations and
CAPITAL EXPENDITURE BUDGETED BALANCE planned capital expenditures.
DIRECT LABOR BUDGET
BUDGET SHEET
PARTS OF AN OPERATING BUDGET
Sales budget Those without *
Cash collection budget * are supporting
Production budget schedules to
Direct materials budget create the
budgeted
Cash disbursements budget *
income
Direct labor budget statement (those
Manufacturing overhead budget with * are
Ending finished goods inventory budget supporting
Operating expenses (SAE) budget schedules to
create the cash
Cost of goods sold budget budget)
Budgeted income statement
PARTS OF A FINANCIAL BUDGET
Cash budget
Budgeted statement of financial position or budgeted balance sheet
Budget for capital expenditures
OPERATING BUDGET COMPONENTS
Sales budget
 The first step in the budgeting process, it is the key to the entire budgeting process. – This budget is
derived from a sales forecast, the latter of which shows potential sales for the industry and the
company’s expected share of such sales.
 It involves a consideration of various factors: general economic conditions, industry trends, market
research studies, anticipated advertising and promotion, previous market share, changes in prices, and
technological development.
 Total Sales = Expected unit sales x Unit sales
P1 P2 P3 P4 Total
Budgeted sales in units xxx xxx xxx xxx xxx
x) Unit selling price xxx xxx xxx xxx xxx
Total sales xxx xxx xxx xxx xxx
MAKING A SALES BUDGET
Midwest Products sells its products for $100 per unit. For the third quarter , it
estimates that it will sell 6000 units in July, 9,000 units in August, and 5,000 units in
September. Construct the sales budget for the third quarter.
OPERATING BUDGET COMPONENTS:
Cash collection budget
 Shows how much cash is collected (on sales) during a particular period
P1 P2 P3 P4 TOTAL
A/R beginning balance xxx xxx
Sales in P1 xxx xxx xxx
Sales in P2 xxx xxx xxx
Sales in P3 xxx xxx xxx
Sales in P4 xxx xxx
Total cash collections xxx xxx xxx xxx xxx

*assuming that sales per period is collected within the period of sale and the immediate period after the sale.
*the uncollected balance from sales in P4 will become the A/R, end in the company’s balance sheet.
MAKING A CASH COLLECTION BUDGET
Midwest Products is a wholesale distributor of leaf rakes. Thus, peak sales occur in August of
each year as shown in the company’s sales budget for the 3 rd quarter given below:

Jul Aug Sept Total

Budgeted sales (all on account) 600k 900k 500k 2,000k

From past experience, the company has learned that 20% of a month’s sales are collected in
the month of sale, another 70% are collected in the month following sale, and the remaining
10% are collected in the second month following sale. Bad debts are negligible and can be
ignored. May sales totaled P430,000 and June sales totaled P540,000.
1. Prepare a schedule of expected cash collections from sales, by month and in total, for the
3rd quarter.
2. Assume that the company will prepare a budgeted balance sheet as of September 30.
Compute the accounts receivable as of that date
OPERATING BUDGET COMPONENTS:
Inventory purchases budget (Merchandising)
 Shows the amount of goods to be purchased from suppliers during the period.
 Required Purchases = Budgeted CGS + Desired Ending merchandise inventory – Beginning
merchandise inventory

Budgeted cost of goods sold xxx

+) Desired ending merchandise inventory xxx
Total needs xxx
–) Beginning merchandise inventory xxx
Required purchases xxx
MAKING A PURCHASES BUDGET CONCEPT CHECK
(PG.294)
If a company has a beginning merchandise inventory of $50,000, a desired ending
merchandise inventory of $30,000 and a budgeted CGS of $300,000, what is the
amount of required inventory purchases?
OPERATING BUDGET COMPONENTS:
Production budget (Manufacturing)
 Shows the number of units of a product to produce to meet anticipated sales demand.
 Required Production Units = Budgeted sales units + Desired Ending Finished Goods Inventory in
units Beginning Finished Goods Inventory in units

Budgeted unit sales xxx xxx

+) Desired ending inventory of finished goods xxx
Total needs xxx
–) Beginning inventory of finished goods xxx
Required production xxx
MAKING A PRODUCTION BUDGET
Crystal Telecom has budgeted the sales (in units) of its innovative mobile phone over
the next four months as follows: July – 30,000, August – 45,000, September –
60,000, and October – 50,000. The company is now in the process of preparing a
production budget for the third quarter. Past experience has shown that end of month
finished goods inventories must equal 10% of the next month’s sales.
Prepare a production budget for the third quarter showing the number of units to be
produced each month and for the quarter in total.
OPERATING BUDGET COMPONENTS:
Direct materials budget
 Prepared after the production requirements have been computed. It details the raw materials that must be purchased to fulfill the
production budget and to provide for adequate inventories.
Required production in units of finished goods xxx
Times raw materials required per unit of finished goods xxx
Raw materials needed to meet the production schedule xxx
+) Desired ending raw materials inventory xxx
Total raw material needs xxx
–) Beginning raw materials inventory xxx
Raw materials to be purchased xxx
Times unit cost of raw materials xxx
Cost of raw materials to be purchased xxx
Cash disbursement budget
 Shows how much cash is budgeted to be spend or disbursed (for material purchases) during a particular period.
MAKING A DIRECT MATERIALS BUDGET
Micro Products Inc. has developed a very powerful electronic calculator. Each
calculator requires three small chips that cost $2 each and are purchased form an
overseas supplier. Micro Products has prepared a production budget for the
calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below:
Budgeted production, in calculators:

Year 2 Q1 60,000 Year 3 Q1 80,000

Q2 90,000
Q3 150,000
Q4 100,000
MAKING A DIRECT MATERIALS BUDGET (CONT’D)
The chip used in production of the calculator is sometimes hard to get, so it is
necessary to carry large inventories as a precaution against stockouts. For this reason,
the inventory of chips at the end of a quarter must equal 20% of the following
quarter’s production needs.
Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At
the bottom of your budget, show the dollar amount of purchases for each quarter
and for the year in total.
OPERATING BUDGET COMPONENTS:
Direct labor budget
 Shows the direct labor hours required to satisfy the production budget
 Total direct labor cost = Units to be produced x Direct labor time per unit x Direct labor cost per
hour

Required production in units xxx

x) Direct labor hour per unit xxx
Total direct labor hours needed xxx
Direct labor cost per hour xxx
Total direct labor cost xxx
MAKING A DIRECT LABOR BUDGET
The production manager of Junnen Corporation has submitted the following forecast
of units to be produced for each quarter of the upcoming fiscal year:
Q1 Q2 Q3 Q4
Units to be produced 5,000 4,400 4,500 4,900

Each unit requires 0.40 direct labor hours and direct labor hour workers are paid
$11 per hour.
REQUIREMENT 1
Construct the company’s direct labor budget for the upcoming fiscal year, assuming
that the direct labor workforce is adjusted each quarter to match the number of hours
required to produce the forecasted number of units produced.
MAKING A DIRECT LABOR BUDGET
REQUIREMENT 2:
Construct the company’ direct labor budget for the upcoming fiscal year, assuming
that the direct labor workforce is not adjusted each quarter. Instead, assume that the
company’s direct labor workforce consists of permanent employees who are
guaranteed to be paid for at least 1,800 hours of work each quarter. If the number
of required direct labor hours is less than this number, the workers are paid for 1,u00
hours anyway. Any hours worked in excess of 1,800 hours in a quarter are paid at a
rate of 1.5 times the normal hourly rate for direct labor.
OPERATING BUDGET COMPONENTS:
Manufacturing overhead budget
 Lists all costs of production other than direct materials and direct labor.
Budgeted direct labor hours xxx
x) Variable manufacturing overhead rate xxx
Variable manufacturing overhead xxx
+) Fixed manufacturing overhead xxx
Total manufacturing overhead xxx
–) Depreciation xxx
Cash disbursements for manufacturing overhead xxx

Total manufacturing overhead xxx

Divided by budgeted direct labor hours xxx
Predetermined overhead rate per year xxx
MAKING A MANUFACTURING OVERHEAD BUDGET
The direct labor budget of Krispin Corporation for the upcoming fiscal year includes
the following budgeted direct labor hours:
Q1 5,000 Q3 5,200
Q2 4,800 Q4 5,400

The company’s variable manufacturing overhead rate is $1.75 per direct labor hour
and the company’s fixed manufacturing overhead is $35,000 per quarter. The only
noncash item included in fixed manufacturing overhead is depreciation, which is
P15,000 per quarter.
Construct the company’s manufacturing overhead budget for the upcoming fiscal year.
Compute the company’s manufacturing overhead rate (including both variable and
fixed manufacturing overhead) for the upcoming fiscal year.
OPERATING BUDGET COMPONENTS:
Ending finished goods inventory budget
 Calculates the cost of finished goods inventory at the end of each budget period. Unit product cost is
computed to determined the cost of goods sold and to know how much the unsold units are worth.
 Ending finished goods inventory = Ending finished goods units x total cost per unit
MAKING AN ENDING FINISHED GOODS
INVENTORY BUDGET
Hampton Freeze Inc. estimates that it needs 3,000 cases of its product as ending
inventory. The production cost per case are as follows:
Direct materials 15 lbs @ 0.20 per pound
Direct labor 0.40 hours @ $15 per hour
MOH 0.40 hours @ $10 per hour

Construct the company’s ending finished goods inventory in dollars

OPERATING BUDGET COMPONENTS:
Operating (Selling and Administrative) expense budget
 Lists the budgeted expenses for areas other than manufacturing and in large organizations, is a
compilation of many smaller, individual budgets submitted by department heads and other persons
responsible for selling and administrative expenses.
MAKING A SELLING AND ADMINISTRATIVE
EXPENSE BUDGET
The budgeted unit sales of Haerve Company for the upcoming fiscal year are
provided below:
Q1 Q2 Q3 Q4
12,000 14,000 11,000 10,000

The company’s variable selling and administrative expenses per unit are $2.75. Fixed
selling and administrative expenses include advertising expenses of $12,000 per
quarter, executive salaries of $40,000 per quarter, and depreciation of $16,000
per quarter. In addition, the company will make insurance payments of $6,000 in the
2nd Quarter and $6,000 in the 4th Quarter. Finally, property taxes of $6,000 will
be paid in the 3rd Quarter.
Prepare the company’s selling and administrative expense budget for the upcoming
fiscal year
OPERATING BUDGET COMPONENTS:
Budgeted income statement
 Indicates the overall profitability of operations for the budget period and serves as a benchmark
against which subsequent company performance can be measured
MAKING A BUDGETED INCOME STATEMENT
Seattle Cat is the wholesale distributor of a small recreational catamaran sailboat.
Management has prepared the following summary data to use in its annual
budgeting process:
Budgeted unit sales 380
Selling price per unit $1,850
Cost per unit $1,425
Variable selling and admin expenses (per unit) $85
Fixed selling and admin expenses (per year) $105,000
Interest expense for the year $11,000
Prepare the company’s budgeted income statement using an absorption income
statement format.
FINANCIAL BUDGET COMPONENTS:
Cash budget
 Shows anticipated cash flows. This is considered as the most important financial budget because cash is
so vital. It is composed of four sections: receipts, disbursements, cash excess or deficiency, and
financing.
 Receipts
 Lists all cash inflows except from financing expected from the budget period.
 Disbursements
 Summarizes all cash payments that are planned for the budget period.
 Financing
 Beg. Cash + receipts = Total cash available – disbursements = excess (deficiency) of cash available over disbursements.
 Cash excess or deficiency
 Shows expected borrowings and repayment of the borrowed funds + interest
MAKING A CASH BUDGET
Forest Outfitters is a retailer that is preparing its budget for the upcoming fiscal year.
Management has prepared the following summary of its budgeted cash flows:
Q1 Q2 Q3 Q4
Total cash receipts $340k $670k $410k $470k
Total cash disbursements $530k $450k $430k $480k

The company’s beginning cash balance for the upcoming fiscal year will be $50,000. The
company requires a minimum cash balance of $30,000 and may borrow any amount needed
from a local bank at a quarterly interest rate of 3%. The company may borrow any amount
at the beginning of any quarter and may repay its loans, or any part of its loans, at the end
of any quarter. Interest payments are due on any principal at the time it is repaid.
Prepare the company’s cash budget for the upcoming fiscal year.
FINANCIAL BUDGET COMPONENTS:
Budgeted statement of financial position
 A projection of financial position at the end of the budget period and is also known as budgeted
balance sheet.
MAKING A BUDGETED BALANCE SHEET
The management of Academic Copy, a photocopying center located on University Avenue has
compiled the following data to use in preparing its budgeted balance sheet for next year:
Ending Balances (in $)
Cash ?
Accounts receivable 6,500
Supplies inventory 2,100
Equipment 28,000
Accumulated depreciation 9,000
Accounts payable 1,900
Common stock 4,000
Retained earnings ?
The beginning balance of retained earnings was $21,000, net income is budgeted to be $8,600,
and dividends are budgeted to be $3,500. Prepare the company’s budgeted balance sheet
SAMPLE COMPREHENSIVE PROBLEM 1
Lotte Company is preparing budgets for the second quarter ending June 30, 2013.
The budgeted sales of the company’s only product for the next five months are as
follows:

April 20,000 units June 30,000 units August 15,000

May 50,000 units July 25,000 units

The selling price is P10 per unit. All sales are on account. The company collects 70%
of these credit sales in the month of sale, 25% are collected in the month following
the sale, and the remaining 5% are uncollectible. The accounts receivable on March
31, 2013 was P30,000. All of this balance was collectible.
SAMPLE COMPREHENSIVE PROBLEM 1 (CONT’D)
The company desires to have inventory on hand at the end of each month equal to 20% of the
following month’s budgeted unit sales. On March 31, 2013, 4,000 units were on hand. In addition,
5 pounds of materials are required per unit of product. Management desires to have materials on
hand at the end of each month equal to 10% of the following month’s production needs. The
beginning materials inventory was 13,000 pounds. The materials cost P0.40 per pound. Each unit
produced requires 0.05 hour of direct labor. Each hour of direct labor costs the company P10.
Management fully adjusts the workforce to the workload each month.

Half of a month’s purchases are paid for in the month of purchase, and the other half is paid for in
the following month. No discounts are given for early payment. The accounts payable on March 31,
2013 was P12,000.
Variable manufacturing overhead is P20 per direct labor hour. Fixed manufacturing overhead is
P50,500 per month. This includes P20,500 in depreciation. Lotte Company uses absorption costing
in its budgeted income statement and balance sheet. Manufacturing overhead is applied to units of
product on the basis of direct labor hours. The company has no work in process inventories.
SAMPLE COMPREHENSIVE PROBLEM 2
Variable selling and administrative expenses are P0.50 per unit sold. Fixed selling
and administrative expenses are P70,000 per month and include P10,000 in
depreciation.
A line of credit is available at a local bank that allows the company to borrow up to
P75,000. All borrowing occurs at the beginning of the month, and all repayments
occur at the end of the month. The interest is 1% per month. The company does not
have to make any payments until the end of the quarter.
Lotte desires a cash balance of at least P30,000 at the end of each month. The cash
balance at the beginning of April was P40,000. Cash dividends of P51,000 are to
be paid to stockholders in April. Equipment purchases of P143,700 are scheduled for
May and P48,800 for June. The equipment will be installed and tested during the
second quarter and will not become operational during July, when depreciation
charges will commence.
SAMPLE COMPREHENSIVE PROBLEM (CONT’D)
Beginning balances for the following balance sheet items are:

Raw materials inventory P5,200 Accumulated depreciation P750,000

Finished goods inventory P20,000 Common stock P200,000
Land P400,000 Retained earnings P1,143,200
Buildings and equipment P1,610,000

Required: Prepare a master budget for Lotte Company, along with all the necessary
supporting schedules.
INTERNATIONAL ASPECTS OF BUDGETING
Exchange rate fluctuations.
High inflation rates in some countries.
Economic conditions abroad.
Government policies abroad.
SHORT PROBLEMS:
Philip Company collects 20% of a month’s sales in the month of sale, 70% in the
month following sale, and 6% in the second month following sale. The remainder is
uncollectible. Budgeted sales for the next four months are: January 200,000 March
350,000 February 300,000 April 250,000 What is the budgeted cash collections in
the month of April?
SHORT PROBLEMS:
Alex Inc. manufactures and sells box trailers for semi trucks. Each trailer requires two
axles. For next quarter, Alex has scheduled 720 trailers for production and 750 for
sale. Alex is also moving to just-in-time purchasing next quarter and plans on
reducing its inventory of trailer axles by 100. How many axles should Alex budget
for purchase for next quarter?
SHORT PROBLEMS:
Darna Corporation is working on its direct labor budget for the next two months. Each
unit of output requires 0.41 direct labor-hours. The direct labor rate is $8.10 per
direct labor-hour. The production budget calls for producing 5,000 units in May and
5,400 units in June. If the direct labor work force is fully adjusted to the total direct
labor-hours needed each month, what would be the total combined direct labor cost
for the two months?
SHORT PROBLEMS:
The manufacturing overhead budget at Finn Corporation is based on budgeted direct
labor-hours. The direct labor budget indicates that 5,800 direct labor-hours will be
required in May. The variable overhead rate is $9.10 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $104,400 per month, which
includes depreciation of $8,120. All other fixed manufacturing overhead costs
represent current cash flows. The company recomputes its predetermined overhead
rate every month. The predetermined overhead rate for May should be:
SHORT PROBLEMS:
The selling and administrative expense budget of Chase Corporation is based on
budgeted unit sales, which are 4,600 units for August. The variable selling and
administrative expense is $7.30 per unit. The budgeted fixed selling and
administrative expense is $51,980 per month, which includes depreciation of $6,440
per month. The remainder of the fixed selling and administrative expense represents
current cash flows. The cash disbursements for selling and administrative expenses on
the August selling and administrative expense budget should be
SHORT PROBLEMS:
Vee makes all sales on account, subject to the following collection pattern: 20% are
collected in the month of sale; 70% are collected in the first month after sale; and
10% are collected in the second month after sale. If sales for October, November,
and December were $70,000, $60,000, and $50,000, respectively, what was the
budgeted receivables balance on December 31?
SHORT PROBLEMS:
The beginning cash balance is $20,000. Sales are forecasted at $800,000 of which
80% will be on credit. 70% of credit sales are expected to be collected in the year
of sale. Cash expenditures for the year are forecasted at $500,000. Accounts
receivable from previous accounting periods totaling $12,000 will be collected in the
current year. The company is required to make a $20,000 loan payment and an
annual interest payment on the last day of the year. The loan balance as of the
beginning of the year is $120,000, and the annual interest rate is 10%.
SHORT PROBLEMS:
X Co. manufactures toy airplanes. Information on X Co.’s labor costs follow: Sales
commissions $5 per plane Administration $10,000 per month Indirect factory labor
$3 per plane Direct factory labor $5 per plane The following information applies to
the upcoming month of July for X Co.: Budgeted production 1,200 units Budget sales
1,000 units What amount of budgeted labor cost would appear in the July selling,
general, and administrative expense budget?