Chapter 9 - Budgeting, Production, Cash and Master Budget PDF

9-1 Chapter 9 Budgeting, Production, Cash and Master Budget  9-2 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcomin...

9-1 Chapter 9 Budgeting, Production, Cash and Master Budget  9-2 The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1. The act of preparing a budget is called budgeting. 2. The use of budgets to control an organization’s activity is known as budgetary control.  9-3 Advantages of Budgeting Define goal and objectives Communicate Think about and plans plan for the future Advantages Coordinate Means of allocating Activities resources “Goal Congruence” Uncover potential bottlenecks  9-4 Responsibility Accounting Managers should be held responsible for those items — and only those items — that the manager can actually control to a significant extent.  9-5 Strategic Plan  Identifies strategies for future activities and operations  Long- and short-term objectives  Objectives form the basis of the budget.  9-6 Master Budget  Comprehensive financial plan for the organization as a whole  Typically, the master budget is for a one-year period, corresponding to the fiscal year of the company.  Yearly budgets are broken down into quarterly and monthly budgets  Allows frequent comparison of actual and budgeted data  9-7 Choosing the Budget Period Operating Budget 2012 2013 2014 2015 The annual operating budget A continuous budget is a may be divided into quarterly 12-month budget that rolls or monthly budgets. forward one month (or quarter) as the current month (or quarter) is completed. LO 1  9-8 Budget Committee Budget Committee:  Reviews the budget  Provides policy guidelines and budgetary goals  Resolves differences that arise as the budget is prepared  Approves the final budget  Monitors actual performance as the year unfolds  9-9 Participative (Self-Imposed) Budget Top M an ag em en t M id d le M id d le M an ag em en t M an ag em en t S u p ervis or S u p ervis or S u p ervis or S u p ervis or A budget is prepared with the full cooperation and participation of managers at all levels. A participative budget is also known as a participative budget.  9-10 Participative (Self-Imposed) Budgets Participative (self-imposed) budgets should be reviewed by higher levels of management to prevent “budgetary slack.” Most companies do not rely exclusively upon participative budgets in the sense that top managers usually initiate the budget process by issuing broad guidelines in terms of overall profits or sales.  9-11 Zero-Based Budgeting A zero-based budget requires managers to justify all budgeted expenditures, not just changes in the budget from the prior year. Most Most managers managers argue argue that that zero-based zero-based budgeting budgeting is is too too time time consuming consuming and and costly costly to to justify justify on on an an annual annual basis. basis. LO 1  9-12 Major Components of the Master Budget Operational Describe the income- generating activities of a Budgets firm Detail the inflows and Financial outflows of cash and the Budgets overall financial position  9-13 The Master Budget: An Overview Sales budget Selling and Ending inventory administrative Production budget budget budget Direct materials Direct labour Manufacturing budget budget overhead budget Cash Budget Budgeted Budgeted income balance sheet statement  9-14 Sales Budget Preparation Steps  Develop a sales forecast:  This is the responsibility of the marketing department.  One approach is the bottom-up approach.  Salespeople submit sales projections.  The forecast is reviewed by the budget committee.  The budget committee recommends changes prior to approval.  9-15 Budgeting Example  Royal Company is preparing budgets for the quarter ending June 30.  Budgeted sales for the next five months are:  April 20,000 units  May 50,000 units  June 30,000 units  July 25,000 units  August 15,000 units.  The selling price is $10 per unit.  9-16 The Sales Budget The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30th.  9-17 Preparing a Budgeted Income Statement Information:. Sales budget, $57,000 Cost of goods sold, $40,611 Selling and administrative expenses, $8,650 ($600 is depreciation), interest expense is $70 Income tax rate, 40% Required: Prepare a budgeted income statement.  9-18 Preparing a Budgeted Income Statement Moose Patties Inc. Budgeted Income Statement for the Year Ending December Sales 31, 2017 $57,000 Less: Cost of Goods Sold (40,611) Gross Margin $16,389 Less: Selling and Admin. (8,650) Expenses Operating Income $7,739 Less: Interest Expense (70) Income Before Taxes $7,669 Less: Income Taxes Income before (3,068) Net Income taxes of $7,669 × $4,601 40% tax rate  9-19 CORNERSTONE 9.11 Preparing an Accounts Receivable Collections Schedule Information: 25% of total sales are cash sales. 75% of total sales are credit sales.  90% of these are paid during the quarter of sale, and 10% are paid in the following quarter. 2017 Sales: (Q1 $10,000; Q2 $12,000; Q3 $15,000; Q4 $20,000)  9-20 CORNERSTONE 9.11 Preparing an Accounts Receivable Collections Schedule Information (cont’d): Balance in Accounts Receivable at the end of 2016: $1,350  Will be collected in cash during the first quarter of 2017 Required: Calculate cash sales expected in each quarter of 2017. Prepare a schedule showing cash receipts from sales expected in each quarter of 2017.  9-21 CORNERSTONE 9.11 SOLUTION Preparing an Accounts Receivable Collections Schedule Cash Receipts from Quarters Sales Dec. 31, 2017 1 2 3 4 Cash Sales $2,50 1st quarter 0 sales × 25% Received on $10,000 × 25% account from: Quarter 4, 2016 All1,350 of 4th quarter 2016’s A/R balance will be collected in the 1st quarter of 2017.  9-22 CORNERSTONE 9.11 SOLUTION Preparing an Accounts Receivable Collections Schedule Cash Receipts from Quarters Sales Dec. 31, 2017 1 2 3 4 Cash Sales $2,50 0 Received on Account from: Quarter 4, 2016 1,350 Quarter 1, 2017 6,750 90% of this quarter’s credit sales  9-23 CORNERSTONE 9.11 SOLUTION Preparing an Accounts Receivable Collections Schedule Cash Receipts from Quarters Sales Dec. 31, 2017 1 2 3 4 25% of 2nd Cash Sales $2,50 $3,00 quarter’s sales 0 0 Received on Remainder of Account from 1st quarter’s credit sales are Q4, 2016 1,350 collected along Q1, 2017 6,750 750 with 90% of 2nd Q2, 2017 8,100 quarter’s credit sales Q3, 2017 Q4, 2017  9-24 CORNERSTONE 9.11 SOLUTION Preparing an Accounts Receivable Collections Schedule Cash Receipts from Quarters Sales Dec. 31, 2017 1 2 3 4 Cash Sales $2,50 $3,00 $3,75 $5,000 0 0 0 Received on Acc. from Q4, 2016 1,350 Q1, 2017 6,750a 750b Q2, 2017 8,100c 900d Q3, 2017 10,12 1,125f 5e g  9-25 CORNERSTONE 9.12 Determining Cash Payments on Accounts Payable Information: All raw materials purchases on account  80% paid for in the quarter of purchase  20% paid for in the following quarter 4th quarter 2016 purchases, $5,000  9-26 CORNERSTONE 9.12 Determining Cash Payments on Accounts Payable Information (cont’d): Expected raw material purchases for 2017 Cornerstones 9.4:  Quarter 1, $4,492  Quarter 2, $5,176  Quarter 3, $6,480  Quarter 4, $6,904 Required: Prepare a schedule showing anticipated payments for accounts payable for materials.  9-27 CORNERSTONE 9.12 SOLUTION Determining Cash Payments on Accounts Payable Cash Payment on Quarter A/P Source 1 2 3 4 Q4, 2016 1,000a Q1, 2017 898c 3,594b Q2, 2017 4,141d 1,035e Q3, 2017 5,184f 1,296g Q4, 2017 5,523h _ _ _ Total Cash $4,59 $5,039 $6,219 $6,819 Payments 4  9-28 Practice Exercise 9-10 Prepare a Budgeted Income Statement Exercise 9-11 Prepare an Accounts Receivable Aging Schedule Exercise 9-12 Prepare an Accounts Payable Schedule Ex 9-14 Prepare a Cash Budget Ex 9-16 Prepare a Sales Budget