Master Budgets: Operating and Financial Budget

Chapter 7
Master Budgets:
operating and
financial budget
Learning Objectives
1. Describe budgeting
objectives, benefits, and
procedures and how human
behavior influences budgeting
2. Define budget types and the
components of the master
budget
© 2016 Pearson Education, Inc. 22-2

Learning Objectives
3. Prepare an operating
budget for a
manufacturing company
4. Prepare a financial budget
for a manufacturing
company
5. Describe how information
technology can be used in
the budgeting process

Learning Objectives
6. Prepare an operating
budget for a merchandising
company (Appendix 22A)
7. Prepare a financial budget
for a merchandising
company (Appendix 22A)

Learning Objective 1
Describe budgeting
objectives, benefits, and
procedures and how human
behavior influences budgeting

7.1 Definitions of Budget
• 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

1.2 Why Do Managers Use Budgets?
• A budget is a financial plan that managers

use to coordinate a business’s activities.
• Managers use budgets to:
– Develop strategies.
– Plan and budget for specific actions to achieve
goals.
– Implement the plan.
– Take corrective action.

1.3 Budgeting Objectives

Budgeting Objectives
 Budgeting requires managers to plan for

the company’s future.
 The budget coordinates a company’s
activities.
 A budget provides a benchmark that
motivates employees and helps managers
evaluate performance.

Benchmarking

1.4 Budgeting Procedures
• Budgeting procedures vary from company

to company.
• Budgeting should include input from all
levels within the organization.
• Budgeting usually begins several months
before the beginning of the budget period.

Budgeting and Human Behavior
• Managers must:
– Support the budget
– Show employees how budgets can help them
achieve better results
– Require that employees participate in
developing the budget
• Budgetary games:
– Budgetary slack occurs when managers
intentionally understate expected revenues or
overstate expected expenses.
– Spend it or lose it.

Define budget types and the

components of the master
budget

Are There Different Types of Budgets?

Static and Flexible Budgets
• A static budget is a budget prepared for

only one level of sales volume.
• A flexible budget is a budget prepared for
various levels of sales volume.

Master Budgets
• The master budget is the set of budgeted

financial statements and supporting schedules
for the entire organization.
• The capital expenditures budget presents the
company’s plan for purchasing long-term
assets.
• A financial budget includes the cash budget and
the budgeted financial statements.
• The cash budget details how the business
expects to go from the beginning cash balance
to the ending cash balances.
Master Budgets

Prepare an operating budget

for a manufacturing company

How Are Operating Budgets Prepared
for a Manufacturing Company?
• The master budget includes the following
budgets:
– Sales budget
– Production budget
– Direct materials budget
– Direct labor budget
– Manufacturing overhead budget
– Cost of goods sold budget
– Selling and administrative budget


Sales Budget
• The forecast of sales revenue is the cornerstone of the

master budget because the levels of sales affects expenses
and almost all other elements of the master budget.

Production Budget
• The production budget determines the number of tablets

to be produced during the year and is the basis for the
production costs budgets. The production budget is the
basis for product costs budgets, direct materials budget,
direct labor budgets, and manufacturing overhead
budgets.

Production Budget

• Suppose for the 2nd quarter the following
information is given. Compute the budgeted
tablets to be produced given :
1. budgeted tablets to be sold =550
2. Desired tablets ending inventory =120

Direct Materials Budget
• After completing the production budget,

Smart Touch Learning needs to determine
the product costs for the tablets.

Direct Materials Budget

Direct Labor Budget

Manufacturing Overhead Budget
• The predetermined overhead allocation

rate is used to allocate the indirect
overhead costs to the tablets produced by
Smart Touch Learning.

Manufacturing Overhead Budget

Cost of Goods Sold Budget

Selling and Administrative Expense
Budget

Prepare a financial budget

for a manufacturing
company

How Are Financial Budgets Prepared
• The financial budgets include the cash
budget and the budgeted financial
statements:
– Budgeted income statement
– Budgeted balance sheet
– Budgeted statement of cash flows

Capital Expenditures Budget
• The purchase of long-term assets is part

of a strategic plan.
• Capital expenditures are purchases of
long-term assets, such as:
– Delivery trucks
– Computer systems
– Office furniture
– Manufacturing equipment

Cash Budget
• The cash budget pulls information from

the other budgets previously prepared.
• The cash budget has three sections:
– Cash receipts
– Cash payments
– Short-term financing

Cash Receipts

Cash Receipt
1stQuarter 2nd 3rd 4th Quarter Total
Quarter Quarter
Total sales Br 250,000 275,000 300,000 325,000 1,150,000
1stQuarter 2nd Quarter 3rd Quarter 4th Quarter Total

Cash receipt from customer
A/R balance od dec 31,2018 70,000
1st qu. Cash sale (30%) 75,000
1st qu. Credit sale (70%, 60% cash collected in 1st qu. 105,000
1st qu. Credit sale of 70% 40 % credit collected in 2 nd qur. 70,000
2nd qu. Cash sale (30%) 82,500
2nd qu. Credit sale (70%, 60% cash collected in 2nd qu. 115,500
2nd qu. Credit sale of 70% 40 % credit collected in 3 nd qur. 77,000
3nd
qu. Cash sale (30%) 90,000
3rd qu. Credit sale (70%, 60% cash collected in 3nd qu. 126,000
3rd qu. Credit sale of 70% 40 % credit collected in 4th 84,000
qur.
4th
qu. Cash sale (30%) 97,500
4th qu. Credit sale (70%, 60% cash collected in 4th qu. 136,500
Total cash receipt from the customer 250,000 268,000 293,000 318,000 1,129,000
• A/R on dec 31,2019
• 4th qu. Credit sale (70%, 60% cash collected in 4th
qu)= 91,000

Cash Payments
• Capital expenditures
• Product costs:
– Direct materials purchases
– Direct labor costs
– Manufacturing overhead costs
• Selling and administrative expenses

Short-Term
Financing

Short-Term Financing




Budgeted Income Statement
• Below is a summary of the sources used to

calculate the budgeted income statement.


Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Describe how information

technology can be used in
the budgeting process

How Can Information Technology Be
Used in the Budgeting Process?
• To conduct sensitivity analysis
• To combine individual unit budgets to
create the companywide master budget

Prepare an operating budget

for a merchandising company
(Appendix 22A)

for a Merchandising Company?

Sales Budget

Sales Budget

Inventory, Purchases, and Cost of
Goods Sold Budget
• The cost of goods sold computation shows
the relationship between inventory,
purchases, and ending inventory:
• The equation can be rearranged to find the

amount of purchases required:

Inventory, Purchases, and Cost of
Goods Sold Budget

Selling and Administrative
Expense Budget

Prepare a financial budget for

a merchandising company
(Appendix 22A)

How Are Financial Budgets Prepared
for a Merchandising Company?
• The budgets for a merchandising company
include:
– Capital expenditures budget
– Cash budget
– Budgeted income statement
– Budgeted balance sheet
– Budgeted statement of cash flows

Cash Receipts

Cash Payments

Cash Payments

• Companies often borrow funds to maintain

a minimum cash balance.
• For example, Greg’s Games borrows cash
in $1,000 increments at an annual interest
rate of 12%.





Budgeted Statement of Cash Flows


Master Budgets: Operating and Financial Budget

Uploaded by

Copyright:

Available Formats

Master Budgets: Operating and Financial Budget

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Master Budgets: Operating and Financial Budget

Uploaded by

Copyright:

Available Formats

Chapter 7

© 2016 Pearson Education, Inc. 22-2

© 2016 Pearson Education, Inc. 22-3

© 2016 Pearson Education, Inc. 22-4

© 2016 Pearson Education, Inc. 22-5

• The quantitative expression of a proposed

© 2016 Pearson Education, Inc. 22-6

• A budget is a financial plan that managers

© 2016 Pearson Education, Inc. 22-7

© 2016 Pearson Education, Inc. 22-8

 Budgeting requires managers to plan for

© 2016 Pearson Education, Inc. 22-9

© 2016 Pearson Education, Inc. 22-10

• Budgeting procedures vary from company

© 2016 Pearson Education, Inc. 22-11

© 2016 Pearson Education, Inc. 22-12

Define budget types and the

© 2016 Pearson Education, Inc. 22-13

© 2016 Pearson Education, Inc. 22-14

• A static budget is a budget prepared for

© 2016 Pearson Education, Inc. 22-15

• The master budget is the set of budgeted

© 2016 Pearson Education, Inc. 22-17

Prepare an operating budget

© 2016 Pearson Education, Inc. 22-18

© 2016 Pearson Education, Inc. 22-19

© 2016 Pearson Education, Inc. 22-20

• The forecast of sales revenue is the cornerstone of the

© 2016 Pearson Education, Inc. 22-21

• The production budget determines the number of tablets

© 2016 Pearson Education, Inc. 22-22

© 2016 Pearson Education, Inc. 22-23

© 2016 Pearson Education, Inc. 22-24

• After completing the production budget,

© 2016 Pearson Education, Inc. 22-25

© 2016 Pearson Education, Inc. 22-26

© 2016 Pearson Education, Inc. 22-27

• The predetermined overhead allocation

© 2016 Pearson Education, Inc. 22-28

© 2016 Pearson Education, Inc. 22-29

© 2016 Pearson Education, Inc. 22-30

© 2016 Pearson Education, Inc. 22-31

Prepare a financial budget

© 2016 Pearson Education, Inc. 22-32

© 2016 Pearson Education, Inc. 22-33

• The purchase of long-term assets is part

© 2016 Pearson Education, Inc. 22-34

• The cash budget pulls information from

© 2016 Pearson Education, Inc. 22-35

© 2016 Pearson Education, Inc. 22-36

Total sales Br 250,000 275,000 300,000 325,000 1,150,000

1stQuarter 2nd Quarter 3rd Quarter 4th Quarter Total

© 2016 Pearson Education, Inc. 22-38

• Selling and administrative expenses

© 2016 Pearson Education, Inc. 22-39

© 2016 Pearson Education, Inc. 22-40

© 2016 Pearson Education, Inc. 22-41

© 2016 Pearson Education, Inc. 22-42

© 2016 Pearson Education, Inc. 22-43