Topic 3:

Master Budget
 8-2

The Basic Framework of Budgeting

A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activities is known
as budgetary control.
 8-3

Planning and Control

Planning – Control –
involves developing involves the steps taken
objectives and by management to gather
preparing various feedback to ensure that a
budgets to achieve plan is being properly
those objectives. executed or modified as
circumstances change.
 8-4

Choosing the Budget Period

Operating Budget

2015 2016 2017 2018

Operating budgets ordinarily

A continuous budget is a
cover a one-year period
12-month budget that rolls
corresponding to a company’s
forward one month (or quarter)
fiscal year. Many companies
as the current month (or quarter)
divide their annual budget
is completed.
into four quarters.
 8-5

Developing the Budget

1. Budgets are prepared for
a. Departments.
b. Divisions.
c. Company as a whole.
2. The Budget Committee is responsible for
overall budgeting policy and for coordinating
the preparation of the budget.
a. Senior managers
b. President
c. CFO
d. Various vice-presidents
e. Controller.
 8-6

Self-Imposed Budget (Participative Budget)

A self-imposed budget or participative budget is a budget that is

prepared with the full cooperation and participation of managers
at all levels.
 8-7

The Master Budget: An Overview

Sales budget

Selling and
Ending inventory administrative
Production budget
budget budget

Direct materials Direct labor Manufacturing

budget budget overhead budget

Cash Budget

Budgeted
Budgeted
income
balance sheet
statement
 8-8

The Sales Budget

Detailed schedule showing expected

sales for the coming periods
expressed in units and dollars.
 8-9

The Sales Budget

Detailed schedule showing expected

sales for the coming periods
expressed in units and dollars.
April May June Quarter
Budgeted
  sales (units) 20,000 50,000 30,000 100,000
Selling price
  per unit $ 10 $ 10 $ 10 $ 10
Total sales $200,000 $500,000 $300,000 $1,000,000
 8-10

The Production Budget

Sales
Budget
and t ed Production
e
pl Budget
Expected
Com

Cash
Collections

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
 8-11

The Production Budget

April May June Quarter
Budgeted sales 20,000 50,000 30,000 100,000
Add desired ending
  inventory 10,000
Total needed 30,000
Less beginning
  inventory 4,000

Required production 26,000

 8-12

The Direct Materials Budget

April May June Quarter
Production
Materials per unit
Production needs
Add desired
  ending inventory
Total needed
Less beginning
  inventory
Materials to be
  purchased
 8-13

The Direct Labor Budget

 8-14

Manufacturing Overhead Budget

April May June Quarter
Production in units
Variable mfg. OH rate
Variable mfg. OH costs
Fixed mfg. OH costs
Total mfg. OH costs
Less noncash costs

Cash disbursements
  for manufacturing OH
 8-15

Ending Finished Goods Inventory Budget

Production costs per unit Quantity Cost Total
Direct materials lbs. $ -
Direct labor hrs. -
Manufacturing overhead hrs. -
$ -
Budgeted finished goods inventory
Ending inventory in units
Unit product cost $ -
Ending finished goods inventory

Standard cost card

A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50
 8-16

Selling and Administrative Expense Budget

April May June Quarter
Budgeted sales
Variable selling
  and admin. rate
Variable expense
Fixed selling and
  admin. expense
Total expense
Less noncash
  expenses
Cash disburse-
  ments for
  selling & admin.
 8-17

The Cash Budget

April May June Quarter
Beginning cash balance
Add cash collections
Total cash available
Less disbursements
…
Total disbursements
Excess (deficiency) of
  cash available over
  disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
 8-18

The Budgeted Income Statement

Cash Budgeted
Budget Income
d
Statement
ete
p l
m
Co

After we complete the cash budget, we

can prepare the budgeted income
statement for Royal.
 8-19

The Budgeted Income Statement

Royal Company
Budgeted Income Statement
For the Three Months Ended June 30

Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Operating income
Interest expense
Net income
 8-20

Royal Company
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Equipment
Total property and equipment
Total assets

Accounts payable
Common stock
Retained earnings
Total liabilities and equities
 8-21

End of Topic 3