Chapter 9

Budgetary
Planning

Managerial Accounting, Sixth Edition

9-1
 Chapter 9 Budgetary Planning
Learning Objectives
After studying this chapter, you should be able to:

[1] Indicate the benefits of budgeting.

[2] State the essentials of effective budgeting.

[3] Identify the budgets that comprise the master budget.

[4] Describe the sources for preparing the budgeted income statement.

[5] Explain the principal sections of a cash budget.

[6] Indicate the applicability of budgeting in non-manufacturing companies.

9-2
 Preview of Chapter 9

Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
9-3
 Budgeting Basics
 Budgeting is critical to financial well-being
► Students budget your study time & money
► Family budget income & expenses
► Governmental agencies budget revenue & expenditures
 Use budgets in planning and controlling operations
 Specific focus is on how budgeting is used as a planning
tool by management.
► Maintain enough cash to pay creditors
► Sufficient raw material to meet production requirement
► Have adequate finished goods to meet expected sales
9-4
 Budgeting Basics

Budget: a formal written statement of management’s plans

for a specified future time period, expressed in financial terms.

 Quantitative plan for acquiring and using resources over

a specified time period

 Used for two distinct purposes: planning and control

 Planning: Management responsibility

 Control: Involves steps taken by management to ensure

all parts of the organization are working together to
achieve the goals set at planning stage
9-5
 Budgeting Basics

Budget: a formal written statement of management’s plans

for a specified future time period, expressed in financial terms.

 Planning: management responsibility

► Involves developing goals and preparing various budgets

to achieve those goals

► Process of establishing enterprise-wide objectives

► Set forth objectives of the company & the proposed way

to accomplishing them.

9-6
 Budgeting Basics

Budget: a formal written statement of management’s

plans for a specified future time period, expressed in
financial terms.

 Primary way to communicate agreed-upon objectives to

all parts of the company.

 Promotes efficiency.

 Control device - important basis for performance

evaluation once adopted.

9-7
 Budgeting Basics

Budgeting and Accounting

 Accounting information makes major contribution to
the budgeting process.

 Historical accounting data on revenues, costs, and

expenses help in formulating future budgets.

 Accountants normally responsible for presenting

management’s budgeting goals in financial terms.

9-8
 Budgeting Basics

Budgeting and Accounting

 Translate management’s plans & communicate the
budget to employees throughout the company.

 Prepare periodic budget reports that provide the basis

for measuring performance & comparing actual
results with planned objectives.

 The budget and its administration are the responsibility

of management.

9-9
 Budgeting Basics

The Benefits of Budgeting

 Requires all levels of management to plan ahead.
 Provides definite objectives for evaluating performance.
 Creates an early warning system for potential problems.
 Facilitates coordination of activities within the business.
 Results in greater management awareness of the entity’s
overall operations.
 Motivates personnel throughout organization to meet
planned objectives.

9-10 LO 1 Indicate the benefits of budgeting.

 Budgeting Basics

The Benefits of Budgeting

A budget is
an aid (tool) to management;
not a substitute for management.

Budget cannot operate or enforce itself but

companies can realizes the benefits of budgeting
when it is administer carefully

9-11 LO 1 Indicate the benefits of budgeting.

 Budgeting Basics

Essentials of Effective Budgeting

 Depends on a sound organizational structure with
authority and responsibility for all phases of operations
clearly defined.

 Based on research and analysis with realistic goals.

 Accepted by all levels of management.

 Once adopted budget is an important tool for

evaluating performance

9-12 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Essentials of Effective Budgeting

 Managers should systematically & periodically
review variations between actual and expected
result to determine the causes.

 Individuals should not be held responsible for

variations that are beyond their control.

9-13 LO 2 State the essentials of effective budgeting.

 Budgeting Basics
Length of the Budget Period
 May be prepared for any period of time.
► Most common - one year.
► Supplement with monthly and quarterly budgets.
► Different budgets may cover different time periods.
 Long enough to provide an attainable goal and minimize the
impact of seasonal or cyclical fluctuations.
 Short enough for reliable estimates.
 Most common use budget - continuous 12 month budgets
– drop the month just ended and add a future month – keeps
management planning with a full year ahead.
9-14 LO 2 State the essentials of effective budgeting.
 Budgeting Basics

Length of the Budget Period

 Factors that influence the length of budget.
► Types of budget.
► Nature of organization.
► The need for periodic appraisal.
► Prevailing business condition

9-15 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

The Budgeting Process

 Base budget goals on past performance
► Collect data from organizational units.
► Begin several months before end of current year.

 Develop budget within the framework of a sales

forecast.
► Shows potential industry sales.
► Shows company’s expected share of such sales

9-16 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

The Budgeting Process

 Factors considered in Sales Forecasting:
1. General economic conditions
2. Industry trends
3. Market research studies
4. Anticipated advertising and promotion
5. Previous market share
6. Price changes
7. Technological developments
9-17 LO 2 State the essentials of effective budgeting.
 Budgeting Basics

The Budgeting Process

 Budgeting process is often informal for small Co.
 Large companies – “budget committees” responsible
for coordinating the preparation of budget
 Budget committees – President, Treasurer, Chief
accountant (controller) and management personnel from
each of major areas of the Company - sales, production
& research department.

9-18 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

The Budgeting Process

 Budget committee – serves as review board where
managers can defend their budget goals & request.
 Differences are reviewed, modified if necessary &
reconciled.
 Budget is put in its final form by budget committee,
approved & distributed.

9-19 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Budgeting and Human Behavior

Participative Budgeting: Each level of management
should be invited to participate.

 Have significant impact on human behavior.

 May inspire higher levels of performance or discourage

additional effort.

 Depends on how budget developed and administered.

This “bottom-to-top” approach is called
Participative Budgeting

9-20 LO 2 State the essentials of effective budgeting.

 Budgeting Basics
Participative Budgeting
 Advantages:
► More accurate budget estimates because lower level
managers have more detailed knowledge of their area.
► Tendency to perceive process as fair due to involvement
of lower level management.

 Overall goal - produce budget considered fair and

achievable by managers while still meeting corporate
goals.
 Risk of unreliable budgets greater when they are
developed from “top-down”.
9-21 LO 2 State the essentials of effective budgeting.
 Budgeting Basics

Participative Budgeting
 Disadvantages:
► Can be time consuming and costly.
► Can foster budgetary “gaming” through budgetary
slack.
► “Budgetary slack” - situation where managers
intentionally underestimate budgeted revenues or
overestimate budgeted expenses so that budget goals
are easier to meet.
To minimize budgetary slack – higher level managers must
carefully review & thoroughly question the budget projections.
9-22 LO 2 State the essentials of effective budgeting.
 Budgeting Basics

Participative Budgeting
 For budget to be effective, top management must
completely support the budget.
 Budget is use as an important basis for evaluating
performance & positive aid in achieving projected
goals.
 Effect of evaluation is positive when top
management tempers criticism with advice &
assistance.

9-23 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Participative Budgeting

 Manager is likely to respond negatively if top

management uses the budget to assess blame
 Budget should not be used as a pressure
device to force improved performance.

9-24 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Flow of budget data from lower management to top levels

Illustration 9-1

9-25 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Budgeting and Long-Range Planning

Three basic differences :
Time period:
1. Time period involved.
Budgeting is short-term –
2. Emphasis usually one year and
often prepared for short
3. Detail presented period, a month or
quarter;
Long range planning - at
least five years.

9-26 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Budgeting and Long-Range Planning

Three basic differences : Emphasis:
1. Time period involved. Budget - focus on specific
short term goals – meeting
2. Emphasis annual profit objectives.
Long range planning -
3. Detail presented identifies long term goals,
select strategies to achieve the
goals & develop policies &
plan to implement strategies.
Anticipated economic trend &
political environment.

9-27 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

Budgeting and Long-Range Planning

Three basic differences : Detail presented:
1. Time period involved. Budget – can be very detailed
Long range planning - less
2. Emphasis detail and intended more for
review of progress toward long
3. Detail presented term goals.
Example:
Budget: Government budget To develop best strategy to
tabled every year at Parlimen maximize Co’s performance
over an extended future period.
Long term planning: Vision
2020 or Government
Transformation program

9-28 LO 2 State the essentials of effective budgeting.

 Budgeting Basics

The Master Budget

 Set of interrelated budgets that constitutes a plan of
action for a specified time period.

 Contains two classes of budgets:

► Operating budgets. Individual budgets that result

in the preparation of the
► Financial budgets. budgeted income statement
– establish goals for sales
and production personnel.

9-29 LO 3 Identify the budgets that comprise the master budget.

 Budgeting Basics

The Master Budget

 Set of interrelated budgets that constitutes a plan of
action for a specified time period.

 Contains two classes of budgets:

► Operating budgets. Capital expenditures budget,

Cash budget and Budgeted
► Financial budgets. balance sheet – focus
primarily on cash needed to
fund expected operations
and planned capital
expenditures.
9-30 LO 3 Identify the budgets that comprise the master budget.
 Budgeting Basics
Illustration 9-2

Components of Expected
the Master Revenue

Budget Expected
manufacturing cost
= Cost of goods sold

Expected
Operating
expenses

Expected
Net
Income

9-31 Expected Cash flow & financial position LO 3

 Preparing the Operating Budgets

Sales Budget
 First budget prepared.
 Derived from the sales forecast.
► Management’s best estimate of sales revenue for the
budget period.

 Every other budget depends on the sales budget.

 Prepared by multiplying expected unit sales volume for
each product times anticipated unit selling price.

9-32 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Sales Budget
 An inaccurate sales budget – adversely affect net income.
► Overly optimistic sales budget – excessive inventories may
be sold at reduced price, or

► Conservative budget - may result in loss of sales revenue

due to inventory shortages

9-33 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Illustration – Hayes Company

 Expected sales volume: 3,000 units in the first quarter
with 500-unit increases in each succeeding quarter.
 Sales price: $60 per unit.
Illustration 9-3

9-34 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Production Budget
 Shows units that must be produced to meet anticipated
sales.

 Derived from sales budget plus the desired change in

ending finished goods inventory.

 Essential to have a realistic estimate of ending inventory.

Illustration 9-4

9-35 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Production Budget Illustration 9-4

 Excessive inventories in one quarter may lead to

cutbacks in production & employee layoffs in subsequent
quarter.

 Inadequate inventories may result in added costs for

overtime work or lost sales.
 Production budget provides the basis for the budgeted cost
for each manufacturing cost element.
9-36 LO 3 Identify the budgets that comprise the master budget.
 Preparing the Operating Budgets

Illustration – Hayes Company

Hayes Co. believes it can meet future sales needs with an ending
inventory of 20% of next quarter’s sales.
Illustration 9-5

9-37 LO 3
 Example

Becker Company estimates that 2014 unit sales will be 12,000 in

quarter 1, 16,000 in quarter 2, and 20,000 in quarter 3, at a unit
selling price of $30. Management desires to have ending finished
goods inventory equal to 15% of the next quarter’s expected unit
sales. Prepare a production budget by quarter for the first 6 months
of 2014.

16,000 x 15%

9-38 12,000 x 15%

LO 3
 Preparing the Operating Budgets

Direct Materials Budget

 Shows both the quantity and cost of direct materials to be
purchased.

 Formula for direct materials quantities.

Illustration 9-6

 Budgeted cost of direct materials to be purchased = required

units of direct materials x anticipated cost per unit.
 Inadequate inventories could result in temporary shutdowns
9-39
of production. LO 3
 Preparing the Operating Budgets

Illustration – Hayes Company

Because of its close proximity to suppliers,
 Hayes Company maintains an ending inventory of raw
materials equal to 10% of the next quarter’s production
requirements.
 The manufacture of each Rightride requires 2 pounds of
raw materials, and the expected cost per pound is $4.
 Assume that the desired ending direct materials amount is
1,020 pounds for the fourth quarter of 2011.
 Prepare a Direct Materials Budget.

9-40 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Illustration – Hayes Company

Illustration 9-7

9-41
LO 3
 Example
Soriano Company is preparing its master budget for 2014. Relevant data
pertaining to its sales, production, and direct materials budgets are as
follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly
sales are 20%, 25%, 30%, and 25% respectively. The sales price is
expected to be $50 per unit for the first three quarters and $55 per unit
beginning in the fourth quarter. Sales in the first quarter of 2015 are
expected to be 10% higher than the budgeted sales for the first quarter of
2014.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost of
$5 per pound. Management desires to maintain raw materials inventories
at 5% of the next quarter’s production requirements. Assume the
production requirements for the first quarter of 2015 are 810,000 pounds.

9-42
LO 3
 Example

Prepare the sales, production, and direct materials budgets by

quarters for 2014.

9-43 LO 3 Identify the budgets that comprise the master budget.

 Example

Prepare the sales, production, and direct materials budgets by

quarters for 2014.

9-44 LO 3 Identify the budgets that comprise the master budget.

 Example

Prepare the sales, production, and direct materials budgets.

9-45
LO 3
 Preparing the Operating Budgets

Direct Labor Budget

 Shows both the quantity of hours and cost of direct labor
necessary to meet production requirements.

 Critical in maintaining a labor force that can meet expected

production.
 Total direct labor cost formula:
Illustration 9-8

9-46 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Illustration: Direct labor hours are determined from the

production budget. At Hayes Company, two hours of direct labor
are required to produce each unit of finished goods. The
anticipated hourly wage rate is $10.
Illustration 9-9

9-47 LO 3 Identify the budgets that comprise the master budget.

 Preparing the Operating Budgets

Manufacturing Overhead Budget

 Shows the expected manufacturing overhead costs for
the budget period.
 Distinguishes between fixed and variable overhead
costs.

9-48 LO 3 Identify the budgets that comprise the master budget.

 Manufacturing Overhead Budget

Illustration: Hayes Company expects variable costs to fluctuate

with production volume on the basis of the following rates per
direct labor hour: indirect materials $1.00, indirect labor $1.40,
utilities $0.40, and maintenance $0.20. Thus, for the 6,200 direct
labor hours to produce 3,100 units, budgeted indirect materials are
$6,200 (6,200 x $1), and budgeted indirect labor is $8,680 (6,200 x
$1.40). Hayes also recognizes that some maintenance is fixed.
The amounts reported for fixed costs are assumed.

Prepare a Manufacturing Overhead Budget.

9-49 LO 3 Identify the budgets that comprise the master budget.

 Manufacturing Overhead Budget

Illustration 9-10

9-50 LO 3
 Preparing the Operating Budgets

Selling and Administrative Expense Budget

 Projection of anticipated operating expenses.
 Distinguishes between fixed and variable costs.

Illustration: Variable expense rates per unit of sales are sales

commissions $3 and freight-out $1. Variable expenses per quarter
are based on the unit sales from the sales budget (Illustration 9-3).
Hayes expects sales in the first quarter to be 3,000 units. Fixed
expenses are based on assumed data.

Prepare a selling and administrative expense budget.

9-51 LO 3 Identify the budgets that comprise the master budget.

 Selling and Administrative Expense Budget

Illustration 9-11

9-52 LO 3
 Preparing the Operating Budgets

Budgeted Income Statement

 Important end-product of the operating budgets.
 Indicates expected profitability of operations.
 Provides a basis for evaluating company performance.
 Prepared from the operating budgets:

► Sales ► Manufacturing Overhead

► Direct Materials ► Selling and Administrative Expense
► Direct Labor

9-53 LO 4 Describe the sources for preparing the budgeted income statement.
 Budgeted Income Statement

Illustration: To find the cost of goods sold, it is first necessary to

determine the total unit cost of producing one Rightride, as follows.
Illustration 9-12

Second, determine Cost of Goods Sold by multiplying units sold

times unit cost: 15,000 units x $44 = $660,000

Refer to Illustration 9-3

9-54 LO 4 Describe the sources for preparing the budgeted income statement.
 Preparing the Operating Budgets

Illustration: All data for the income statement come from the
individual operating budgets except the following: (1) interest
expense is expected to be $100, and (2) income taxes are
estimated to be $12,000.
Illustration 9-13

9-55 LO 4
 EXAMPLE

Soriano Company is preparing its budgeted income statement

for 2014. Relevant data pertaining to its sales, production, and
direct materials budgets can be found on the following slide.
(refer to slides 9-43,9-44,9-45 & 9-47) Soriano budgets 0.5
hours of direct labor per unit, labor costs at $15 per hour, and
manufacturing overhead at $25 per direct labor hour. Its
budgeted selling and administrative expenses for 2014 are
$12,000,000. (a) Calculate the budgeted total unit cost. (b)
Prepare the budgeted income statement for 2014.

9-56 LO 4 Describe the sources for preparing the budgeted income statement.
 Example

Soriano Company is preparing its master budget for 2014. Relevant data
pertaining to its sales, production, and direct materials budgets are as
follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly
sales are 20%, 25%, 30%, and 25% respectively. The sales price is
expected to be $50 per unit for the first three quarters and $55 per unit
beginning in the fourth quarter. Sales in the first quarter of 2015 are
expected to be 10% higher than the budgeted sales for the first quarter of
2014.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost of
$5 per pound. Management desires to maintain raw materials inventories
at 5% of the next quarter’s production requirements. Assume the
production requirements for the first quarter of 2015 are 810,000 pounds.

9-57
LO 4
 Example

Calculate the budgeted total unit cost and prepared the budgeted
income statement 2014

9-58 LO 4
 Preparing the Financial Budgets

Cash Budget
 Shows anticipated cash flows.
 Often considered to be the most important output in
preparing financial budgets.
 Contains three sections:
► Cash Receipts
► Cash Disbursements
► Financing

 Shows beginning and ending cash balances.

9-59 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Cash Budget - Basic Format

Illustration 9-14

9-60 LO 5 Explain the principal sections of a cash budget.

 Cash Budget
 Cash Receipts Section
► Expected receipts from the principal sources of revenue –
cash sales and collection from credit sales
► Expected interest and dividends receipts, proceeds from
planned sales of investments, plant assets, and capital
stock.
 Cash Disbursements Section
► Expected cash payments for direct materials and labor,
taxes, dividends, plant assets, etc. include projected
payment for income taxes, dividends, investments and plant
assets.

9-61 LO 5
 Cash Budget

 Financing Section
► Expected borrowings and repayments of borrowed funds
plus interest.
► Needs this section when there is cash deficiency or cash
balance below management’s minimum required balance.

9-62 LO 5
 Preparing the Financial Budgets

Cash Budget
 Must prepare in sequence.
 Ending cash balance of one period is the beginning cash
balance for the next.
 Data obtained from other budgets and from management.
 Often prepared for the year on a monthly basis.
 Contributes to more effective cash management.
 Shows managers the need for additional financing before
actual need arises.
 Indicates when excess cash will be available.

9-63 LO 5
 Cash Budget

Illustration – Hayes Company Assumptions

1. The January 1, 2014, cash balance is expected to be $38,000. Hayes
wishes to maintain a balance of at least $15,000.

2. Sales (Illustration 9-3): 60% are collected in the quarter sold and 40%
are collected in the following quarter. Accounts receivable of $60,000
at December 31, 2013, are expected to be collected in full in the first
quarter of 2014.

3. Short-term investments are expected to be sold for $2,000 cash in the

first quarter.
Continued

9-64 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration – Hayes Company Assumptions

4. Direct materials (Illustration 9-7): 50% are paid in the quarter
purchased and 50% are paid in the following quarter. Accounts
payable of $10,600 at December 31, 2013, are expected to be paid in
full in the first quarter of 2014.

5. Direct labor (Illustration 9-9): 100% is paid in the quarter incurred.

6. Manufacturing overhead (Illustration 9-10) and selling and

administrative expenses (Illustration 9-11): All items except
depreciation are paid in the quarter incurred.

7. Management plans to purchase a truck in the second quarter for

$10,000 cash.

9-65 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration – Hayes Company Assumptions

8. Hayes makes equal quarterly payments of its estimated annual
income taxes.

9. Loans are repaid in the earliest quarter in which there is sufficient

cash (that is, when the cash on hand exceeds the $15,000 minimum
required balance).

Prepare a schedule of collections from customers.

9-66 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration – Prepare a schedule of collections from customers.

Illustration 9-15

9-67 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration – Prepare a schedule of cash payments for direct

materials. Illustration 9-16
Illustration 9-16

9-68 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration

Illustration 9-17

9-69
LO 5
 Preparing the Financial Budgets

Budgeted Balance Sheet

 A projection of financial position at the end of the
budgeted period

 Developed from the budgeted balance sheet for the

preceding year and the budgets for the current year.

Illustration: Pertinent data from the budgeted balance sheet at

December 31, 2013, are as follows.

9-70 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

Illustration: Pertinent data from the budgeted balance sheet at

December 31, 2013, are as follows.

1. Cash: Ending cash balance $37,900, shown in the cash budget

(Illustration 9-17).

2. Accounts receivable: 40% of fourth-quarter sales $270,000,

shown in the schedule of expected collections from customers
(Illustration 9-15). 40% x $270,000 = $108,000
Continued

9-71 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

3. Finished goods inventory: Desired ending inventory 1,000

units, shown in the production budget (Illustration 9-5) times the
total unit cost $44 (shown in Illustration 9-12). 1,000 units x $44 = $44,000

4. Raw materials inventory: Desired ending inventory 1,020

pounds, times the cost per pound $4, shown in the direct
materials budget (Illustration 9-7). 1,020 pounds x $4 = $4,080

5. Buildings and equipment: December 31, 2013, balance

$182,000, plus purchase of truck for $10,000 (Illustration 9-17).
$182,000 + $10,000 = $192,000

Continued

9-72 LO 5 Explain the principal sections of a cash budget.

 Preparing the Financial Budgets

6. Accumulated depreciation: December 31, 2013, balance

$28,800, plus $15,200 depreciation shown in manufacturing
overhead budget (Illustration 9-10) and $4,000 depreciation
shown in selling and administrative expense budget (Illustration
9-11). $28,800 + $15,200 + $4,000 = $48,000

7. Accounts payable: 50% of fourth-quarter purchases $37,200,

shown in schedule of expected payments for direct materials
(Illustration 9-16). 50% x $37,200 = $18,600

8. Common stock: Unchanged from the beginning of the year.

9. Retained earnings: December 31, 2013, balance $46,480, plus

net income $47,900, shown in budgeted income statement
(Illustration 9-13). $46,480 + $47,900 = $94,380
9-73 LO 5 Explain the principal sections of a cash budget.
 Preparing the Financial Budgets
Budgeted Balance Sheet Illustration 9-18

9-74 LO 5
 Example

Martian Company management wants to maintain a minimum

monthly cash balance of $15,000. At the beginning of March, the
cash balance is $16,500, expected cash receipts for March are
$210,000, and cash disbursements are expected to be $220,000.
How much cash, if any, must be borrowed to maintain the desired
minimum monthly balance?

9-75 LO 5 Explain the principal sections of a cash budget.

 Budgeting in Nonmanufacturing Companies

Merchandisers
 Sales Budget: starting point and key factor in developing
the master budget.
 Use a purchases budget instead of a production budget.
 Does not use the manufacturing budgets (direct materials,
direct labor, manufacturing overhead).
 To determine budgeted merchandise purchases:
Illustration 9-19

9-76 LO 6 Indicate the applicability of budgeting in non-manufacturing companies.

 Budgeting in Nonmanufacturing Companies

Illustration: Lima’s budgeted sales for July $300,000 and for

August $320,000. Cost of Goods Sold: 70% of sales. Desired
ending inventory is 30% of next month’s Cost of Goods Sold.
Required merchandise purchases for July are computed as follows.
Illustration 9-20

9-77 LO 6 Indicate the applicability of budgeting in non-manufacturing companies.

 Budgeting in Nonmanufacturing Companies

Service Enterprises
 Critical factor in budgeting is coordinating professional
staff needs with anticipated services.
 Problems if overstaffed:
 Disproportionately high labor costs.
 Lower profits due to additional salaries.
 Increased staff turnover due to lack of challenging work.
 Problems if understaffed:
 Lost revenues because existing and future client needs for
services cannot be met.
 Loss of professional staff due to excessive work loads.
9-78 LO 6
 Budgeting in Nonmanufacturing Companies

Not-For-Profit Organizations
 Just as important as for profit-oriented company.
 Budget process differs from profit-oriented company.
 Budget on the basis of cash flows (expenditures and
receipts), not on a revenue and expense basis.
 Starting point is usually expenditures, not receipts.
 Management’s task is to find receipts needed to support
planned expenditures.
 Budget must be followed, overspending often illegal.

9-79 LO 6 Indicate the applicability of budgeting in non-manufacturing companies.