Chapter 8

BUDGETING / PROFIT PLANNING

Baruch College
ACC 2203
Introduction to Managerial Accounting

BUDGETING

A budget is a detailed quantitative plan for acquiring and

using financial and other resources over a specified
forthcoming time period.
• The act of preparing a budget is called budgeting.
• The use of budgets to control an organization’s activities
is known as budgetary control.

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DIFFERENCE BETWEEN PLANNING AND CONTROL

Planning involves developing objectives and preparing

various budgets to achieve those objectives.

Control involves the steps taken by management to increase

the likelihood that the objectives set down at the planning
stage are attained and that all parts of the organization are
working together toward those objectives.

To be effective, a good budgeting system must provide for

both planning and control.

MASTER BUDGET

Comprehensive plan (forecast, estimate). Includes the

following budgets:
n Sales Budget – forecast of sales quantities, prices,
and sales revenues
n Purchases Budget – forecast of purchase quantities
and costs
n Selling and Administrative Expense Budget – forecast
of selling costs required for attaining forecasted sales
levels; prediction of administrative costs
n Cash Budget
n Budgeted Income Statement
n Budgeted Balance Sheet

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 EXAMPLE

Foster Company buys and sells cashmere sweaters. In

September 2023, we put together a Master Budget for 2024
(by quarter).

SALES BUDGET – forecast of sales quantities, prices, and

sales revenues
We plan to charge $200 for each sweater.
Our marketing team predicts that at this price, the company
can sell 1,000 sweaters in the first quarter of 2024.
Our marketing team predicts a sales increase of 100
sweaters each quarter after the first one.

SALES BUDGET

Foster Company
Sales Budget for 2024
Quarter Year
1st 2 nd 3rd 4th
Expected Sales
1,000 1,100 1,200 1,300 4,600
(in units)
Selling price
$200 $200 $200 $200 $200
per unit
Total Sales 920,000
$200,000 $220,000 $240,000 $260,000
Revenue

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EXPECTED CASH COLLECTIONS

When do we expect to receive cash for our sales?

1. 80% of our sales are on credit; 20% cash.

2. 70% of credit sales are collected in the quarter the

sale is made; 30% in the following quarter.
3. A/R is estimated to be $60,000 on January 1, 2024;
we expect to collect the outstanding receivables in
the first quarter.

EXPECTED CASH COLLECTIONS

How much cash does the company expect to receive in:

Quarter 1: $60,000 (A/R)

+ 20% * $200,000 (cash sales)
+ 70% * 80% * $200,000 (collections on Qtr. 1 credit sales)
= $212,000

Quarter 2: 20% * $220,000 (cash sales)

+ 30% * 80% * $200,000 (collections on Qtr. 1 credit sales)
+ 70% * 80% * $220,000 (collections on Qtr. 2 credit sales)
=$215,200

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EXPECTED CASH COLLECTIONS

How much cash does the company expect to receive in:

Quarter 3: 20% * $240,000 (cash sales)

+ 30% * 80% * $220,000 (collections on Qtr. 2 credit sales)
+ 70% * 80% * $240,000 (collections on Qtr. 3 credit sales)
=$235,200

Quarter 4: 20% * $260,000 (cash sales)

+ 30% * 80% * $240,000 (collections on Qtr. 3 credit sales)
+ 70% * 80% * $260,000 (collections on Qtr. 4 credit sales)
=$255,200

EXPECTED ACCOUNTS RECEIVABLE ON 12/31/24

What is the expected accounts receivable balance at the

end of the 4th quarter (on 12/31/2024)?

A/R (12/31/2024) = Uncollected credit sales as of 12/31/2024

= 30% * 80% * $260,000
= $62,400

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PURCHASES BUDGET

Finished Goods Inventory

Beginning F.G. Inventory Units Sold

Units Purchased

Ending F.G. Inventory

Beginning F.G. inventory + Units to be purchased

= Ending F.G. Inventory + Units to be sold

Units to be purchased = Ending F.G. Inventory

+ Units to be sold
- Beginning F.G. inventory

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PURCHASES BUDGET

Each quarter, we plan to maintain an ending inventory

of 10% of the next quarter’s sales. (At end of next
year, we want ending inventory of 140 units).

This allows us to meet demand in case of a sudden

surge in orders.

Inventory buffer

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 PURCHASES BUDGET

How many sweaters does the company expect to purchase in:

Quarter 1: Units to be purchased = 10% * 1,100 (Ending FG inv.)

+1,000 (units to be sold)
– 10% *1,000 (Beginning FG inv.)
=1,010 units

Quarter 2: Units to be purchased = 10% * 1,200 (Ending FG inv.)

+1,100 (units to be sold)
– 10% *1,100 (Beginning FG inv.)
=1,110 units

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Ending inventory (previous qtr) = Beginning inventory (this qtr)

n Inventory on 3/31/2024 (11:59 pm) = Inventory on

4/1/2024 (12:00 am)
n Inventory on 12/31/2023 = Inventory on 1/1/2024

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 PURCHASES BUDGET

How many sweaters does the company expect to purchase in:

Quarter 3: Units to be purchased = 10% * 1,300 (Ending FG inv.)

+1,200 (units to be sold)
– 10% *1,200 (Beginning FG inv.)
=1,210 units

Quarter 4: Units to be purchased = 140 (Ending FG inv.)

+1,300 (units to be sold)
– 10% *1,300 (Beginning FG inv.)
=1,310 units

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4th Quarter Purchases

Expect to sell = 1,300 units

Desired ending inventory = 140 units
UNITS NEEDED =1,300 + 140 = 1,440
But we will already have:
Expected beginning inventory = 130 units
So don’t purchase 1,440; instead, purchase 1,440 – 130
= 1,310

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 CASH DISBURSEMENTS FOR PURCHASES

Schedule of expected cash disbursements for purchases –

shows the amount and timing of cash payments we make to
our suppliers for merchandise.

1. We buy all merchandise on credit. We expect to pay

$85/sweater.
2. We usually pay off 60% of purchases in the same quarter
as the purchase; the rest is paid in the following quarter
3. We expect to have an accounts payable balance of
$40,000 on December 31, 2023; we expect to pay these off
in the first quarter of 2024

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CASH DISBURSEMENTS FOR PURCHASES

How much cash does the company expect to pay for merchandise in:

Quarter 1: $40,000 (A/P from 12/31/2023)

+ 0.6 * 1,010 * $85 (Disbursements made in 1st qtr. for
merchandise bought in 1st qtr.)
= $91,510

Quarter 2: 0.4 * 1,010 * $85 (Disbursements made in 2nd qtr. for

merchandise bought in 1st qtr.)
+ 0.6 * 1,110 * $85 (Disbursements made in 2nd qtr. for
merchandise bought in 2nd qtr.)
= $90,950

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 n Sell 100 units at $200; customer pays $20,000 90 days
later
n Buy 100 units to ship to the customer; pay
$85*100=$8,500. Supplier wants payment right away.
n Where to find the cash, $8,500? Find FINANCING !!!

n Sell 100 units at $200; customer pays $20,000 90 days

later
n Buy 100 units to ship to the customer; pay
$85*100=$8,500. Supplier allows paying in 90 days.
n Where to find the cash, $8,500? Pay the supplier when
the customer pays us. Find FINANCING !!!
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CASH DISBURSEMENTS FOR PURCHASES

How much cash does the company expect to pay for merchandise in:

Quarter 3: 0.4 * 1,110 * $85 (Disbursements made in 3rd qtr. for

merchandise bought in 2nd qtr.)
+ 0.6 * 1,210 * $85 (Disbursements made in 3rd qtr. for
merchandise bought in 3rd qtr.)
= $99,450

Quarter 4: 0.4 * 1,210 * $85 (Disbursements made in 4th qtr. for

merchandise bought in 3rd qtr.)
+ 0.6 * 1,310 * $85 (Disbursements made in 4th qtr. for
merchandise bought in 4th qtr.)
= $107,950
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EXPECTED ACCOUNTS PAYABLE ON 12/31/24

What is the expected accounts payable balance at the end of the

4th quarter (on 12/31/2024)?

A/P (12/31/2024) = Unpaid merchandise as of 12/31/2024

= 0.4 * 1,310 * $85
= $44,450

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S&A EXPENSE BUDGET

Estimated cost of (i) selling (marketing, pre-sale customer-support, after-

sale customer support, shipping, etc.) for projected unit sales; and (ii)
administrative activities
Variable S&A expenses for each sweater include (i) 10% sales
commission and (ii) average shipping of $10 / unit.
Fixed S&A expenses for the year (incurred evenly throughout the year):

Advertising $60,000
Executive salaries 120,000
Insurance 40,000
Depreciation (with the new fixtures) 20,000
Total $240,000

Cash Fixed S&A = $60,000 + $120,000 + $40,000 = $220,000 / year

Cash Fixed S&A = $220,000 / 4 = $55,000 / qtr.
Non-cash Fixed S&A (i.e. depreciation) = $20,000 / 4 = $5,000 / qtr.
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 S&A EXPENSE BUDGET
Foster Company
Selling and Administrative Expense Budget for 2024
Quarter
Year
1 st 2 nd 3rd 4th
Units to be sold 1,000 1,100 1,200 1,300 4,600

Total variable S&A 1,000 * $30 = 1,100 * $30 =

$30,000 $33,000 $36,000 $39,000 $138,000
expenses
Total fixed S&A
expenses – cash $55,000 $55,000 $55,000 $55,000 $220,000
Total fixed S&A
expenses – non- $5,000 $5,000 $5,000 $5,000 $20,000
cash
Total S&A
$90,000 $93,000 $96,000 $99,000 $378,000
expenses
Total cash S&A
$85,000 $88,000 $91,000 $94,000 $358,000
expenses
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CASH BUDGET

Cash receipts:
Cash sales
Collections on credit sales
Receipts of dividends and/or interest
Receipts from sales of equipment and/or other assets
Total cash receipts
Cash disbursements:
Payments for merchandise
Payments for selling and administrative expenses
Payments for equipment/fixture purchases, dividends, and income taxes
Total cash disbursements
Financing:
New borrowings
Interest payments and/or repayments of principal
Total financing

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CASH BUDGET

Cash balance, beginning

+ Total cash receipts
Total cash available before financing
− Total cash disbursements
Excess (deficiency) of cash receipits over disbursements
± Total (net) financing
Cash balance, ending

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CASH BUDGET

Expected beginning cash balance $40,000

Cash receipts:
- Expected cash collections from sales (slides 8 & 9);
- In the 1st quarter, we expect to sell securities for $10,000.

Cash disbursements:
- Cash disbursements for merchandise (slides 17 & 18);
- All employees are paid in same quarter as services used;
- S&A expenses are paid in same quarter as incurred;
- On January 1, we plan to spend $90,000 on new fixtures.

Financing:
- We will get a loan for the $90,000 fixture purchase. We will not repay any
principal in 2024, just pay quarterly interest at 10% annual rate.

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 CASH BUDGET

Foster Company
Cash Budget for 2024
Quarter
1st 2nd 3rd 4th
CASH – BEGINNING (p.24) $40,000 $117,240 $159,740
Cash receipts:
Cash sales (p.8&9) $40,000 $48,000 $52,000
Collections on credit sales (p.8&9) $172,000 $187,200 $203,200
Sale of securities (p.24) $10,000
TOTAL CASH RECEIPTS $222,000 $235,200 $255,200
TOTAL CASH AVAILABLE $262,000 $352,440 $414,940
Cash disbursements:
Payments for merchandise (p.17&18) $91,510 $99,450 $107,950
Payments for S&A (p.21) $85,000 $91,000 $94,000
Purchase of fixtures (p.24) $90,000
TOTAL CASH DISBURSED $266,510 $190,450 $201,950
Excess (deficiency) of cash ($4,510) $161,990 $212,990

$262,000 - $266,510
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CASH BUDGET

Excess (deficiency) of cash

($4,510) $161,990 $212,990
available over disbursements
Financing:
Borrowings (p.24) $90,000
Interest payments (p.24 & 26) ($2,250) ($2,250) ($2,250)
TOTAL FINANCING $87,750 ($2,250) ($2,250)
CASH - ENDING $83,240 $159,740 $210,740

- $4,510 + $87,750

Annual interest expense = 0.1 * $90,000 = $9,000

Quarterly interest payments = $9,000 / 4 = $2,250

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 CASH BUDGET

Foster Company
Cash Budget for 2024
(p.26) Quarter
(p.24)
1st 2nd 3rd 4th
CASH – BEGINNING $40,000 $83,240 $117,240 $159,740
Cash receipts:
Cash sales (p.8&9) $40,000 $44,000 $48,000 $52,000
Collections on credit sales (p.8&9) $172,000 $171,200 $187,200 $203,200
Sale of securities (p.24) $10,000
TOTAL CASH RECEIPTS $222,000 $215,200 $235,200 $255,200
TOTAL CASH AVAILABLE $262,000 $298,440 $352,440 $414,940
Cash disbursements:
Payments for merchandise (p.17&18) $91,510 $90,950 $99,450 $107,950
Payments for S&A (p.21) $85,000 $88,000 $91,000 $94,000
Purchase of fixtures (p.24) $90,000
TOTAL CASH DISBURSED $266,510 $178,950 $190,450 $201,950
Excess (deficiency) of cash ($4,510) $119,490 $161,990 $212,990

$298,440 - $178,950
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CASH BUDGET

Excess (deficiency) of cash

($4,510) $119,490 $161,990 $212,990
available over disbursements
Financing:
Borrowings (p.24) $90,000
Interest payments (p.24 & 26) ($2,250) ($2,250) ($2,250) ($2,250)
TOTAL FINANCING $87,750 ($2,250) ($2,250) ($2,250)
CASH - ENDING $83,240 $117,240 $159,740 $210,740

- $4,510 + $87,750 $119,490 - $2,250

Annual interest expense = 0.1 * $90,000 = $9,000

Quarterly interest payments = $9,000 / 4 = $2,250

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CASH BUDGET - Summary

Quarter
st nd
1 2 3rd 4th

Cash balance, beginning $40,000 $83,240 $117,240 $159,740

+ Total cash receipts $222,000 $215,200 $235,200 $255,200
Total cash available $262,000 $298,440 $352,440 $414,940
- Total cash disbursements $266,510 $178,950 $190,450 $201,950
Excess (deficiency) of cash ($4,510) $119,490 $161,990 $212,990
Total (net) financing $87,750 ($2,250) ($2,250) ($2,250)
Cash balance, ending $83,240 $117,240 $159,740 $210,740

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BUDGETED INCOME STATEMENT

Foster Company
Budgeted Income Statement for 2024
Sales (4,600 units * $200/unit) $920,000 (p.6)

$391,000 (p.6 & 16)

COGS (4,600 units * $85/unit)

Gross Margin $529,000

S&A expense $378,000 (p.21)

Net operating income $151,000

Interest expense $9,000 (p.24 & 26)

Net income $142,000

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BUDGETED BALANCE SHEET

Projected assets, liabilities, shareholders’ equity at the end

of the budget period.

December 31, 2023 balance sheet is expected to have:

Fixed assets $560,000 Common stock $450,000
Accumulated depreciation $75,040 Retained earnings $113,460

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BUDGETED BALANCE SHEET

Foster Company
Budgeted Balance Sheet for December 31, 2024

TOTAL ASSETS
Cash (p.25) $210,740

Accounts receivable (p.10) $62,400

(p.12
Finished goods inventory & 16) $11,900 (140 units * $85/unit)

Fixed assets (p.24 & 31) $650,000 ($560,000+$90,000)

(p.20 & 31)
Less: Accumulated depreciation ($95,040) ($75,040+$20,000)
Total assets $840,000

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 BUDGETED BALANCE SHEET

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable $44,540 (p.19)

Long term debt $90,000 (p.24)

Common stock $450,000 (p.31)

Retained earnings $255,460 (p.30 & 31)

Total liabilities and equity $840,000

Retained Earnings 12/31/24 = Retained Earnings 12/31/23 + Net Income – Dividends

= $113,460 + 142,000 – 0
= $255,460

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