Chapter 9 Financial Planning and Analysis: The Master Budget 385

5. Cash disbursements budget for raw material purchases for 20x8:

Quarter
1st 2nd 3rd 4th Year
Cost of raw material purchases
(from direct-material budget) ...................... $27,800 $63,400 $72,200 $36,600 $200,000
Cash payments for purchases made
during the quarter (70% of current
quarter’s purchases) .................................. $19,460 $44,380 $50,540 $25,620 $140,000
Cash payments for prior quarter’s
purchases (30% of prior
quarter’s purchases) .................................. 10,980* 8,340 19,020 21,660 60,000
Total cash payments for
raw material purchases .............................. $30,440 $52,720 $69,560 $47,280 $200,000
*Purchases in the fourth quarter of 20x7 were given at $36,600.

Key Terms
For each term’s definition refer to the indicated page, or turn to the glossary at the end of the text.

activity-based budgeting budgeted schedule of cost of e-budgeting, 379 production overhead

(ABB), 360 goods manufactured and financial planning and budget, 365
budget, 353 sold, 375 analysis (FP&A) profit plan (or master
budget committee, 379 budgeted statement of cash system, 352 budget), 354
budget director (or chief flows, 370 financial planning purchases budget, 363
budget officer), 378 capital budget, 354 model, 378 rolling budgets (also
budget manual, 379 cash budget, 368 financing budget, 354 revolving or continuous
budgetary slack, 381 cash disbursements master budget (or profit budgets), 354
budgeted balance sheet, 370 budget, 368 plan), 354 sales budget, 362
budgeted financial state- cash receipts budget, 366 operational budgets, 356 sales forecasting, 355
ments (or pro forma conversion costs, 364 padding the budget, 381 selling, general, and
financial statements), 354 direct-labor budget, 364 participative budgeting, 381 administrative expense
budgeted income direct-material production budget, 372 (SG&A) budget, 366
statement, 369 budget, 373

Review Questions
9–1. Explain how a budget facilitates communication and 9–11. What is the purpose of a budget manual?
coordination. 9–12. How can a company’s board of directors use the budget
9–2. Use an example to explain how a budget could be used to influence the future direction of the firm?
to allocate resources in a university. 9–13. Discuss the importance of predictions and assumptions
9–3. Explain what a master budget is, and list five of its parts. in the budgeting process.
9–4. Draw a flowchart similar to the one in Exhibit 9–1 for a 9–14. Define the term budgetary slack, and briefly describe a
service station. The service station provides automotive problem it can cause.
maintenance services in addition to selling gasoline and 9–15. How can an organization help to reduce the problems
related products. caused by budgetary slack?
9–5. Give an example of how general economic trends 9–16. Why is participative budgeting often an effective
would affect sales forecasting in the airline industry. management tool?
9–6. What is meant by the term operational budgets? List 9–17. Discuss this comment by a small-town bank president:
three operational budgets that would be prepared by “Budgeting is a waste of time. I’ve been running this
Cook County Hospital in Chicago. business for 40 years. I don’t need to plan.”
9–7. How does activity-based budgeting explain the logic of 9–18. List the steps you would go through in developing a
budgeting? budget to meet your college expenses.
9–8. How does e-budgeting make use of the Internet? 9–19. Briefly describe three issues that create special chal-
9–9. Give three examples of how the city of Boston could lenges for multinational firms in preparing their budgets.
use a budget for planning purposes. 9–20. What are the primary differences in budgeting between
9–10. Describe the role of a budget director. manufacturing and nonmanufacturing firms?
386 Chapter 9 Financial Planning and Analysis: The Master Budget

All applicable Exercises are available with McGraw-Hill’s Connect Accounting ®.

Exercises
■ Exercise 9–21 San Fernando Fertilizer Company plans to sell 40,000 units of finished product in July and anticipates
Budgeting Production and a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished
Raw-Material Purchases product is 80 percent of the next month’s estimated sales. There are 32,000 finished units in inventory on
(LO 9-3, 9-6) June 30. Each unit of finished product requires four pounds of raw material at a cost of $1.40 per pound.
There are 140,000 pounds of raw material in inventory on June 30.
Required:
1. Compute the company’s total required production in units of finished product for the entire three-
month period ending September 30.
2. Independent of your answer to requirement (1), assume the company plans to produce 120,000
units of finished product in the three-month period ending September 30, and to have raw-material
inventory on hand at the end of the three-month period equal to 25 percent of the use in that
period. Compute the total estimated cost of raw-material purchases for the entire three-month
period ending September 30.

(CMA, adapted)

■ Exercise 9–22
Cash Collections Coyote Loco, Inc., a distributor of salsa, has the following historical collection pattern for its credit sales.
(LO 9-3, 9-5) 70 percent collected in the month of sale.
15 percent collected in the first month after sale.
10 percent collected in the second month after sale.
4 percent collected in the third month after sale.
1 percent uncollectible.

The sales on account have been budgeted for the last seven months as follows:
June ........................................................................................................................................................ $122,500
July ......................................................................................................................................................... 150,000
August ..................................................................................................................................................... 175,000
September ............................................................................................................................................... 200,000
October .................................................................................................................................................... 225,000
November ................................................................................................................................................ 250,000
December ................................................................................................................................................ 212,500

Required:
1. Compute the estimated total cash collections during October from credit sales.
2. Compute the estimated total cash collections during the fourth quarter from sales made on account
during the fourth quarter.
3. Build a spreadsheet: Construct an Excel spreadsheet to solve both of the preceding requirements.
Show how the solution will change if the following information changes: sales in June and July
were $100,000 and $130,000, respectively.

(CMA, adapted)

■ Exercise 9–23
Missing Amounts; Various Fill in the missing amounts in the following schedules.
Types of Budgets July August September
(LO 9-3, 9-5, 9-6)
1. Sales* ...................................................................... $240,000 $180,000 $ ?
Cash receipts:
From cash sales ................................................... $ ? $ ? $135,000
From sales on account† ........................................ ? 102,000 ?
Total cash receipts ................................................ $ ? $ ? $ ?

2. Accounts payable, 12/31/x0 ...................................................................................... €600,000‡

Purchase of goods and services on account during 20x1 ............................................ 2,400,000
Payments of accounts payable during 20x1 ............................................................... ?
Accounts payable, 12/31/x1 ...................................................................................... 800,000
 Chapter 9 Financial Planning and Analysis: The Master Budget 387

3. Accounts receivable, 12/31/x0 .................................................................................. ¥1,700,000§

Sales on account during 20x1 ................................................................................... 4,500,000
Collections of accounts receivable during 20x1 .......................................................... 3,900,000
Accounts receivable, 12/31/x1 .................................................................................. ?
4. Accumulated depreciation, 12/31/x0 .......................................................................... $ 405,000
Depreciation expense during 20x1 ............................................................................. 75,000
Accumulated depreciation, 12/31/x1 ......................................................................... ?
5. Retained earnings, 12/31/x0 ..................................................................................... $1,537,500
Net income for 20x1 ................................................................................................. 300,000
Dividends paid in 20x1 ............................................................................................. –0–
Retained earnings, 12/31/x1 ..................................................................................... ?
*Half of each month’s sales are on account. June sales amounted to $180,000.
†
60% of credit sales is collected in the month of sale; 40% is collected in the following month.
‡
The Euro (€) is used in most European markets.
§
The Yen (¥) is the Japanese national currency. The Chinese national currency is denominated in Yuan,
which shares the same symbol.

■ Exercise 9–24
Alder Company budgets on an annual basis. The following beginning and ending inventory levels (in Budgeting Production and
units) are planned for the next year. Two units of raw material are required to produce each unit of fin- Direct-Material Purchases
ished product. (LO 9-3, 9-6)
January 1 December 31
Raw material ..................................... 245,000 ............................................ 315,000
Work in process ................................. 84,000 ............................................ 84,000
Finished goods .................................. 560,000 ........................................... 350,000

Required:

1. If Alder Company plans to sell 3,360,000 units during the year, compute the number of units the
firm would have to manufacture during the year.
2. If 3,500,000 finished units were to be manufactured by Adler Company during the year, determine
the amount of raw material to be purchased.

(CMA, adapted)

■ Exercise 9–25
The following information is from White Mountain Furniture Showroom’s financial records. Cash Budgeting
Month Sales Purchases (LO 9-3, 9-5)
July ............................................................. $180,000 ................................................... $105,000
August ........................................................ 165,000 ................................................... 120,000
September .................................................. 150,000 ................................................... 90,000
October ....................................................... 195,000 ................................................... 135,000

Collections from customers are normally 70 percent in the month of sale, 20 percent in the month
following the sale, and 9 percent in the second month following the sale. The balance is expected to be
uncollectible. All purchases are on account. Management takes full advantage of the 2 percent discount
allowed on purchases paid for by the tenth of the following month. Purchases for November are bud-
geted at $150,000, and sales for November are forecasted at $165,000. Cash disbursements for expenses
are expected to be $36,000 for the month of November. The company’s cash balance on November 1
was $55,000.

Required: Prepare the following schedules.

1. Expected cash collections during November.

2. Expected cash disbursements during November.
3. Expected cash balance on November 30.

(CPA, adapted)