1. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-1 Master Budgets and Planning Chapter 23

2. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-2 Learning objectives 1.Budget Process 2.Budget Administration 3.Master Budget 4.Decision Analysis: Activity-Based Budget

3. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-3 Advantages Communicates plans and instructions Promotes analysis and a focus on the future Motivates employees Provides a basis for evaluating performance against past or expected results Coordinates business activities Defines goals and objectives 1. Budget Process

4. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-4 Consists of managers from all departments of the organization. Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. 2. Budget Administration - Budget Committee

5. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-5 Flow of Budget Data is a bottom-up process. Budget Committee

6. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-6 1999200020012002 Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. Budget Timing

7. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-7 Continuous or Rolling Budget The budget may be a twelve-month budget that rolls forward one month as the current month is completed. 1999200020012002 Budget Timing

8. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-8 3. Master Budget - Master Budget Components Sales budget Merchandise Purchases Prepare financial budgets: l cash l income l balance sheet Prepare capital expenditure budget Prepare selling and general administrative budgets

9. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-9 Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel 3. Master Budget - Sales Budget

10. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-10 In September 2005, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months: Sales Budget

11. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-11 Sales Budget Exh. 23-6

12. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-12 The quantity purchased is affected by: Just-in-time inventory systems that enable purchases of smaller, frequently delivered quantities. Safety stock inventory systems that provide protection against lost sales caused by delays in supplier shipments. 3. Master Budget - Merchandise Purchases Budget

13. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-13 Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks are on hand on September 30. Inventory to be purchased = Budgeted ending inventory + Budgeted cost of sales for the period – Budgeted beginning inventory Let’s prepare the purchases budget for Hockey Den. Merchandise Purchases Budget Exh. 23-7

14. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-14 Merchandise Purchases Budget Exh. 23-8

15. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-15 Merchandise Purchases Budget Exh. 23-8

16. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-16 Merchandise Purchases Budget Exh. 23-8

17. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-17 Merchandise Purchases Budget Exh. 23-8

18. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-18 Let’s prepare the sales budget for Hockey Den. Hockey Den pays sales commissions equal to 10 percent of total sales. Hockey Den pays a monthly salary of $2,000 to its sales manager. 3. Master Budget - Selling Expense Budget

19. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-19 From Hockey Den’s sales budget Selling Expense Budget Exh. 23-9

20. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-20 Let’s prepare the general and administrative expense budget for Hockey Den. General and administrative salaries are $4,500 per month. Depreciation of equipment is $1,500 per month. 3. Master Budget - General and Administrative Expense Budget

21. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-21 General and Administrative Expense Budget Exh. 23-10

22. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-22 Cash Budget Expected Receipts and Disbursements Budgeted Income Statement Budgeted Balance Sheet 3. Master Budget - Financial Budgets

23. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-23 Forty percent of Hockey Den’s sales are for cash. The remaining sixty percent are credit sales that are collected in full in the month following sale. Let’s prepare the cash receipts budget for Hockey Den. Budgeted Cash Receipts

24. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-24 60 percent of September sales are collected in October From Hockey Den’s sales budget Budgeted Cash Receipts Exh. 23-12

25. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-25 40% of sales 60% of sales Budgeted Cash Receipts Exh. 23-12

26. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-26 Budgeted Cash Receipts Exh. 23-12

27. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-27 Hockey Den’s purchases of merchandise are entirely on account. Full payment is made in the month following purchase. The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. Cash Disbursements for Purchases

28. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-28 From merchandise purchases budget Cash Disbursements for Purchases Exh. 23-13

29. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-29 Hockey Den: Will pay a cash dividend of $3,000 in November. Will purchase $25,000 of equipment in December. Has an income tax liability of $20,000 from the previous quarter that will be paid in October. Has a September 30 cash balance of $20,000. Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. Continue Cash Budget

30. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-30 Hockey Den: Pays interest equal to one percent of the prior month’s ending loan balance. Repays loans when the ending cash balance exceeds $20,000. Owes $10,000 on this loan arrangement on September 30. Has 40 percent income tax rate. Will pay taxes for current quarter next year. Let’s prepare the cash budget for Hockey Den. Cash Budget

31. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-31 From Cash Receipts Budget Exh. 23-11

32. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-32 From Cash Disbursements for Purchases Exh. 23-11

33. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-33 From Selling Expense Budget Exh. 23-11

34. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-34 From General and Administrative Expense Budget Depreciation is a non-cash expense. Exh. 23-11

35. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-35.01 × $10,000 Because Hockey Den maintains a minimum cash balance of $20,000, the company must borrow $12,800. Exh. 23-11

36. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-36 Ending cash balance for October is the beginning November balance. Cash Budget Continued Exh. 23-11

37. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-37.01 × $22,800 Exh. 23-11 Cash balance is sufficient to repay the $22,800 loan.

38. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-38 Ending cash balance for November is the beginning December balance. Cash Budget Continued Exh. 23-11

39. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-39 Exh. 23-11

40. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-40 Cash Budget Continued Exh. 23-11

41. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-41 Let’s prepare the budgeted income statement for Hockey Den. Cash Budget Budgeted Income Statement Completed Budgeted Income Statement

42. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-42 Exh. 23-14 From the Sales Budget

43. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-43 From the Merchandise Purchases Budget Exh. 23-14

44. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-44 From the Selling Expense Budget Exh. 23-14

45. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-45 From the General and Administrative Expense Budget Depreciation is a non-cash expense. Exh. 23-14

46. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-46 From the Cash Budget Exh. 23-14

47. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-47 $71,672 ×.40 Exh. 23-14

48. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-48 Let’s prepare the budgeted balance sheet for Hockey Den. Budgeted Balance Sheet Completed Budgeted Income Statement Budgeted Balance Sheet

49. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-49 Hockey Den reports the following account balances on September 30 prior to preparing its budgeted financial statements: Equipment $200,000 Accumulated depreciation $ 36,000 Common stock $150,000 Retained earnings $ 41,800 Let’s prepare the budgeted balance sheet for Hockey Den. Preparing a Budgeted Balance Sheet

50. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-50 Exh. 23-15

51. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-51 From the Cash Budget Exh. 23-15

52. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-52 From the Cash Receipts Budget Exh. 23-15

53. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-53 From the Merchandise Purchases Budget 8,100 units @ $6 Exh. 23-15

54. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-54 $200,000 September 30 balance plus the $25,000 December acquisition Exh. 23-15

55. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-55 $36,000 September 30 balance plus the $4,500 from the General and Administrative Expense Budget Exh. 23-15

56. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-56 From the Merchandise Purchases Budget Exh. 23-15

57. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-57 From the Budgeted Income Statement Exh. 23-15

58. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-58 From the Cash Budget Exh. 23-15

59. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-59 Exh. 23-15

60. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-60 4. Decision Analysis - Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. Exh. 23-16

61. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 23-61 End of Chapter 23