1. Profit Planning Master Budget Chapter 7
Introduction to Managerial Accounting, Brewer, Garrison,Noreen
Power Points from website - adapted by Cynthia Fortin, CPA, CMA

2. Planning Develop objectives Prepare various budgets
To achieve those objectives
Planning involves developing objectives and preparing various budgets to achieve those objectives.
Control involves the steps taken by management to increase the likelihood that the objectives set down at the planning stage are attained and that all parts of the organization are working together toward that goal.
To be effective, a good budgeting system must provide for both planning and control. Good planning without effective control is time wasted.

3. Control
Take steps to meet objectives

4. Budgeting allows a company to
1. Think about and plan for the future
2. Allocate resources
3. Uncover potential bottlenecks
4. Coordinate activities
Budgets communicate management’s plans throughout the organization.
Budgets force managers to think about and plan for the future.
The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively.
The budget process can uncover potential bottlenecks before they occur.
Budgets coordinate the activities of the entire organization by integrating the plans of its various parts.
Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.
While our focus in this chapter is on preparing operating budgets for a one-year time frame, longer-term budgets also can be very helpful to organizations from a planning standpoint.
5. Define and communicate objectives

5. Responsibility Accounting
Managers
held responsible for items
they can actually control.
The premise of responsibility accounting is that managers should be held responsible only for those items that they can control to a significant extent. Responsibility accounting systems enable organizations to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results. The point is not to penalize individuals for missing targets.

6. Master Budget A comprehensive plan for the upcoming accounting period
Usually prepared for a one-year period
Based on a series of budget assumptions
The first bullet and its secondary bullets are all automated.
The first click brings in the second bullet.

7. The Master Budget: An Overview
Sales budget
Selling and
administrative
budget
Ending inventory
budget
Production budget
Direct materials
budget
Direct labor budget
Manufacturing
overhead budget
The master budget consists of a number of separate but interdependent budgets.
This chart is to illustrate the interdependency of the various individual budgets.
The sales budget shows the expected sales for the budget period expressed in amounts and units. It is usually based on a company’s sales forecast.
All other parts of the master budget are dependent on the sales budget.
The production budget is prepared after the sales budget.
It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory.
The production budget in turn directly influences the direct materials, direct labor, and manufacturing overhead budgets, which in turn enable the preparation of the ending finished goods inventory budget.
These budgets are then combined with data from the sales budget and the selling and administrative expense budget to determine the cash budget.
The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget.
The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet.
Cash budget
Budgeted income statement
Budgeted balance sheet

9. Assumptions Sales Forecasting
Project past sales trends using judgment or statistical methods.
Estimate sales based on industry data for similar businesses.
Predict sales based on forecasted economic variables.
Gather sales predictions from sales and other personnel.
Conduct market research to estimate customer demand.
budget assumptions, which are plans and predictions about next period’s operating activities.

11. Assumptions Cost Forecasting Budget individual costs as
% of revenues or
% change from the prior year
Evaluate cost behaviour

13. Assumptions Cash flow forecasting Identify Sources and Uses of cash
Estimate their Timing

15. Operating Budgets Production Ending Finished Goods Inventory
Sales
Production
Direct materials
Direct labor
Manufacturing overhead
Ending Finished Goods Inventory
Sales and Administration
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16. Financial Budgets Cash Budgeted financial statements Income
Balance Sheet
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17. Revenue and Production Budgets
SJ, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell 6,000 units in April and 7,000 units in May. SJ prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April.
The given information and the solution templates are automated.
The first click brings in the solution for the revenue budget.
The second click brings in the solutions for the production budget.
How much Revenue will SJ earn?
How many units will SJ produce?

18. Direct Materials Purchase Budget
SJ’s product uses 0.3 kg of direct material per unit, at a cost of $4/kg. There were 220 kg of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials budget for April.
From production budget
Given
6500*0.3*20%
given
The given information and the solution template are automated.
The first click brings in the solution.
How much DM must SJ purchase to produce the budget units?

19. Direct Labour Budget How many labour hours are needed?
SJ’s product uses 0.2 hours of direct labour at a cost of $12/hr. Prepare the direct labour budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
How many labour hours are needed?
How much will DL cost?

20. Manufacturing Overhead Budget
SJ’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labour hour. Prepare the manufacturing overhead budget for April.
From labor budget
Given
given
The given information and the solution template are automated.
The first click brings in the solution.
How much total overhead will be incurred?

21. Direct Materials Used and Ending inventory budget
Prepare the April ending inventories budget for direct materials.
From DM budget
220 * $4
390 * $4
The given information and the solution template are automated.
The first click brings in the solution.
How much DM will be used to produce the budget units?

22. Finished Goods Ending Inventory Budget
Prepare the April ending inventories budget for finished goods.
Total cost
Divided by
Unit cost
The given information and the solution template are automated.
The first click brings in the solution.
Multiply by
What will the ending inventory of FG be?
First compute unit cost of FG then apply it to FG ending inventory units

23. Cost of goods sold Budget
Assume that SJ’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April.
Given
Previous slide
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The first click brings in the solution.
We need cost of goods sold for the Income statement budget

24. Selling & Administration Budget
SJ’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April.
The given information and the solution template are automated.
The first click brings in the solution.

25. Income Statement Budget
Suppose that SJ’s income tax rate is 28%. Prepare the budgeted income statement for April.
The given information and the solution template are automated.
The first click brings in the solution.

26. How is a cash budget developed?

27. Cash Budgets Summary of the expected amounts
and timing of cash receipts and disbursements.
Operating cash receipts estimated from budgeted revenues.
Operating cash disbursements estimated from the budgets for DM, DL, O/H and support departments.
The first bullet is automated.
One click is required for each remaining bullet and sub-bullet.

28. Cash budgets 1. Cash receipts 2. Cash disbursements
3. Short-term borrowings or investments

29. Cash Budget Example
Race Manufacturing is preparing a cash budget for a new division that will begin operations on January 1, Race expects sales to be 40% cash and 60% on account, with 45% of credit sales are collected in the month of the sale. In the month after the sale, 50% of credit sales should be collected, with the remainder collected two months after the sale. Budgeted sales for the first three months are $100,000, $150,000 and $200,000. Prepare a cash receipts budget for the first three months of 2015.
The given information and the solution template are automated.
The first click brings in the solution.

30. Cash Budget Example
Race Manufacturing budgets direct labour costs to be 30% of sales revenue and expects to pay this in the month the costs are incurred. Direct materials purchases will be on account, and paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Budgeted direct material purchases for the first 3 months of 2010 are $20,000, $35,000 and $45,000. Compute the budgeted cash disbursements for direct materials and labour for the first 3 months of 2012.
The given information and the solution template are automated.
The first click brings in the solution.

31. Cash Budget Example
Race Manufacturing budgets other variable costs at 4% of sales revenue and will be paid in the month after the costs are incurred. Other budgeted fixed costs are $6,000 per month and will be paid in the month incurred. Prepare a cash disbursements budget for all costs, including direct materials and labour.
The given information and the solution template are automated.
The first click brings in the solution.

32. Cash Budget Example
Using the information from the prior slides, prepare a schedule of budgeted cash flows for Race Manufacturing’s new division for the first three months of 2015.
The given information and the solution template are automated.
The first click brings in the solution.