Master Budget

Budget Defined

• The quantitative expression of a proposed plan of action by management for

a specified period, and

• An aid to coordinating what needs to be done to implement that plan

• May include both financial and non-financial data

 The Ongoing Budget Process

• Managers and accountants plan the performance of the company, taking into
account past performance and anticipated future changes

• Senior managers distribute a set of goals against which actual results will be
compared

• Accountants help managers investigate deviations from budget. Corrective

action occurs at this point

• Managers and accountants assess market feedback, changed conditions, and

their own experiences as plans are laid for the next budget period
Strategy, Planning and Budgets
 Advantages of Budgets

• Provides a framework for judging performance

• Motivates managers and other employees

• Promotes coordination and communication among subunits within the company

 Components of Master Budgets

• Operating Budget – building blocks leading to the

creation of the Budgeted Income Statement

• Financial Budget – building blocks based on the

Operating Budget that lead to the creation of the
Budgeted Balance Sheet and the Budgeted
Statement of Cash Flows
 Basic Operating Budget Steps
1. Prepare the Revenues Budget

2. Prepare the Production Budget (in Units)

3. Prepare the Direct Materials Usage Budget and Direct

Materials Purchases Budget

4. Prepare the Direct Manufacturing Labor Budget

5. Prepare the Manufacturing Overhead Costs Budget

6. Prepare the Ending Inventories Budget

7. Prepare the Cost of Goods Sold Budget

8. Operating Expense (Period Cost) Budget

9. Prepare the Budgeted Income Statement

 Basic Financial Budget Steps
• Based on the Operating Budgets:

1. Prepare the Capital Expenditures Budget

2. Prepare the Cash Budget

3. Prepare the Budgeted Balance Sheet

4. Prepare the Budgeted Statement of Cash Flows

Sample
Master
Budget
 Preparing the Operating Budgets:
Revenue Budget
The Revenue budget is prepared by multiplying
the expected unit sales volume for each product by
its anticipated unit selling price.
 For Hayes Company, sales volume is expected to be
3,000 units in the first quarter with 500-unit
increments in each succeeding quarter. Based on a
sales
Hayes price of Rs.60 per unit, the revenue budget for
Company
Revenue Budget
the year by quarters is shown below:
For the Year Ending December 31

Quarter
1 2 3 4 Year
Expected unit sales 3,000 3,500 4,000 4,500 15,000
Unit selling price(Rs.) x 60 x 60 x 60 x 60 x 60
Total sales(Rs.) 180,000 210,000 240,000 270,000 900,000
 Preparing the Operating Budgets:
Production Budget
The production budget shows the units that
must be produced to meet anticipated sales.
A realistic estimate of ending inventory is
essential in scheduling production
requirements.
The production requirements formula is:

Desired Beginning
Required
Budgeted Ending Finished
Finished
Production
Sales Units Goods
Goods Units Units
Units
Preparing the Operating Budgets:
Production Budget
Hayes believes it can meet future sales
requirements by maintaining an ending
inventory equal to 20% of the next
quarter’s budgeted sales volume.
For example, the ending finished goods
inventory for the first quarter is 700 units
(20% x anticipated second-quarter sales of
3,500 units).
The production budget is shown on the
next slide.
 Preparing the Operating Budgets:
Production Budget

Hayes Company
Production Budget
For the Year Ending December 31

Quarter
1 2 3 4 Year
Expected unit sales (sales budget) 3,000 3,500 4,000 4,500
Add: Desired ending FG unitsa 700 800 900 1,000b
Total required units 3,700 4,300 4,900 5,500
Less: Beginning FG units 600c 700 800 900
Required production units 3,100 3,600 4,100 4,600 15,400

a
20% of next quarter’s sales
b
Expected 5000 first-quarter sales of the next year- 5000 units x 20%
c
20% of estimated first-quarter sales units
 Preparing the Operating Budgets:
Direct Materials Budget
The direct materials budget contains
both the quantity and cost of direct
materials to be purchased.
It is derived from the direct materials units
required for production (per production
budget) plus the desired ending direct
materials units less the beginning direct
materials units.
Direct Required
Desired Beginning
Materials Direct
Ending Direct Direct
Units Materials
Materials Materials
Required for Purchases
Units Units
Production Units
Preparing the Operating Budgets:
Direct Materials Budget
Because of its close proximity to its
suppliers, Hayes Company has found that
an ending inventory of raw materials equal
to 10% of the next quarter’s production is
sufficient.
The manufacture of each Kitchen-mate
requires 2 pound of raw materials and the
expected cost per pound is Rs.4.
The direct materials budget is shown on
the next slide.
 Preparing the Operating Budgets:
Direct Materials Budget

Hayes Company
Direct Materials Budget
For the Year Ending December 31
Quarter
1 2 3 4 Year
3,100 3,600 4,100 4,600
Units to be produced (from
production budget)
Direct materials per unit x 2 x 2 x 2 x 2
Total pounds needed for production 6,200 7,200 8,200 9,200
Add: Desired ending DM 720a 820 920 1,020b
Total materials required 6,920 8,020 9,120 10,220
Direct materials purchases 620c 720 820 920
Cost per pound 6,300 7,300 8,300 9,300
x 4 x 4 x 4 x 4
Total cost of DM purchases 37,200 124,800
25,200 33,200
29,200
a
10% of next quarter’s production
b
Estimated 10200 first-quarter pounds needed for production, 10,200 x 10%
c
10% of estimated first-quarter pounds needed for production
 Preparing the Operating Budgets:
Direct Labor Budget
The direct labor budget contains the quantities
(hours) and cost of direct labor necessary to meet
production requirements.
 At Hayes Company, two hours of direct labor are required to
produce each unit of finished goods, and the anticipated
hourly wage rate is Rs.10. The direct labor budget is shown
below:
Hayes Company
Direct Labor Budget
For the Year Ending December 31
Quarter
1 2 3 4 Year
Units to be produced (from
production budget) 3,100 3,600 4,100 4,600
Direct labor time per unit x 2 x 2 x 2 x 2
Total required direct labor hours 6,200 7,200 8,200 9,200
Direct labor cost per hour x 10 x 10 x 10 x 10
Total direct labor cost 62,000 72,000 82,000 92,000 308,000
 Preparing the Operating Budgets:
Manufacturing Overhead Budget
The manufacturing overhead budget on the next
slide shows the expected manufacturing overhead costs
for the budget period.
This budget distinguishes between fixed and variable
overhead costs.
The fixed cost amounts are assumed and Hayes expects
the following variable costs per direct labor hour:
indirect materials: Re.1.00
indirect labor: Rs.1.40
utilities: Rs.0.40
maintenance: Rs.0.20
 Preparing the Operating Budgets:
Manufacturing Overhead Budget
Hayes Company
Manufacturing Budget
For the Year Ending December 31 Year
Quarter
1 2 3 4
Variable Costs
6,200 7,200 8,200 9,200
Indirect materials 12,880
8,680 10,080 11,480
Indirect labor 3,680
2,480 2,880 3,280
Utilities 1,240 1,440 1,640 1,840
Maintenance 18,600 21,600 24,600 27,600
Total variable
Fixed costs: 20,000
20,000 20,000 20,000
Supervisory salaries 3,800
3,800 3,800 3,800
Depreciation 9,000
9,000 9,000 9,000
Property tax and insurance 5,700
5,700 5,700 5,700
Maintenance 38,500
38,500 38,500 38,500
Total manufacturing overhead 66,100 246,400
57,100 60,100 63,100

Direct Labor hours 6,200 7,200 8,200 9,200 30,800

Manufacturing overhead rate per direct labor hour (246,400  30,800) 8.00
Cash Budget
It provides the information about the cash
receipt and payments.
It also provides the surplus and deficit at
the end of the period.
In case of deficit the company make
arrangements for financing it cash
requirements.
In case of surplus, the company make
arrangement for temporarily invest the
same to earn profit.
 Format and Example of Cash Budget
The following example illustrates the format of cash budget.
Company A maintains a minimum cash balance of Rs.5,000. In
case of a deficiency, loan is obtained at 8% annual interest
rate on the first day of the period.
Company A
Cash Budget
For the Year Ending December 30,......
  Quarter(Rs.)  
  1 2 3 4 Year
Beginning Cash Balance 5,200 5,000 5,000 11,740 5,200
Add: Budgeted Cash Receipts: 37,150 54,190 53,730 62,300 207,370
Total Cash Available for Use 42,350 59,190 58,730 74,040 212,570
Less: Cash Disbursements          
Direct Material 14,960 16,550 16,810 19,410 67,730
Direct Labor 8,830 9,610 9,750 11,900 40,090
Factory Overhead 10,020 10,400 11,000 11,780 43,200
Selling and Admin. Expenses 7,640 8,360 8,500 9,610 34,110
Equipment Purchases   6,000   14,000 20,000
Total Disbursements 41,450 50,920 46,060 66,700 205,130
Cash Surplus/(Deficit) 900 8,270 12,670 7,340 7,440
Financing:          
Borrowing 4,100       4,100
Repayments   −3,188 −912   −4,100
Interest   −82 −18   −100
Net Cash from Financing 4,100 −3,270 −930   −100
Budgeted Ending Cash Balance 5,000 5,000 11,740 7,340 7,340
 Problem
 An company has the following information's:

Particulars May June July August Septemb

er
Sales (Rs.) 45,000 50,000 55,000 60,000 65,000
Purchase of 26,000 30,000 32,000 35,000 38,000
materials(Rs.)
Wages(Rs.) 12,000 12,000 12,200 12,500 13,000
Overheads(Rs 6,000 7,000 8,000 8,500 9,000
•.)Sales: 20% of sales made each month are on cash basis and the
balance on credit. Of the credit sales, 40% are collected in the
same month, 40% in the next month and the balance 20% in the
third month.
•Purchases: material supplier allows a credit of 2 months. So the
payments for purchase made in January will be paid in march.
•Wages: 75% of wages are payable in the same month and the
balance in the next month.
•Overheads: of the overheads, Rs. 1000 represents depreciation.
Out of the balance 50% is payable in the same month and the
balance in the next month.
•Cash and bank: the opening balance on 1st July 2014 is
Other items:
The company has to pay a sum of Rs. 3,000
towards insurance charges in July 2014.
Dividend from investment of Rs.12,000 will be
received in August 2014.
A new machine will be erected in august 2014.
an advance of Rs.10,000 is to be paid in July.
The first half yearly instalment of Rs.25,000 is
due for payment in august.
The sale of old machine will fetch Rs.20,000 in
July.
Prepare the cash budget for July, August
and September 2014.