Managerial Accounting

Wild and Shaw

Third Edition
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 7

Master Budgets and

Performance Planning
 Conceptual Learning
Objectives

C1: Describe the importance and benefits

of budgeting and the process of
budget administration.
C2: Describe a master budget and the
process of preparing it.

7-3
Analytical Learning Objectives

A1: Analyze expense planning using

activity-based budgeting.

7-4
 Procedural Learning
Objectives
P1: Prepare each component of a master
budget and link each to the budgeting
process.
P2: Link both operating and capital
expenditures budgets to budgeted
financial statements.
P3: Appendix 7A: Prepare production
and manufacturing budgets.

7-5
C1

Budget Process
Defines goals
and objectives

Communicates plans Promotes analysis and

and instructions a focus on the future

Advantages

Coordinates
business activities Motivates employees

Provides a basis for

evaluating performance against
past or expected results 7-6
C1

Budget Timing

Continuous or
Rolling Budget

2011 2012 2013 2014

The budget may be a twelve-month

budget that rolls forward one month
as the current month is completed.

7-7
C2

Master Budget Components

Sales Merchandise
budget Purchases

Prepare Prepare
financial Prepare
selling and
budgets: capital
 cash general
expenditure
 income administrative
budget
 balance sheet budgets
7-8
P1

Sales Budget
HOCKEY DEN
Monthly Sales Budget
October 2011 – January 2012

Budgeted Budgeted Budgeted

Unit Sales Unit Price Total Sales
September 2011 (actual) 700 $ 100 $ 70,000

October 2011 1,000 $ 100 $ 100,000

November 2011 800 100 80,000
December 2011 1,400 100 140,000
Total 3,200 $ 100 $ 320,000

January 2012 900 $ 100 $ 90,000

7-9
P1 Merchandise Purchases
Budget
Inventory Budgeted Budgeted Budgeted
to be = ending + cost of sales – beginning
purchased inventory for the period inventory

Hockey Den buys hockey sticks for $60.00 each and

maintains an ending inventory equal to 90 percent of
the next month’s budgeted sales. 900 hockey sticks
are on hand on September 30.

Let’s prepare the purchases budget for Hockey Den.

7-10
P1 Merchandise Purchases
Budget
HOCKEY DEN
Merchandise Purchases Budget
October 2011 – December 2011

October November December

Next month's unit sales 800 1,400 900
Ending inventory percentage × 90% × 90% × 90%
Budgeted ending inventory units 720 1,260 810
Add current month's unit sales 1,000 800 1,400
Total units needed 1,720 2,060 2,210
Deduct beginning inventory units 900 720 1,260
Number of units to be purchased 820 1,340 950
Budgeted cost per unit × $ 60 × $ 60 × $ 60
Budgeted cost of purchases $ 49,200 $ 80,400 $ 57,000

Beginning inventory is last month's ending inventory. 7-11

P1

Selling Expense Budget

HOCKEY DEN
Selling Expense Budget
October 2011 – December 2011
October November December Total
Budgeted sales $ 100,000 $ 80,000 $ 140,000 $ 320,000
Sales commission % × 10% × 10% × 10% × 10%
Sales commission $ 10,000 $ 8,000 $ 14,000 $ 32,000
Sales manager salary 2,000 2,000 2,000 6,000
Total selling expenses $ 12,000 $ 10,000 $ 16,000 $ 38,000

From Hockey Den’s sales budget

7-12
P1 General and Administrative
Expense Budget

HOCKEY DEN
General and Administrative Expense budget
October 2011 – December 2011
October November December Total
Administrative salaries $ 4,500 $ 4,500 $ 4,500 $ 13,500
Equipment depreciation 1,500 1,500 1,500 4,500
Total $ 6,000 $ 6,000 $ 6,000 $ 18,000

7-13
P2

Financial Budgets

Cash
Budget Budgeted Budgeted
Income Balance
(Expected Statement Sheet
Receipts &
Disbursements)

7-14
P2

Budgeted Cash Receipts

 40% of Hockey Den’s
sales are for cash.
 60% are credit sales
(collected in full in the
month following sale).

Let’s prepare the cash receipts budget for Hockey Den.

7-15
 P2

Budgeted Cash Receipts

From Hockey Den’s sales budget
HOCKEY DEN
Cash Receipts Budget
October 2011 – December 2011

September October November December

Budgeted sales $ 70,000 $ 100,000 $ 80,000 $ 140,000
Accounts receivable $ 42,000 $ 60,000 $ 48,000 $ 84,000
Cash receipts from:
Cash sales $ 40,000 $ 32,000 $ 56,000
Collection of receivables
Total cash receipts

60 percent of September
sales are collected in October 60% of sales 40% of sales
7-16
P2

Budgeted Cash Receipts

HOCKEY DEN
Cash Receipts Budget
October 2011 – December 2011

September October November December

Budgeted sales $ 70,000 $ 100,000 $ 80,000 $ 140,000
Accounts receivable $ 42,000 $ 60,000 $ 48,000 $ 84,000
Cash receipts from:
Cash sales $ 40,000 $ 32,000 $ 56,000
Collection of receivables 42,000 60,000 48,000
Total cash receipts $ 82,000 $ 92,000 $ 104,000

7-17
P2 Cash Disbursements for
Purchases
 Hockey Den’s purchases
of merchandise are
entirely on account.
 Full payment is made in
the month following
purchase.
 The September 30
balance of Accounts
Payable is $58,200.
Let’s look at cash disbursements
for purchases for Hockey Den.
7-18
P2 Cash Disbursements for
Purchases

HOCKEY DEN
Cash Disbursements for Purchases
October 2011 - December 2011
October payments (September 30 balance) $ 58,200
November payments (October purchases) 49,200
December payments (November purchases) 80,400

From merchandise purchases budget

7-19
P2

Cash Budget
Hockey Den:
 Will pay a cash dividend of $3,000 in November.
 Will purchase $25,000 of equipment in
December.
 Has an income tax liability of $20,000 from the
previous quarter that will be paid in October.
 Has a September 30 cash balance of $20,000.
 Has an agreement with its bank for loans at the
end of each month to enable a minimum cash
balance of $20,000. Continue
7-20
P2

Cash Budget
Hockey Den:
 Pays interest equal to one percent of the prior
month’s ending loan balance.
 Repays loans when the ending cash balance
exceeds $20,000.
 Owes $10,000 on this loan arrangement on
September 30.
 Has 40 percent income tax rate.
 Will pay taxes for current quarter next year.
Let’s prepare the cash budget for Hockey Den. 7-21
P2
HOCKEYFrom
DEN Cash Receipts Budget
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions
Sales salaries
Administrative salaries
Income taxes
Dividends From Cash Disbursements
Interest for Purchases
Equipment purchase
Total disbursements
Preliminary balance

7-22
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Administrative salaries
Income taxes
Dividends
Interest From Selling Expense Budget
Equipment purchase
Total disbursements
Preliminary balance

7-23
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000
Receipts from customers 82,000 Because Hockey
92,000 Den
104,000
Total cash available $ 102,000 maintains a minimum
Disbursements cash balance of $20,000,
Payments for merchandise $ 58,200 the$ 49,200
company$ must
80,400
Sales commissions 10,000 8,000 14,000
borrow $12,800.
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000
Dividends
Interest
.01 × $10,000 100
Equipment purchase
Total disbursements $ 94,800
Preliminary balance $ 7,200

7-24
P2

Cash Budget Continued

HOCKEY DEN
Cash Budget
October 2011 - December 2011

October November December

Preliminary balance $ 7,200
Additional borrowing 12,800
Loan repayment
Ending cash balance $ 20,000
Ending loan balance $ 22,800

Ending cash balance for October

is the beginning November balance.
7-25
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000 $ 20,000
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000 $ 112,000
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000 Cash balance
Dividends .01 × $22,800 3,000 is sufficient
Interest 100 228 to repay the
Equipment purchase $22,800 loan.
Total disbursements $ 94,800 $ 66,928
Preliminary balance $ 7,200 $ 45,072
7-26
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October November December
Beginning cash balance $ 20,000 $ 20,000 $ 22,272
Receipts from customers 82,000 92,000 104,000
Total cash available $ 102,000 $ 112,000 $ 126,272
Disbursements
Payments for merchandise $ 58,200 $ 49,200 $ 80,400
Sales commissions 10,000 8,000 14,000
Sales salaries 2,000 2,000 2,000
Administrative salaries 4,500 4,500 4,500
Income taxes 20,000
Dividends 3,000
Interest 100 228
Equipment purchase 25,000
Total disbursements $ 94,800 $ 66,928 $ 125,900
Preliminary balance $ 7,200 $ 45,072 $ 372
7-27
P2

Cash Budget Continued

HOCKEY DEN
Cash Budget
October 2011 - December 2011

October November December

Preliminary balance $ 7,200 $ 45,072 $ 372
Additional borrowing 12,800 19,628
Loan repayment (22,800)
Ending cash balance $ 20,000 $ 22,272 $ 20,000
Ending loan balance $ 22,800 $ 0 $ 19,628

7-28
P2
From the Sales Budget

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
Sales commissions $ 32,000
Sales salaries From the Merchandise
6,000
Administrative salaries 13,500
Purchases Budget
Equipment depreciation 4,500
Interest expense 328 56,328
Net income before taxes $ 71,672
Income tax expense 28,669
Net income $ 43,003
7-29
P2

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
Sales commissions $ 32,000
Sales salaries 6,000
Administrative salaries 13,500
Equipment depreciation 4,500
Interest expense 328 56,328
Net income before taxes $ 71,672
Income tax expense From the Selling 28,669
Net income Expense Budget $ 43,003
7-30
P2

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
Sales commissions $ 32,000
Sales salaries 6,000
Administrative salaries 13,500
Equipment depreciation 4,500
Interest expense 328 56,328
Net incomeFrom
before taxes
the General and Administrative $ 71,672
Income tax expense Expense Budget 28,669
Net incomeDepreciation is a non-cash expense. $ 43,003
7-31
P2

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
Sales commissions $ 32,000
Sales salaries 6,000
Administrative salaries 13,500
Equipment depreciation 4,500
Interest expense 328 56,328
Net income before taxes $ 71,672
Income tax expense 28,669
Net income From the Cash Budget $ 43,003
7-32
P2

HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100) $ 320,000
Cost of goods sold (3,200 units @ $60) 192,000
Gross profit $ 128,000
Operating expenses:
Sales commissions $ 32,000
Sales salaries 6,000
Administrative salaries 13,500
Equipment depreciation 4,500
Interest expense 328 56,328
Net income before taxes $ 71,672
Income tax expense $71,672 × .40 28,669
Net income $ 43,003
7-33
P2 Preparing a Budgeted
Balance Sheet
Hockey Den reports the following account
balances on September 30 prior to preparing its
budgeted financial statements:
 Equipment $200,000
 Accumulated depreciation $ 36,000
 Common stock $150,000
 Retained earnings $ 41,800

Let’s prepare the budgeted balance

sheet for Hockey Den.
7-34
 HOCKEY DEN
P2
Budgeted Balance Sheet
December 31, 2011
Assets
Cash From the Cash Budget $ 20,000
Accounts receivable 84,000
Inventory 48,600
Equipment $ 225,000
Less accumulated depreciation 40,500 184,500
Total assets $337,100

Liabilities and Equity

Liabilities
Accounts payable $ 57,000
Income taxes payable 28,669
Bank loan payable 19,628 $105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $337,100
7-35
 HOCKEY DEN
P2
Budgeted Balance Sheet
December 31, 2011
Assets
Cash $ 20,000
Accounts receivable 84,000
Inventory 48,600
Equipment From the Merchandise $ 225,000
Less accumulated depreciation 40,500 184,500
Total assets
Purchases Budget $337,100

Liabilities and Equity

Liabilities
Accounts payable $ 57,000
Income taxes payable 28,669
Bank loan payable 19,628 $105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $337,100
7-36
 HOCKEY DEN
P2
Budgeted Balance Sheet
December 31, 2011
Assets
Cash $ 20,000
Accounts receivable 84,000
Inventory 48,600
Equipment $ 225,000
Less accumulated
Fromdepreciation
the Budgeted 40,500 184,500
Total assets $337,100
Income Statement
Liabilities and Equity
Liabilities
Accounts payable $ 57,000
Income taxes payable 28,669
Bank loan payable 19,628 $105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $337,100
7-37
 HOCKEY DEN
P2
Budgeted Balance Sheet
December 31, 2011
Assets
Cash $ 20,000
Accounts receivable 84,000
Inventory 48,600
Equipment $ 225,000
Less accumulated depreciation 40,500 184,500
Total assets $337,100

From theLiabilities
Cash Budgetand Equity
Liabilities
Accounts payable $ 57,000
Income taxes payable 28,669
Bank loan payable 19,628 $105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $337,100
7-38
 HOCKEY DEN
P2
Budgeted Balance Sheet
December 31, 2011
Assets
Cash $ 20,000
Accounts receivable 84,000
Inventory 48,600
Equipment $ 225,000
Less accumulated depreciation 40,500 184,500
Total assets $337,100
Beginning retained earnings $ 41,800
Liabilities and Equity
Add net income 43,003
Liabilities
Deduct
Accounts dividends
payable $ 57,000 (3,000)
Ending
Income retained
taxes payable earnings $ 81,803
28,669
Bank loan payable 19,628 $105,297
Stockholders' equity
Common stock $ 150,000
Retained earnings 81,803 231,803
Total liabilities and equity $337,100
7-39
A1

Activity-Based Budgeting
Activity-based budgeting is based on
activities rather than traditional items such
as salaries, supplies, depreciation, and
utilities.

7-40
End of Chapter 7

7-41