CHP 9: Managerial Accounting Edisi 11 by Hilton & Platt

Managerial Accounting
Creating value in a Dynamic Business Environment

Tenth Edition
Chapter 9
Financial
Planning and
Analysis: The
Master Budget
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9-1
without the prior written consent of McGraw-Hill Education.
Learning Objective 9-1 – Explain the
relationship between financial planning
and analysis and the master budget.
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Financial Planning and Analysis (FP &
A) Systems
• A financial planning and analysis (FP&A)
system helps managers assess the company’s
future and know if they are reaching their
performance goals. A complete FP&A system
includes subsystems for
1) planning,
2) measuring and recording results, and
3) evaluating performance.
• The planning component of the FP&A system is
called the master budget. It is intended to help
ensure that plans are consistent and yield a result
that makes sense for the organization.
Learning Objective 9-2 – List and
explain five purposes of budgeting.

Purposes of Budgeting Systems
• Budget
– A detailed plan, expressed in quantitative
terms, that specifies how resources will be
acquired and used during a specified period of
time.
1. Planning
2. Facilitating Communication and Coordination
3. Allocating Resources
4. Controlling Profit and Operations
5. Evaluating Performance and Providing
Incentives

Types of Budgets (1 of 2)
• Detail Budget
1. Materials
2. Production
3. Sales
• Master Budget
– Covering all phases of a company’s operations.
• Budgeted Financial Statements
– Income Statement
– Balance Sheet
– Statement of Cash Flows

Types of Budgets (2 of 2)

Learning Objective 9-3 – Describe
the similarities and differences in the
operational budgets prepared by
manufacturers, service-industry firms,
merchandisers, and non-profit
organizations.

Formation of Master Budget

Financing Budgets
• Cash Receipts Budget
– Provides information about cash inflows.
Considers things such as the timing of sales
and collections, collection patterns, and sales
that will never be collected.
• Cash Disbursements Budget
– Portrays spending plans based other
budgets prepared

Learning Objective 9-4 – Explain
the concept of activity-based
budgeting and the logic it brings to
the budgeting process.

Activity-Based Costing versus
Activity-Based Activity Based
Budgeting (ABB)
• Activity-Based Costing (ABC)
1. Resources
2. Activities
3. Cost objects: products and services produced,
and customers served.
• Activity-Based Budgeting (ABB)
1. Forecast of products and services to be
produced and customers served.
2. Activities
3. Resources
Learning Objectives 9-5 & 9-6–
Prepare each of the budget schedules
that make up the master budget in a
non-manufacturing firm, and that exist
in manufacturing budgets as well (LO
9-5). Prepare the additional master
budget schedules required by a
manufacturing firm (LO 9-6).

Sales Budget (1 of 2)
• Breakers, Inc. is preparing budgets for the
quarter ending June 30.
• Budgeted sales for the next five months are:
April 20,000
May 50,000
June 30,000
July 25,000
August 15,000
• The selling price is $10 per unit.

Sales Budget (2 of 2)
April May June Quarter
Budgeted
20,000 50,000 30,000 100,000
sales (units)
Selling price
$ 10 $ 10 $ 10 $ 10
per unit
Total Revenue $ 200,000 $ 500,000 $ 300,000 $ 1,000,000

Production Budget (1 of 2)
• The management of Breakers, Inc. wants
ending inventory to be equal to 20% of the
following month’s budgeted sales in units.
• On March 31, 4,000 units were on hand.
• Let’s prepare the production budget.

Production Budget (2 of 2)
Sales in units 20,000 50000 30000 100000
Add: desired end. inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less: beg. inventory 4,000 10,000 6,000 4,000
Units to be produced 26,000 46,000 29,000 101,000
20,000: From sales budget

4,000: March 31 ending inventory
Ending inventory becomes beginning inventory the
next month
May sales 50,000 units
Desired percent 20%
Desired inventory 10,000 units
Direct-Material Budget (1 of 3)
• At Breakers, five pounds of material are
required per unit of product.
• Management wants materials on hand at the
end of each month equal to 10% of the
following month’s production.
• On March 31, 13,000 pounds of material are
on hand. Material cost $.40 per pound.
– Let’s prepare the direct materials budget.

From our production budget
Production in units 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add: desired ending inventory 23,000 14,500 11,500 11,500
Total needed 153,000 244,500 156,500 516,500
Less: beginning inventory 13,000 23,000 14,000 13,000
Materials to be purchased 140,000 221,500 142,500 503,500
The “Production in units” for April, May, and June is

from our production budget.
23,000: 10% of the following month’s production
13,000 March 31 inventory
July Production
Sales in units 25,000
Add: desired ending inventory 3,000
Totals units needed 28,000
Less: beginning inventory 5,000
Production in units 23,000
June Ending Inventory

July production in units 23,000
Materials per unit 5
Total units needed $ 115,000
Inventory percentage 10%
June desired ending inventory 11,500

Direct-Labor Budget (1 of 2)
• At Breakers, each unit of product requires 0.1
hours of direct labor.
• The Company has a “no layoff” policy so all
employees will be paid for 40 hours of work each
week.
• In exchange for the “no layoff” policy, workers
agreed to a wage rate of $8 per hour regardless of
the hours worked (No overtime pay).
• For the next three months, the direct labor
workforce will be paid for a minimum of 3,000
hours per month.
Let’s prepare the direct labor budget.

Direct-Labor Budget (2 of 2)
Production in units 26,000 46,000 29,000 101,000
Direct labor hours 0.10 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900 10,100
Guaranteed labor hours 3,000 3,000 3,000
Labor hours paid 3,000 4,600 3,000 10,600
Wage rate $8 $8 $8 $8
Total direct labor cost $ 24,000 $ 36,800 $ 24,000 $ 84,000
• The “Production in units” for April, May, and June

is from our production budget.
• The labor hours paid in April, May, and June is the
greater of labor hours required or labor hours
guaranteed.
Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.

Indirect labor $ 17,500 $ 26,500 $ 17,900 $ 61,900
Indirect material 7,000 12,600 8,600 28,200
Utilities 4,200 8,400 5,200 17,800
Rent 13,300 13,300 13,300 39,900
Insurance 5,800 5,800 5,800 17,400
Maintenance 8,200 9,400 8,200 25,800
$ 56,000 $ 76,000 $ 59,000 $ 191,000

Selling and Administrative Expense
Budget (1 of 2)
• At Breakers, variable selling and
administrative expenses are $ 0.50 per unit
sold.
• Fixed selling and administrative expenses are
$ 70,000 per month.
• The $ 70,000 fixed expenses include $10,000
in depreciation expense that does not require
a cash outflow for the month.

Selling and Administrative Expense
Budget (2 of 2)
Sales in units 20,000 50,000 30,000 100,000
Variable S&A rate $ 0.50 $ 0.50 $ 0.50 $ 0.50
Variable expense $ 10,000 $ 25,000 $ 15,000 $ 50,000
Fixed S&A expense 70,000 70,000 70,000 210,000
Total expense 80,000 95,000 85,000 260,000
Less: noncash expenses 10,000 10,000 10,000 30,000
Cash disbursements $ 70,000 $ 85,000 $ 75,000 $230,000
The “Sales in units” for April, May, June is from our

Sales budget.

Cash Receipts Budget (1 of 2)
• At Breakers, all sales are on account.
• The company’s collection pattern is:
– 70% collected in the month of sale,
– 25% collected in the month following the
sale,
– 5% is uncollected.
• The March 31 accounts receivable balance of
$30,000 will be collected in full.

Cash Receipts Budget (2 of 2)
Accounts rec. - 3/31 $ 30,000 $ 30,000
April sales
70% × $ 200,000 140,000 140,000
25% × $ 200,000 $ 50,000 50,000
May sales
70% × $ 500,000 350,000 350,000
25% × $ 500,000 $ 125,000 125,000
June sales
70% × $300,000 210,000 210,000
Total cash collections
$ 170,000 $ 400,000 $ 335,000 $ 905,000

Cash Disbursement Budget (1 of 3)
• Breakers pays $ 0.40 per pound for its
materials.
• One-half of a month’s purchases are paid for in
the month of purchase; the other half is paid
in the following month.
• No discounts are available.
• The March 31 accounts payable balance is $
12,000.

Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% × $56,000 28000 28,000
50% × $56,000 $ 28000 28,000
May purchases
50% × $88,600 44300 44,300
50% × $88,600 $ 44,300 44,300
June purchases
50% × $56,800 28,400 28,400
Total cash payments for materials $ 40,000 $ 72,300 $ 72,000 $ 185,000
140,000 lbs. × $ .40/lb. = $ 56,000

• Breakers:
– Maintains a 12% open line of credit for
$75,000.
– Maintains a minimum cash balance of $30,000.
– Borrows and repays loans on the last day of
the month.
– Pays a cash dividend of $25,000 in April.
– Purchases $143,700 of equipment in May and
$48,300 in June paid in cash.
– Has an April 1 cash balance of $40,000.

Cash Budget (Collections and
Disbursements) (1 of 3)
Beginning cash balance $ 40,000 $30,000 $ 30,000 $ 40,000
Add: cash collections 170,000 400,000 335,000 905,000
Total cash available 210,000 430,000 365,000 945,000
Less: disbursements
Materials 40,000 72,300 72,700 185,000
Direct labor 24,000 36,800 24,000 84,000
Mfg. overhead 56,000 76,000 59,000 191,000
Selling and admin. 70,000 85,000 75,000 230,000
Equipment purchase - 143,700 48,300 192,000
Dividends 25,000 - - 25,000
Total disbursements 215,000 413,800 279,000 907,800
Excess (deficiency) of Cash
$ (5,000) $ 16,200 $ 86,000 $ 37,000
available over disbursements

• Cash collections: 170,000 is from our Cash
Receipts Budget.
• Materials: 40,000 is from our Cash Disbursements
Budget.
• Direct labor: 24,000 is from our Direct Labor
Budget
• Mgf. Overhead: 56,000 is from our Overhead
Budget
• Selling and Admin: 70,000 is from our Selling and
Administrative Expense Budget
• To maintain a cash balance of $30,000, Breakers
must borrow $35,000 on its line of credit.
• Breakers must borrow an addition $13,800 to
maintain a cash balance of $30,000.
• At the end of June, Breakers has enough cash to
repay the $48,800 loan plus interest at 12%.

Cash Budget (Financing and
Repayment) (1 of 2)
Excess (deficiency) of Cash

$ (5,000) $ 16,200 $ 86,000 $ 37,200
available over disbursements
Financing:
Ending cash balance for35,000
Borrowing April is13,800
the beginning 48,800
May
balance.
Repayments - - (48,800) (48,800)
Interest - - (838) (838)
Total financing 35,000 13,800 (49,638) (838)
Ending cash© balance
Copyright $ 30,000
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Cash Budget (Financing and
Repayment) (2 of 2)
Monthly
Month’s Interest
Interest Rate Borrowing Interest
Outstanding Expense
Rate
12% / 12 = 1% $ 35,000 × 1% × 2 = $ 700
12% / 12 = 1% $ 13,800 × 1% × 1 = 138
$ 838

Cost of Goods Manufactured
Direct material:
Beg. material inventory $ 5,200 $ 9,200 $ 5,800 $ 5,200
Add: Materials purchases 56,000 88,600 56,800 201,400
Material available for use 61,200 97,800 62,600 206,600
Deduct: End. material inventory 9,200 5,800 4,600 4,600
Direct material used 52,000 92,000 58,000 202,000
Direct labor 24,000 36,800 24,000 84,800
Manufacturing overhead 56,000 76,000 59,000 191,000
Total manufacturing costs 132,000 204,800 141,000 477,800
Add: Beg. Work-in-process
3,800 16,200 9,400 3,800
inventory
Subtotal 135,800 221,000 150,400 481,600
Deduct: End. Work-in-process
16,200 9,400 17,000 17,000
inventory
Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600

Cost of Goods Sold
Cost of goods
$ 119,600 $ 211,600 $ 211,600 $ 464,600
manufactured
Add: Beg. finished-

18,400 46,000 46,000 18,400
goods inventory
Cost of goods available

138,000 257,600 257,600 483,000
for sale
Deduct: End. finished.-

46,000 27,600 27,600 23,000
goods inventory
Cost of goods sold $ 92,000 $ 230,000 $ 230,000 $ 460,000

Budgeted Income Statement

Budgeted Statement of Cash Flows
(1 of 2)
Cash flows from operating
activities:
Cash receipts from customers $ 170,000
Cash payments:
To suppliers of raw material (40,000) (72,300) (72,700) (185,000)
For direct labor (24,000) (36,000) (24,000) (84,000)
For manufacturing-overhead
(56,000) (76,000) (59,000) (191,000)
expenditures
For selling and administrative
(70,000) (85,000) (75,000) (230,000)
expenses
For interest - - (838) (838)
Total cash payments (190,000) (270,100) (231,538) (691,638)
Net cash flow from operating
$ (20,000) $ 129,000 $ 103,462 $ 213,362
activities

Budgeted Statement of Cash Flows
(2 of 2)
Cash flows from investing
activities:
Purchase of equipment - (143,700) (48,300) (192,000)
Net cash used by investing
$- $ (143,700) $ (48,300) $ (192,000)
activities
Cash flows from financing
activities:
Payment of dividends (25,000) - - (25,000)
Principle of bank loan 35,000 13,800 - 48,800
Repayment of bank loan - - (48,800) (48,800)
Net cash provided by financing
$ 10,000 $ 13,800 $ (48,800) $ (25,000)
activities
Net increase in cash $ (10,000) $ - $ 6,362 $ (3,638)
Balance in cash, beginning 40,000 30,000 30,000 40,000
Balance in cash. end of month $ 30,000 $ 30,000 $ 36,362 $ 36,362

Budgeted Balance Sheet (1 of 2)
• Breakers reports the following account
balances on March 31 prior to preparing its
budgeted financial statements for June 30:
– Land - $50,000
– Building (net) - $148,000
– Common stock - $217,000
– Retained earnings - $46,400

Budgeted Balance Sheet (2 of 2)

Learning Objective 9-7 – Discuss
the role of assumptions and
predictions in budgeting.

Financial Planning Model
When the interactions of the elements of the
master budget are expressed as a set of
mathematical relations, it becomes a financial
planning model that can be used to answer
“what if” questions about unknown variables.

Learning Objective 9-8 – Describe a
typical organization’s process of
budget administration.

Budget Administration
• The Budget Committee is a standing
committee responsible for . . .
– overall policy matters relating to the budget.
– coordinating the preparation of the budget.

International Aspects of Budgeting
• Firms with international operations face
special problems when preparing a budget.
1. Fluctuations in foreign currency exchange
rates.
2. High inflation rates in some foreign countries.
3. Differences in local economic conditions.

Learning Objective 9-9 – Discuss
the behavioral issues in budgeting.

Behavioral Impact of Budgets
Budgetary Slack: Padding the Budget
People often perceive that their performance
will look better in their superiors’ eyes if they
can “beat the budget.”

Participative Budgeting
Flow of Budget Data
• Supervisors
• Middle Management
• Top Management


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Managerial Accounting

Creating value in a Dynamic Business Environment

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution

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• The selling price is $10 per unit.

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April May June Quarter

Total Revenue $ 200,000 $ 500,000 $ 300,000 $ 1,000,000

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20,000: From sales budget

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The “Production in units” for April, May, and June is

June Ending Inventory

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• The “Production in units” for April, May, and June

April May June Quarter

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The “Sales in units” for April, May, June is from our

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140,000 lbs. × $ .40/lb. = $ 56,000

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April May June Quarter

Excess (deficiency) of Cash

12% / 12 = 1% $ 35,000 × 1% × 2 = $ 700

12% / 12 = 1% $ 13,800 × 1% × 1 = 138

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Add: Beg. finished-

Cost of goods available

Deduct: End. finished.-

Cost of goods sold $ 92,000 $ 230,000 $ 230,000 $ 460,000

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