Financial Planning and Analysis The Master Budget Chapt.docx

Financial Planning and Analysis: The Master Budget
Chapter 9
Copyright © 2014 by The McGraw-Hill Companies, Inc. All
rights reserved.
McGraw-Hill/Irwin
Helen (H) - CHAPTER 9: CORRECTION REQUIRED
Note that not all slides include slide numbers.
Helen (H) - Slide 12
Note that I deleted the previous Slide 12 because the slides was
blank.
Chapter 9: Financial Planning and Analysis: The Master Budget
Learning Objective 9-1 – Explain the relationship between
financial planning and analysis and the master budget.
9-*
Learning Objective 9-1. Explain the relationship between
financial planning and analysis and the master budget.

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.
9-*
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. (LO 9-1)
Learning Objective 9-2 – List and explain five purposes of
budgeting.
9-*

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.PlanningFacilitating Communication and
CoordinationAllocating ResourcesControlling Profit and
OperationsEvaluating Performance and Providing Incentives
9-*
A budget is a detailed plan, expressed in quantitative terms, that
specifies how resources will be acquired and used during a
specified period of time. The procedures used to develop a
budget constitute a budgeting system. Budgeting systems have
five primary purposes: (1) planning, (2) facilitating
communication and coordination, (3) allocating resources, (4)
controlling profit and operations and (5) evaluating performance
and providing incentives. (LO 9-2)
Types of Budgets
Detail
Budget
Detail
Budget
Detail

Budget
Master
Budget
Covering all
phases of
a company’s
operations.
Sales
Production
Materials
9-*
Different types of budgets serve different purposes. A master
budget, or profit plan, is a comprehensive set of detailed
budgets covering all phases of an organization’s operations for
a specified period of time. (LO 9-2)
Types of Budgets
Budgeted Financial
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
9-*
Budgeted financial statements, often called pro forma financial
statements, show how the organization’s financial statements
will appear at a specified time if operations proceed according
to plan. Budgeted financial statements include a budgeted

income statement, a budgeted balance sheet, and a budgeted
statement of cash flows. (LO 9-2)
Types of Budgets
2014
2015
2016
2017
Continuous or
Rolling Budget
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
L o n g R a n g e B u d g e t s
Capital budgets with acquisitions
that normally cover several years.
Financial budgets with financial resource acquisitions.
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Helen (H) - Slide 8 CORRECTION REQUIRED
The years on the timeline should be updated.
Helen (H) - Slide 8

Reduced the font size for the words 'Continuous or Rolling
Budget.'
A capital budget is a plan for the acquisition of capital assets,
such as buildings and equipment. A financial budget is a plan
that shows how the organization will acquire its financial
resources, such as through the issuance of stock or incurrence of
debt. Budgets are developed for specific time periods. Short-
range budgets cover a year, a quarter, or a month, whereas long-
range budgets cover periods longer than a year. Rolling budgets
are continually updated by periodically adding a new
incremental time period, such as a quarter, and dropping the
period just completed. Rolling budgets are also called revolving
budgets or continuous budgets. (LO 9-2)
Learning Objective 9-3 – Describe the similarities and
differences in the operational budgets prepared by
manufacturers, service-industry firms, merchandisers, and non-
profit organizations.
9-*
Learning Objective 9-3. Describe the similarities and
differences in the operational budgets prepared by
manufacturers, service-industry firms, merchandisers, and
nonprofit organizations.
Budgeted Income Statement
Cash Budget
Sales of Services or Goods

Ending
Inventory
Budget
Work in Process
and Finished
Goods
Production
Budget
Direct
Materials
Budget
Selling and
Administrative
Budget
Direct
Labor
Budget
Overhead
Budget
Ending
Inventory
Budget
Direct Materials
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
9-*
The master budget comprises many separate budgets, or
schedules, that are interdependent. Based on the sales budget, a
company develops a set of operational budgets that specify how
its operations will be carried out to meet the demand for its
goods or services. A manufacturing company develops a

production budget, which shows the number of product units to
be manufactured and ending inventory budgets. From the
production budget, a manufacturer develops budgets for the
direct materials, direct labor, and overhead that will be required
in the production process. A budget for selling and
administrative expenses also is prepared. The operational
portion of the master budget is similar in a merchandising firm,
but instead of a production budget for goods, a merchandiser
develops a budget for merchandise purchases. A merchandising
firm will not have a budget for direct materials. Based on the
sales budget for its services, a service industry firm develops a
set of budgets that show how the demand for those services will
be met. Every business prepares a cash budget. This budget
shows expected cash receipts, as a result of selling goods or
services, and planned cash disbursements, to pay the bills
incurred by the firm. The final portion of the master budget
includes a budgeted income statement, a budgeted balance
sheet, and a budgeted statement of cash flows. (LO 9-3)
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.
Helen (H) - Slide 11 NN

Last sentence: Changed the word 'patters' to read 'patterns.'
After developing its sales and operational budgets, a company
knows where its money will be coming from and where it will
go. But several timing issues affect when they can collect the
cash. To plan for this, companies develop a set of financing
budgets including a cash receipts budget, a cash disbursements
or payments budget, and an overall cash budget.
A cash receipts budget considers the timing of sales and
collections, collection patterns, and even the sales that may
never be collected. (LO 9-3)
Financing Budgets
Cash Disbursements Budget
Portrays spending plans based other budgets prepared
First paragraph, last sentence: Changed the words '30 days for
more" to read 'for 30 days or more.'
Second paragraph, fifth sentence: Changed the word 'an' after
the word 'ahead' to read 'and.'
The cash disbursements budget depends on the spending plans
outlined in several operational budgets. For example, the

company may not pay cash immediately for most of their
expenditures. Rather, it will pay its suppliers according to
standard commercial arrangements, often delaying payments for
30 days or more past the delivery date.
Finally, the cash budget can be prepared. The cash budget plays
a critical role in planning the firm’s cash needs. It summarizes
the various cash inflows and outflows and incorporates
nonoperational cash flows as well. It also addresses financing
issues. By predicting the company’s net cash position at
frequent points, the firm can plan ahead and can arrange sources
of short term borrowings and make short term investments as
the cash positions allow. The ability to foresee and avoid cash
emergencies makes the cash budget a very important and
powerful tool. (LO 9-3)
Learning Objective 9-4 – Explain the concept of activity-based
budgeting and the logic it brings to the budgeting process.
9-*
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)
Resources
Cost objects:
products and services

produced, and
customers served.
Activities
Resources
Forecast of products
and services to be
produced and
customers served.
Activities
9-*
Activity-Based
Costing (ABC)
Activity-Based
Budgeting (ABB)
Applying ABC concepts to the budgeting process yields
activity-based budgeting or ABB. Under ABB, the first step is
to specify the products or services to be produced and the
customers to be served. Then the activities that are necessary to
produce these products and services are determined. Finally, the
resources necessary to perform the specified activities are
quantified. Conceptually, ABB takes the ABC model and
reverses the flow of the analysis. ABC assigns resource costs to

activities, and then it assigns activity costs to products and
services produced and customers served. ABB, on the other
hand, begins by forecasting the demand for products and
services as well as the customers to be served. These forecasts
then are used to plan the activities for the budget period and to
allocate the resources necessary to carry out the activities. (LO
9-4)
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).
9-*
Changed the colon after the word 'well' to a period. Added the
learning objective after the first and second sentences.
The next series of steps cover the development of the master
budget. This section will look at two learning objectives
simultaneously.
Learning Objective 9-5. 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.
And
Learning Objective 9-6. Prepare the additional master budget

schedules required by a manufacturing firm.
Sales Budget
Breakers, Inc. 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-*
We will prepare each type of budget that make up the master
budget.
Breakers, Inc. is preparing budgets for the quarter ending June
30. The unit sales are projected for the months of April through
August. The selling price per unit is budgeted at $10. (LO 9-5)
Sales Budget
9-*
Added a comma after the word 'June.'

The projected units are multiplied by $10 for each month to
determine the budgeted revenue for the months of April, May,
June, and the quarter. (LO 9-5)
SalesAprilMayJuneQuarterBudgeted sales
(units)20,00050,00030,000100,000Selling price per unit$ 10$
10$ 10$ 10Total Revenue$ 200,000$ 500,000$ 300,000$
1,000,000
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ProductionAprilMayJuneJulySales in
units20,00050,00030,00025,000Add: desired ending
inventory10,0006,0005,0003,000Total
needed30,00056,00035,00028,000Less: begin-ning
inventory4,00010,0006,0005,000Production in
units26,00046,00029,00023,000May sales (sales
budget)50,000Percent of inventory desired20%Desired ending
inventory10,000
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MaterialsAprilMayJuneQuarterProduction in
units26,00046,00029,000101,000Materials per
unit5555Production needs130,000230,000145,000505,000Add:
desired ending inventory23,00014,50011,50011,500Total
needed153,000244,500156,500516,500Less: beginning
inventory13,00023,00014,50013,000Materials to be
purchased140,000221,500142,000503,500
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LaborAprilMayJuneQuarterProduction in
units26,00046,00029,000101,000Direct labor
hours0.050.050.050.05Labor hours
required1,3002,3001,4505,050Guaranteed labor
hours1,5001,5001,500Labor hours
paid1,5002,3001,5005,300Wage rate$ 10$ 10$ 10$ 10total
direct labot cost$ 15,000$ 23,000$ 15,000$ 53,000

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OverheadAprilMayJuneQuarterProduction in
units26,00046,00029,000101,000Variable mfg. OH rate$ 1$
1$ 1$ 1Variable mfg. OH costs$ 26,000$ 46,000$
29,000$ 101,000Fixed mfg. OH
costs50,00050,00050,000150,000Total mfg. OH costs$
76,000$ 96,000$ 79,000$ 251,000Less: noncash
costs20,00020,00020,00060,000Cash disbursements for
manufacturing OH$ 56,000$ 76,000$ 59,000$ 191,000
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Eding Inv.Production costs per unitQuantityCostTotalDirect
materials5.00lbs.$ 0.40$ 2.00Direct labor0.05hrs.$ 10.00$
0.50Manufacturing overhead0.05hrs.$ 49.70$ 2.49$
4.99Budgeted finished goods inventoryEnding inventory in
units3,000Unit product cost$ 4.99Ending finished goods
inventory$ 14,970
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SellingAprilMayJuneQuarterSales in
units20,00050,00030,000100,000Variable selling and admin.
rate$ 0.50$ 0.50$ 0.50$ 0.50Variable expense$ 10,000$
25,000$ 15,000$ 50,000Fixed selling and admin.
expense70,00070,00070,000210,000Total
expense80,00095,00085,000260,000Less: noncash
expenses10,00010,00010,00030,000Cash disburse-ments for
selling & admin.$ 70,000$ 85,000$ 75,000$ 230,000
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Cash inAprilMayJuneQuarterAccounts rec. - March 31$
30,000$ 30,000April sales70% x $200,000140,000140,00025%
x $200,000$ 50,00050,000May sales70% x
$500,000350,000350,00025% x $500,000$
125,000125,000June sales70% x $300,000210,000210,000Total
cash collections$ 170,000$ 400,000$ 335,000$ 905,000

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Cash MaterialsAprilMayJuneQuarterAccounts pay. March 31$
12,000$ 12,000April purchases50% x $5600028,00028,00050%
x $56000$ 28,00028,000May purchases50% x
$88,60044,30044,30050% x $88600$ 44,30044,300June
purchases50% x $56,80028,40028,400Total cash payments for
materials$ 40,000$ 72,300$ 72,700$ 185,000
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CashAprilMayJuneQuarterBeginning cash balance$ 40,000$
30,000$ 30,000$ 40,000Add: cash
collections170,000400,000325,000905,000Total cash
available210,000430,000355,000945,000Less:
disbursementsMaterials40,00072,30072,700185,000Direct
labor15,00023,00015,00053,000Mfg.
overhead56,00076,00059,000191,000Selling and
admin.70,00085,00075,000230,000Equipment purchase-
0143,70048,300192,000Dividends49,000- 0-
049,000230,000400,000270,000900,000Excess (deficiency) of
Cash available over disbursements(20,000)30,00085,00045,000
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Sheet11AprilMayJuneQuarterExcess (deficiency) of Cash
available over disbursements$ (20,000)$ 30,000$ 95,000$
45,000Financing:Borrowing50,000- 0- 050,000Repayments- 0-
0(50,000)(50,000)Interest- 0- 0(2,000)(2,000)Total
financing50,000- 0(52,000)(2,000)Ending cash balance$
30,000$ 30,00043,000$ 43,000
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Production Budget
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.
9-*
Now that the sales budget is complete, the production budget
can be prepared. The purpose of the production budget is to
ensure that production meets budgeted sales and provides
sufficient ending inventory. Production must be adequate to
meet budgeted sales and provide for sufficient ending inventory.
Management has determined that the ending inventory should be
equal to 20% of the sales for the following month. At the end
of March, there were 4,000 units on hand. (LO 9-6)

Production Budget
From sales
budget
March 31
ending inventory
Ending inventory becomes beginning inventory the next month
9-*
Fourth paragraph, second sentence: Changed the word 'budget'
to read 'budgets.'
Fifth paragraph, first sentence: Added a comma after the word
'May,'
The number of units projected to be sold in the first month is
obtained from the sales budget.
The desired ending inventory is calculated by multiplying the
projected sales for the next month, May, by 20%. This is added
to the projected sales to determine the units needed for April.
The ending inventory for the previous month, March, is
deducted from the amount needed to determine the number of
units that must be produced.
The ending inventory for the first month, April, becomes the
beginning inventory for the second month. The May and June
production budgets are prepared in the same manner as April.

Sales in units for the quarter is the sum of April, May, and June
sales. Since the end of June is also the end of the quarter, the
ending inventory for the quarter is the same as the ending
inventory for June. Since the beginning of April is also the
beginning of the quarter, the beginning inventory for the quarter
is the same as April’s beginning inventory. Total units needed
for the quarter is the sum of the sales units and the ending
inventory. The beginning inventory is subtracted from the total
units needed to arrive at the units to be produced for the
quarter. (LO 9-6)
ProductionAprilMayJuneQuarterSales in
units20,00050,00030,000100,000Add: desired end.
inventory10,0006,0005,0005,000Total
needed30,00056,00035,000105,000Less: beg.
inventory4,00010,0006,0004,000Units to be
produced26,00046,00029,000101,000May sales (sales
budget)50,000Percent of inventory desired20%Desired ending
inventory10,000
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Sheet1May sales50,000unitsDesired percent20%Desired
inventory10,000units
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Sheet2
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Direct-Material Budget
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.
9-*
First sentence: Changed the word 'for' after the word 'pounds' to
read 'of.'
Five pounds of materials are required to produce one unit.
Management has determined that direct materials ending
inventory should be 10% of the next month’s production. There
are 31,000 pounds of direct materials in March’s ending
inventory. The cost is 40 cents per pound. (LO 9-6)
From our
production

budget
10% of the following
month’s production
March 31
inventory
9-*
The first row in the direct materials budget is the units to be
produced each month and for the quarter. This information is
obtained from the production budget.
For each month, the units to be produced needs to be multiplied
by 5 pounds to determine the amount of direct materials needed
in each month. The ending inventory for April is 10% of May’s
direct material needs. The desired ending inventory for April is
added to the production needs for April.
The beginning inventory is subtracted from the total direct
material needed for the month to arrive at the materials to be
purchased.
The calculations are the same for each month. As in the
production budget, the ending inventory for the quarter is the
same as the ending inventory for June and the beginning
inventory for the quarter is the same as the beginning inventory
in April. (LO 9-6)
purchased140,000221,500142,000503,500
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9-*
The ending direct material inventory for June requires a bit
more explanation. The projections for July must be expanded to
determine the production budget for July, which will provide
the information necessary to calculate the materials needed for
June’s ending inventory. (LO 9-6)
purchased140,000221,500142,000503,500
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Sheet1June Ending InventoryJuly production in
units23,000Materials per unit5Total units
needed115,000Inventory percentage10%June desired ending
inventory11,500
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Sheet1July ProductionSales in units25,000Add: desired ending
inventory3,000Total units needed28,000Less: beginning

inventory5,000Production in units23,000
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Direct-Labor Budget
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.
9-*
Each unit can be produced in one tenth of an hour. Breaker’s
pays employees for 40 hours each week. The wage rate is $8
per hour and there is no overtime pay. Management has
projected that direct laborers will be paid for a minimum of
3,000 hours per month for the next three months. (LO 9-5)
Direct-Labor Budget
From our
production
budget
This is the greater of
labor hours required or
labor hours guaranteed.

9-*
The direct labor budget starts with the units to be produced
from the production budget.
The production for each month and the quarter is multiplied by
one tenth of an hour to determine the labor hours required.
The labor hours required is compared to the number of
guaranteed labor hours. The labor hours to be paid is the
greater of the two for each month. The labor hours to be paid
for the quarter is the sum of the labor hours paid for the three
months.
The labor hours paid is multiplied by the $8 wage rate to
determine the total direct labor cost. (LO 9-5)
LaborAprilMayJuneQuarterProduction in
units26,00046,00029,000101,000Direct labor
hours0.100.100.100.10Labor hours
required2,6004,6002,90010,100Guaranteed labor
hours3,0003,0003,000Labor hours
paid3,0004,6003,00010,600Wage rate$ 8$ 8$ 8$ 8Total
direct labot cost$ 24,000$ 36,800$ 24,000$ 84,800
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Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.
9-*

The manufacturing-overhead budget shows the cost of overhead
expected to be incurred in the production process during the
budget period. Breaker’s manufacturing overhead budget lists
the expected cost of each overhead item by month. At the
bottom of the schedule, the total budgeted overhead for each
month is shown. (LO 9-5)
Sheet1AprilMayJuneQuarterIndirect labor$ 17,500$ 26,500$
17,900$ 61,900Indirect
material7,00012,6008,60028,200Utilities4,2008,4005,20017,800
Rent13,30013,30013,30039,900Insurance5,8005,8005,80017,40
0Maintenance8,2009,4008,20025,800$ 56,000$ 76,000$
59,000$ 191,000
Sheet2
Sheet3
Selling and Administrative Expense Budget
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.
9-*
Management at Breaker’s has projected the variable selling and
administrative expenses to by 50 cents per unit sold. The fixed
selling and administrative costs are projected to be $70,000 per
month. Each month, $10,000 of the fixed expenses is for
depreciation, which does not require a cash outflow. This
information will be important when the cash disbursements
budget is prepared. (LO 9-5)

Selling and Administrative Expense Budget
From our
Sales budget
9-*
Once again, we start with the unit sales for each month and the
quarter from the sales budget.
The sales for each month and the quarter are multiplied by the
variable selling and administrative cost rate of 50 cents per unit
to determine the variable S&A costs. This is added to the fixed
S&A costs of $70,000 for each month to arrive at the total S&A
expenses for each month. Don’t forget that the fixed S&A
expenses for the quarter is the sum of fixed S&A expenses for
the three months.
The noncash expenses are deducted from the total expenses to
determine the amount of cash disbursements required for each
month and the quarter for selling and administrative expenses.
(LO 9-5)
SellingAprilMayJuneQuarterSales in
units20,00050,00030,000100,000Variable S&A rate$ 0.50$
0.50$ 0.50$ 0.50Variable expense$ 10,000$ 25,000$
15,000$ 50,000Fixed S&A
expense70,00070,00070,000210,000Total
expense80,00095,00085,000260,000Less: noncash
expenses10,00010,00010,00030,000Cash disbursements$
70,000$ 85,000$ 75,000$ 230,000
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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.
9-*
All sales at Breakers are on account. The company has
experienced the following collection pattern: 70% collected in
the month of the sale, 25% is collected in the month following
the sale, 5% becomes uncollectible. The accounts receivable
balance at the end of March is $30,000 and is expected to be
collected in full in April. (LO 9-5)
9-*
During April, the remainder of March’s sales will be collected,
which is the $30,000 accounts receivable balance on March 31.
70% of April’s sales are also expected to be collected in April.
Therefore, the total collections expected in April is $170,000.
May’s collections will be 25% of April’s sales and 70% of
May’s sales. June’s collections will be 25% of May’s sales and
70% of June’s sales. The collections for the quarter is the sum

of the collections for the three months. (LO 9-5)
Cash inAprilMayJuneQuarterAccounts rec. - 3/31$ 30,000$
30,000April sales70% x $200,000140,000140,00025% x
$200,000$ 50,00050,000May sales70% x
$500,000350,000350,00025% x $500,000$
125,000125,000June sales70% x $300,000210,000210,000Total
cash collections$ 170,000$ 400,000$ 335,000$ 905,000
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Cash Disbursement Budget
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.
9-*
Breakers pays 40 cents per pound for its materials. The
company pays for half of its materials purchases in the month of
the purchase and the remaining half is paid for in the following
month. There are no discounts available to Breakers. The
balance in accounts payable is $12,000 at the end of March.
(LO 9-5)
140,000 lbs. × $.40/lb. = $56,000

9-*
The purchases for each month is multiplied by 40 cents per
pound to determine the cost of materials purchased for the
month. This cost is then multiplied by 50%. 50% of April’s
materials purchases will be paid for in April, the remaining 50%
will be paid in May. This pattern is followed in May and June
to determine the cash disbursements for materials for each
month.
The cash disbursements for each month are added together to
determine the cash disbursements for the quarter. (LO 9-5)
Sheet: 慃桳䴠瑡牥慩獬
12000.0
12000.0
28000.0
28000.0
28000.0
28000.0
44300.0
44300.0
44300.0
44300.0
28400.0
28400.0
40000.0
72300.0
72700.0
185000.0

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.
9-*
Breakers will also make cash disbursements for payments on an
open line of credit, loans, a cash dividend, and equipment
purchases. All borrowings and repayments occur on the last day
of each month. (LO 9-5)
To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
Cash Budget
(Collections and Disbursements)
From our Cash
Receipts Budget
From our Cash Disbursements
Budget
From our Direct Labor Budget
From our Overhead Budget
From our Selling and Administrative Expense Budget
9-*

The cash budget is a combination of the cash receipts budget,
the cash disbursements for materials budget and other cash
disbursements required, such as for direct labor and overhead.
The cash budget starts with the beginning cash balance for
April. This is also the beginning cash balance for the quarter.
The cash collections for the month are found on the cash
receipts budget and added to the beginning cash balance to
arrive at the total cash available.
The cash outflow for materials is found on the cash
disbursements budget.
The cash outflow for wages can be found on the direct labor
budget.
Cash outflow requirements for manufacturing overhead can be
found on the overhead budget.
Cash outflow for S&A costs can be found on the selling and
administrative expense budget.
There are no equipment purchases made in April, but dividends
are paid. The disbursements are totaled and them subtracted
from the total cash available for the month. In April, there is a
cash deficit. (LO 9-5)
Cash Budget
Breakers must
borrow an
addition $13,800
to maintain a

cash balance
of $30,000.
9-*
Cash collections and disbursements are determined in the same
manner for the month of May. Although there is not a cash
deficit at the end of May, the $16,200 available is still below
the $30,000 minimum balance requirement by $13,800. (LO 9-
5)
At the end of June, Breakers has enough cash to repay
the $48,800 loan plus interest at 12%.
Cash Budget
9-*
June’s collections and disbursements budget follows the same
format. There will be enough cash at the end of June to repay
the amounts borrowed in April and May plus the 12% interest.
(LO 9-5)
CashAprilMayJuneQuarterBeginning cash balance$ 40,000$
30,000$ 30,000Add: cash
collections170,000400,000335,000Total cash
available210,000430,000365,000Less:
disbursementsMaterials40,00072,30072,700Direct
labor24,00036,80024,000Mfg.
overhead56,00076,00059,000Selling and
admin.70,00085,00075,000Equipment purchase-
0143,70048,300Dividends25,000- 0- 0Total

disbursements215,000413,800279,000Excess (deficiency) of
Cash available over disbursements$ (5,000)$ 16,200$
86,000
&A
Page &P
Cash Budget
9-*
The beginning cash balance for the quarter is April’s beginning
cash balance. The cash collections for the quarter are added to
determine the total cash available for the quarter. Each item’s
cash disbursements are totaled for the quarter and then added
together to determine the total cash disbursements for the
quarter. The disbursements for the quarter are then deducted
from the collections for the quarter. There is a $37,200 cash
surplus for the quarter. (LO 9-5)
Sheet: 慃桳
40000.0
30000.0
30000.0
40000.0
170000.0
400000.0
335000.0
905000.0
210000.0
430000.0
365000.0
945000.0

40000.0
72300.0
72700.0
185000.0
24000.0
36800.0
24000.0
84800.0
56000.0
76000.0
59000.0
191000.0
70000.0
85000.0
75000.0
230000.0
0.0
143700.0
48300.0
192000.0
25000.0
0.0
0.0
25000.0
215000.0
413800.0
279000.0
907800.0
-5000.0
16200.0
86000.0
37200.0
Cash Budget

(Financing and Repayment)
Ending cash balance for April
is the beginning May balance.
9-*
Now let’s discuss the financing and repayment needs.
Because there is a cash deficit in April, Breakers must borrow
$35,000 to maintain the $30,000 minimum balance required.
The ending cash balance for April becomes the beginning cash
balance for May.
Cash collections and disbursements are determined in the same
manner for the month of May. Although there is not a cash
deficit at the end of May, the $16,200 available is still below
the $30,000 minimum balance requirement by $13,800;
therefore, Breakers must borrow an additional $13,800 at the
end of May to have a $30,000 cash balance for the beginning of
June.
The $35,000 borrowed at the end of April requires a $700
interest payment and the $13,800 borrowed at the end of May
requires an interest payment of $138. The total to be repaid for
principle and interest is $49,638. The ending cash balance for
June is also the ending cash balance for the quarter.
The borrowings for the quarter is the sum of the borrowings in
April and May. The repayments and interest for the quarter
occurred in June. The ending cash balance for the quarter is the
ending cash balance for June since the end of June is also the
end of the quarter. (LO 9-5)

37,200Financing:Borrowing35,00013,80048,800Repayments- 0-
0(48,800)(48,800)Interest- 0- 0(838)(838)Total
financing35,00013,800(49,638)(838)Ending cash balance$
30,000$ 30,000$ 36,362$ 36,362
&A
Page &P
Sheet1Interest RateBorrowingMonthly Interest
RateMonths OutstandingInterest Expense12% / 12 =
1%$35,000×1%×2=$70012% / 12 = 1%$13,800×1%×1=138$
838
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Cost of Goods Manufactured
9-*
The cost of goods manufactured schedule is prepared from the
direct materials budget, the direct labor budget and the
overhead budget. The ending work-in-process inventory
amounts are estimates provided by management. The amounts
for direct materials are in dollars, not units. The direct
materials beginning inventory, purchases, and ending inventory
amounts were taken from the direct materials budget. These
amounts were multiplied by the cost of 40 cents per pound to
arrive at the dollar amounts. (LO 9-6)
Sheet1FCTCTR- 080,00080,000-
010080,000110,00050,00020080,000140,000100,00030080,0001
70,000150,00040080,000200,000200,00050080,000230,000250,

00060080,000260,000300,00070080,000290,000350,00080080,0
00320,000400,000
Sheet2FCTCTR- 080,00080,000-
010080,000110,00050,000100,00020080,000140,000100,000Pro
fit30080,000170,000150,00080,00040080,000200,000200,00050
080,000230,000250,00060,00060080,000260,000300,00070080,
000290,000350,00040,00080080,000320,000400,00020,0000`(2
0,000)100200300400500600700Units(40,000)(60,000)450,0004
00,000350,000300,000250,000200,000150,000100,00050,00010
0200300400500600700800Units
Sheet3
Sheet4A. Traditional FormatACCUTIME COMPANYIncome
StatementFor the Year Ended December 31,
20x1Sales$500,000Less:380,000Gross margin$120,000Less:
Operating expenses:Selling expenses$35,000Administrative
expenses35,00070,000Net income$50,000B. Contribution
FormatACCUTIME COMPANYIncome StatementFor the Year
Ended December 31, 20x1Sales$500,000Less: Variable
expenses:Variable manufacturing$280,000Variable
selling15,000Variable administrative5,000300,000Contribution
margin$200,000Less: Fixed expenses:Fixed
manufacturing$100,000Fixed selling20,000Fixed
administrative30,000150,000Net income$50,000
Sheet5TargetTargetafter-tax=before-tax(1-t)net incomeincome
Sheet6Direct material (see schedule 3 for details):Raw-material
inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . $ 64,800aAdd: Purchases of raw material . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,400,000bRaw material available for use . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,464,800bDeduct: Raw-material inventory, December 31 . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800aDirect material
used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . $6,400,000bDirect labor (see schedule 4 for details)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375,000Manufacturing overhead (see schedule 5 for details) . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000Total
manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . $8,175,000Add:Work-in-process
. . . . . . 0cSubtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,175,000Deduct:Work-in-process inventory, December 31 . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0cCost of goods
manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . $8,175,000Add: Finished-goods inventory,
January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,750dCost of goods available for sale . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750Deduct:
Finished-goods inventory, December 31 . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 81,750dCost of goods sold . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,175,000AprilMayJuneQuarterDirect material:Beg.material
inventory$ 5,200$ 9,200$ 5,800$ 5,200Add: Materials
purchases56,00088,60056,800201,400Material available for
use61,20097,80062,600206,600Deduct: End. material
inventory9,2005,8004,6004,600Direct material
used52,00092,00058,000202,000Direct
labor24,00036,80024,00084,800Manufacturing
overhead56,00076,00059,000191,000Total manufacturing
costs132,000204,800141,000477,800Add: Beg. Work-in-process
inventory3,80016,2009,4003,800Subtotal135,800221,000150,40
0481,600Deduct: End.Work-in-process
inventory16,2009,40017,00017,000Cost of goods manufactured$
119,600$ 211,600$ 133,400$ 464,600Add: Beg. finished-
goods inventory18,40046,00027,60018,400Cost of goods
available for sale138,000257,600161,000483,000Deduct: End.
finished-goods inventory46,00027,60023,00023,000Cost of
goods sold$ 92,000$ 230,000$ 138,000$ 460,000

Revenue (100,000 × $10)
1,000,000
$
Cost of goods sold (100,000 × $4.60)
460,000
Gross margin
540,000
Operating expenses:
Selling and admin. Expenses
260,000
$
Interest expense
838
Total operating expenses
260,838
Net income
279,162
$
Breakers, Inc.
For the Three Months Ended June 30
Revenue (100,000 × $10)1,000,000$
Cost of goods sold (100,000 × $4.60)460,000
Gross margin540,000
Operating expenses:

Selling and admin. Expenses260,000$
Interest expense838
Total operating expenses260,838
Net income279,162$
Breakers, Inc.
MBD00559E2F.xls
Sheet119100010600Breakers, Inc.18.0188679245Budgeted
Income StatementFor the Three Months Ended June 30Revenue
(100,000 × $10)$ 1,000,000Cost of goods sold (100,000 ×
$4.60)460,000Gross margin540,000Operating expenses:Selling
and admin. Expenses$ 260,000Interest expense838Total
operating expenses260,838Net income$ 279,162
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Cost of Goods Sold
9-*
The cost of goods sold schedule starts where the cost of goods
manufactured left off. The cost of goods manufactured at the
beginning of April can be divided by the units manufactured,
26,000, to arrive at a unit cost of $4.60. The 4,000 units in
finished goods inventory at the beginning of April is multiplied
by the unit cost to determine the beginning inventory cost. The
ending inventory for each month is also multiplied by $4.60 to
determine the cost of the ending inventory. Remember, the
ending inventory for one month becomes the beginning
inventory for the following month. The beginning inventory for

the quarter is the same as the beginning inventory for April and
the ending inventory for the quarter is the same as the ending
inventory for June. (LO 9-6)
Sheet1FCTCTR- 080,00080,000-
010080,000110,00050,00020080,000140,000100,00030080,0001
70,000150,00040080,000200,000200,00050080,000230,000250,
00060080,000260,000300,00070080,000290,000350,00080080,0
00320,000400,000
Sheet2FCTCTR- 080,00080,000-
010080,000110,00050,000100,00020080,000140,000100,000Pro
fit30080,000170,000150,00080,00040080,000200,000200,00050
080,000230,000250,00060,00060080,000260,000300,00070080,
000290,000350,00040,00080080,000320,000400,00020,0000`(2
0,000)100200300400500600700Units(40,000)(60,000)450,0004
00,000350,000300,000250,000200,000150,000100,00050,00010
0200300400500600700800Units
Sheet3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000Total
. . . . . . 0cSubtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0cCost of goods
manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750Deduct:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
used52,00092,00058,000202,000Direct
inventory16,2009,40017,00017,000AprilMayJuneQuarterCost of
goods manufactured$ 119,600$ 211,600$ 133,400$

464,600Add: Beg. finished-goods
inventory18,40046,00027,60018,400Cost of goods available for
sale138,000257,600161,000483,000Deduct: End. finished-goods
inventory46,00027,60023,00023,000Cost of goods sold$
92,000$ 230,000$ 138,000$ 460,000
Revenue (100,000 × $10)
1,000,000
$
460,000
Gross margin
540,000
Operating expenses:
260,000
$
Interest expense
838
260,838
Net income
279,162
$

Breakers, Inc.
Revenue (100,000 × $10)1,000,000$
Gross margin540,000
Operating expenses:
Interest expense838
Net income279,162$
Breakers, Inc.
MBD00559E2F.xls
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
9-*
Now that the cost of goods manufactured and cost of goods sold
schedules are complete, the budgeted income statement can be

prepared.
A budgeted income statement for the quarter ending June 30 can
now be prepared for Breakers. Revenue is taken from the sales
budget. Cost of goods sold is taken from the cost of goods sold
schedule. Gross margin is revenue less cost of goods sold. The
operating expenses is taken from the selling and administrative
expense budget and the cash budget. Net income is gross
margin less total operating expenses. (LO 9-5)
(100,000 × $10)$ 1,000,000Cost of goods sold460,000Gross
margin540,000Operating expenses:Selling and admin.
expenses$ 260,000Interest expense838Total operating
expenses260,838Net income$ 279,162
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
9-*
The information for the budgeted statement of cash flows can be
taken from the cash budget. (LO 9-5)
Sheet1FCTCTR- 080,00080,000-
010080,000110,00050,00020080,000140,000100,00030080,0001
70,000150,00040080,000200,000200,00050080,000230,000250,
00060080,000260,000300,00070080,000290,000350,00080080,0

00320,000400,000
Sheet2FCTCTR- 080,00080,000-
010080,000110,00050,000100,00020080,000140,000100,000Pro
fit30080,000170,000150,00080,00040080,000200,000200,00050
080,000230,000250,00060,00060080,000260,000300,00070080,
000290,000350,00040,00080080,000320,000400,00020,0000`(2
0,000)100200300400500600700Units(40,000)(60,000)450,0004
00,000350,000300,000250,000200,000150,000100,00050,00010
0200300400500600700800Units
Sheet3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000Total

. . . . . . 0cSubtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0cCost of goods
manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750Deduct:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
used52,00092,00058,000202,000Direct
inventory16,2009,40017,00017,000AprilMayJuneQuarterCost of
goods manufactured119,600211,600133,400464,60026,000Add:
Beg. finished-goods inventory18,40046,00027,60018,400Cost of
goods available for
sale138,000257,600161,000483,00030,000Deduct: End.
finished-goods inventory46,00027,60023,00023,000Cost of
goods sold$ 92,000$ 230,000$ 138,000$ 460,000
Sheet7AprilMayJuneQuarterCash flows from operating
activities:Cash receipts from customers$ 170,000$ 400,000$
335,000$ 905,000Cash payments:To suppliers of raw

material(40,000)(72,300)(72,700)(185,000)For direct
labor(24,000)(36,800)(24,000)(84,800)For manufacturing-
overhead expenditures(56,000)(76,000)(59,000)(191,000)For
selling and administrative
expenses(70,000)(85,000)(75,000)(230,000)For interest--
(838)(838)Total cash
payments(190,000)(270,100)(231,538)(691,638)Net cash flow
from operating activities$ (20,000)$ 129,900$ 103,462$
213,362Cash flows from investing activities:Purchase of
equipment-(143,700)(48,300)(192,000)Net cash used by
investing activities$ -$ (143,700)$ (48,300)$
(192,000)Cash flows from financing activities:Payment of
dividends(25,000)--(25,000)Principle of bank
loan35,00013,800-48,800Repayment of bank loan--
(48,800)(48,800)Net cash provided by financing activities$
10,000$ 13,800$ (48,800)$ (25,000)Net increase in cash$
(10,000)$ -$ 6,362$ (3,638)Balance in cash,
beginning40,00030,00030,00040,000Balance in cash. end of
month$ 30,000$ 30,000$ 36,362$ 36,362
Revenue (100,000 × $10)
1,000,000
$
460,000
Gross margin
540,000
Operating expenses:

260,000
$
Interest expense
838
260,838
Net income
279,162
$
Breakers, Inc.
Revenue (100,000 × $10)1,000,000$
Gross margin540,000
Operating expenses:
Interest expense838
Net income279,162$
Breakers, Inc.
AprilMayJuneQuarter
Beginning cash balance40,000$ 30,000$ 30,000$ 40,000$
Add: cash collections170,000 400,000 335,000 905,000
Total cash available210,000 430,000 365,000 945,000
Less: disbursements
Materials40,000 72,300 72,700 185,000

Direct labor24,000 36,800 24,000 84,800
Mfg. overhead56,000 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
Dividends25,000 - - 25,000
Total disbursements215,000 413,800 279,000 907,800
Excess (deficiency) of
Cash available over
disbursements(5,000)$ 16,200$ 86,000$ 37,200$
AprilMayJuneQuarter
Cash available over
disbursements(5,000)$ 16,200$ 86,000$ 37,200$
Financing:
Borrowing35,000 13,800 48,800
Repayments- - (48,800) (48,800)
Interest- - (838) (838)
Total financing35,000 13,800 (49,638) (838)
Ending cash balance30,000$ 30,000$ 36,362$ 36,362$
MBD0059B721.xls
Sheet: 慃桳
40000.0
30000.0
30000.0
40000.0
170000.0
400000.0
335000.0
905000.0
210000.0
430000.0
365000.0
945000.0
40000.0
72300.0

72700.0
185000.0
24000.0
36800.0
24000.0
84800.0
56000.0
76000.0
59000.0
191000.0
70000.0
85000.0
75000.0
230000.0
0.0
143700.0
48300.0
192000.0
25000.0
0.0
0.0
25000.0
215000.0
413800.0
279000.0
907800.0
-5000.0
16200.0
86000.0
37200.0
MBD0059D636.xls
37,200Financing:Borrowing35,00013,80048,800Repayments- 0-
0(48,800)(48,800)Interest- 0- 0(838)(838)Total
financing35,00013,800(49,638)(838)Ending cash balance$

30,000$ 30,000$ 36,362$ 36,362
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MBD00559E2F.xls
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
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
9-*
Account balances for property, plant, and equipment and
stockholders’ equity accounts are needed before preparing the
budgeted balance sheet. (LO 9-6)
25%of June
sales of

$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at
$4.60 per unit
50% of June
purchases
of $56,800
9-*
Third left text box: Deleted the period after the word 'unit.'
The budgeted balance sheet is prepared for the date June 30.
Cash is taken from the cash budget or the budgeted statement of
cash flows. Accounts receivable is 25% of June sales. (Recall
the collections pattern from the cash collections schedule.) The
raw materials, work-in-process, and finished goods inventory
amounts can be taken from the cost of goods manufactured and
costs of goods sold schedules. The amount for equipment can
be taken from the cash disbursements budget or the budgeted
statement of cash flows.
The accounts payable balance is 50% of June’s purchases for
direct materials. (Recall the cash disbursements pattern for
direct materials.) The ending retained balance is the beginning
balance plus net income less dividends paid. (LO 9-6)
Sheet1Royal CompanyBudgeted Income StatementFor the Three
Month Ended June 30, 19X1Sales (100,000 units @ $10)$
1,000,000Cost of goods sold (100,000 @ $4.99)499,000Gross
margin501,000Selling and administrative

expenses230,000Operating income271,000Interest
expense2,000Net income$ 269,000Breakers, Inc.Budgeted
Balance SheetJune 30Current assetsCash$ 36,362Accounts
receivable75,000Raw materials inventory4,600Work-in-process
inventory17,000Finished goods inventory23,000Total current
assets155,962Property and
equipmentLand50,000Building148,000Equipment192,000Total
property and equipment390,000Total assets$ 545,962Accounts
payable$ 28,400Common stock217,000Retained
earnings300,562Total liabilities and equities$ 545,962
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Sheet10
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FinRoyal CompanyBudgeted Income StatementFor the Three
Month Ended June 30, 19X1Sales (100,000 units @ $10)$
1,000,000Beginning balance$ 46,400Cost of goods sold
(100,000 @ $4.99)499,000Add: net income279,162Gross
margin501,000Deduct: dividends(25,000)Selling and
administrative expenses230,000Ending balance$
300,562Operating income271,000Interest expense2,000Net
income$ 269,000Royal CompanyBudgeted Balance SheetJune
30, 19X1Current assetsCash$ 43,000Accounts
receivable75,000Raw materials inventory4,600Finished goods
inventory24,950Total current assets147,550Property and
equipmentLand50,000Building175,000Equipment192,000Total
property and equipment417,000Total assets$ 564,550Accounts
payable$ 28,400Common stock200,000Retained

earnings336,150Total liabilities and equities$ 564,550
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Learning Objective 9-7 – Discuss the role of assumptions and
predictions in budgeting.
9-*
Learning Objective 9-7. Discuss the role of assumptions and
predictions in budgeting.
Cash Budget
Sales of Services or Goods
Ending
Inventory
Budget
Work in Process
and Finished
Goods
Production
Budget
Direct
Materials
Budget
Selling and
Administrative
Budget
Direct
Labor

Budget
Overhead
Budget
Ending
Inventory
Budget
Direct Materials
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.
9-*
Managers must make assumptions and predictions in preparing
budgets because organizations operate in a world of uncertainty.
One way of coping with that uncertainty is to supplement the
budgeting process with a financial planning model. A financial
planning model is a set of mathematical relationships that
express the interactions among the various operational,
financial, and environmental events that determine the overall
results of an organization’s activities. A financial planning
model is a mathematical expression of all the relationships
expressed in a master budget flow chart. In a fully developed
financial planning model, all of the key estimates and
assumptions are expressed as general mathematical
relationships. Then the model is run on a computer many times
to determine the impact of different combinations of these
unknown variables. “What if” questions can be answered about
such unknown variables as inflation, interest rates, the value of
the dollar, demand, competitors’ actions, union demands in

forthcoming wage negotiations, and a host of other factors. The
widespread availability of personal computers and electronic-
spreadsheet software has made financial planning models a
more common management tool. (LO7)
Learning Objective 9-8 – Describe a typical organization’s
process of budget administration.
9-*
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.
9-*
In small organizations, the procedures used to gather
information and construct a master budget are usually informal.
In contrast, larger organizations use a formal process to collect
data and prepare the master budget. Such organizations usually
designate a budget director or chief budget officer, which is
often the controller. A budget committee, consisting of key
senior executives, often is appointed to advise the budget
director during the preparation of the budget. This committee is

responsible for policy matters relating to the budget and
coordinating the preparation of the budget. The authority to
give final approval to the master budget usually belongs to the
board of directors. By exercising its authority to make changes
in the budget and grant final approval, the board of directors
can have considerable influence on the overall direction the
organization takes.
E-budgeting is an increasingly popular, Internet-based
budgeting tool that can help streamline and speed up an
organization’s budgeting process. The e in e-budgeting stands
for both electronic and enterprisewide; employees throughout an
organization, at all levels and around the globe, can submit and
retrieve budget information electronically via the Internet.
Managers in organizations using e-budgeting have found that it
greatly streamlines the entire budgeting process. In the past,
these organizations have compiled their master budgets on
hundreds of spreadsheets, which had to be collected and
integrated by the corporate controller’s office. (LO 9-8)
International Aspects of Budgeting
Firms with international operations face special problems when
preparing a budget.
Fluctuations in foreign currency exchange rates.
High inflation rates in some foreign countries.
Differences in local economic conditions.
9-*
Firms with international operations face a variety of additional
challenges in preparing their budgets. First, a multinational

firm’s budget must reflect the translation of foreign currencies
into U.S. dollars. Since almost all the world’s currencies
fluctuate in their values relative to the dollar, this makes
budgeting for those translations difficult. Although
multinationals have sophisticated financial ways of hedging
against such currency fluctuations, the budgeting task is still
more challenging. Second, it is difficult to prepare budgets
when inflation is high or unpredictable. While the United
States has experienced periods of high inflation, some foreign
countries have experienced hyperinflation, sometimes with
annual inflation rates well over 100 percent. Predicting such
high inflation rates is difficult and further complicates a
multinational’s budgeting process. Finally, the economies of all
countries fluctuate in terms of consumer demand, availability of
skilled labor, laws affecting commerce, and so forth. Companies
with offshore operations face the task of anticipating such
changing conditions in their budgeting processes. (LO 9-8)
Learning Objective 9-9 – Discuss the behavioral issues in
budgeting.
9-*
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.”
9-*

When a supervisor provides a departmental cost projection for
budgetary purposes, there is an incentive to overestimate costs.
When the actual cost incurred in the department proves to be
less than the inflated cost projection, the supervisor appears to
have managed in a cost-effective way. At least that is the
perception of many managers, and, in the behavioral area,
perceptions are what count most. These illustrations are
examples of padding the budget. Budget padding means
underestimating revenue or overestimating costs. The difference
between the revenue or cost projection that a person provides
and a realistic estimate of the revenue or cost is called
budgetary slack. (LO 9-9)
Participative Budgeting
Flow of Budget Data
9-*
Most people will perform better and make greater attempts to
achieve a goal if they have been consulted in setting the goal.
The idea of participative budgeting is to involve employees
throughout an organization in the budgetary process. Such
participation can give employees the feeling that “this is our
budget,” rather than the all-too-common feeling that “this is the
budget you imposed on us.” While participative budgeting can
be very effective, it also can have shortcomings. Too much
participation and discussion can lead to uncertainty and delay.
Also, when those involved in the budgeting process disagree in
significant and irreconcilable ways, the process of participation
can accentuate those differences. Finally, the problem of
budget padding can be severe unless incentives for accurate
projections are provided. (LO 9-9)

End Chapter 9
9-*
AprilMayJuneQuarter
Budgeted
sales (units)20,000 50,000 30,000 100,000
Selling price
per unit10$ 10$ 10$ 10$
Total
Revenue
200,000$ 500,000$ 300,000$ 1,000,000$
AprilMayJuneQuarter
Sales in units20,000 50,000 30,000 100,000
Add: desired
end. inventory10,000 6,000 5,000 5,000
Total needed30,000 56,000 35,000 105,000
Less: beg.
inventory4,000 10,000 6,000 4,000
Units to be
produced
26,000 46,000 29,000 101,000
May sales50,000 units
Desired percent20%
Desired inventory10,000 units
AprilMayJuneQuarter
Production in units
26,000 46,000 29,000 101,000
Materials per unit5 5 5 5
Production needs130,000 230,000 145,000 505,000
Add: desired

ending inventory23,000 14,500 11,500 11,500
Total needed153,000 244,500 156,500 516,500
Less: beginning
inventory13,000 23,000 14,500 13,000
Materials to be
purchased
140,000 221,500 142,000 503,500
AprilMayJuneQuarter
Production in units26,000 46,000 29,000 101,000
Materials per unit5 5 5 5
Production needs130,000 230,000 145,000 505,000
Add: desired
ending inventory23,000 14,500 11,500 11,500
Total needed153,000 244,500 156,500 516,500
Less: beginning
inventory13,000 23,000 14,500 13,000
Materials to be
purchased
140,000 221,500 142,000 503,500
June Ending Inventory
July production in units23,000
Materials per unit5
Total units needed115,000
Inventory percentage10%
June desired ending inventory11,500
July Production
Sales in units25,000
Add: desired ending inventory3,000
Total units needed28,000
Less: beginning inventory5,000
Production in units23,000
AprilMayJuneQuarter
Production in units
26,000 46,000 29,000 101,000
Direct labor hours0.10 0.10 0.10 0.10
Labor hours required2,600 4,600 2,900 10,100

Guaranteed labor
hours3,000 3,000 3,000
Labor hours paid3,000 4,600 3,000 10,600
Wage rate8$ 8$ 8$ 8$
Total direct labot cost24,000$ 36,800$ 24,000$ 84,800$
April MayJuneQuarter
Indirect labor17,500$ 26,500$ 17,900$ 61,900$
Indirect material7,000 12,600 8,600 28,200
Utilities4,200 8,400 5,200 17,800
Rent13,300 13,300 13,300 39,900
Insurance5,800 5,800 5,800 17,400
Maintenance8,200 9,400 8,200 25,800
56,000$ 76,000$ 59,000$ 191,000$
AprilMayJuneQuarter
Sales in units20,000 50,000 30,000 100,000
Variable S&A rate0.50$ 0.50$ 0.50$ 0.50$
Variable expense10,000$ 25,000$ 15,000$ 50,000$
Fixed S&A
expense70,000 70,000 70,000 210,000
Total expense80,000 95,000 85,000 260,000
Less: noncash
expenses10,000 10,000 10,000 30,000
Cash
disbursements
70,000$ 85,000$ 75,000$ 230,000$
April
May
June
Quarter
Accounts rec. - 3/31
30,000
$
30,000
$

April sales
70% x $200,000
140,000
140,000
25% x $200,000
50,000
$
50,000
May sales
70% x $500,000
350,000
350,000
25% x $500,000
125,000
$
125,000
June sales
70% x $300,000
210,000
210,000

Total cash collections
170,000
$
400,000
$
335,000
$
905,000
$
April
May
June
Quarter
Accounts pay. 3/31
12,000
$
12,000
$
April purchases
50% x $56,000
28,000
28,000
50% x $56,000
28,000

$
28,000
May purchases
50% x $88,600
44,300
44,300
50% x $88,600
44,300
$
44,300
June purchases
50% x $56,800
28,400
28,400
Total cash payments
for materials
40,000
$
72,300
$

72,700
$
185,000
$
April
May
June
Quarter
Beginning cash balance
40,000
$
Add
: cash collections
170,000
Total cash available
210,000
Less
: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000

Selling and admin.
70,000
Equipment purchase
-
Dividends
25,000
Total disbursements
215,000
Cash available over
disbursements
(5,000)
$
April
May
June
Quarter
40,000
$
30,000
$
Add
: cash collections

170,000
400,000
210,000
430,000
Less
: disbursements
Materials
40,000
72,300
Direct labor
24,000
36,800
Mfg. overhead
56,000
76,000

Selling and admin.
70,000
85,000
Equipment purchase
-
143,700
Dividends
25,000
-
Total disbursements
215,000
413,800
Cash available over
disbursements
(5,000)
$
16,200
$

April
May
June
Quarter
40,000
$
30,000
$
30,000
$
Add
: cash collections
170,000
400,000
335,000
210,000
430,000
365,000

Less
: disbursements
Materials
40,000
72,300
72,700
Direct labor
24,000
36,800
24,000
Mfg. overhead
56,000
76,000
59,000
Selling and admin.
70,000

85,000
75,000
Equipment purchase
-
143,700
48,300
Dividends
25,000
-
-
Total disbursements
215,000
413,800
279,000

Cash available over
disbursements
(5,000)
$
16,200
$
86,000
$
April
May
June
Quarter
40,000
$
30,000
$
30,000
$
40,000
$
Add
: cash collections
170,000
400,000

335,000
905,000
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
84,800
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
Cash available over
disbursements
(5,000)
$
16,200
$
86,000
$
37,200
$
April
May
June
Quarter
Cash available over
disbursements
(5,000)
$
16,200
$
86,000
$

37,200
$
Financing:
Borrowing
35,000
13,800
48,800
Repayments
-
-
(48,800)
(48,800)
Interest
-
-
(838)

(838)
Total financing
35,000
13,800
(49,638)
(838)
Ending cash balance
30,000
$
30,000
$
36,362
$
36,362
$
Interest
RateBorrowing
Monthly
Interest Rate
Months
Outstanding

Interest
Expense
12% / 12 = 1%$35,000×1%×2=$700
12% / 12 = 1%$13,800×1%×1=138
838$
AprilMay June Quarter
Direct material:
Beg.material inventory5,200$ 9,200$ 5,800$ 5,200$
Add: Materials purchases56,000 88,600 56,800 201,400
Material available for use61,200 97,800 62,600 206,600
Deduct: End. material inventory9,200 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 inventory3,800 16,200 9,400
3,800
Subtotal 135,800 221,000 150,400 481,600
Deduct: End.Work-in-process inventory16,200 9,400
17,000 17,000
Cost of goods manufactured 119,600$ 211,600$ 133,400$
464,600$
Cost of goods manufactured 119,600$ 211,600$ 133,400$
464,600$
Add: Beg. finished-goods inventory18,400 46,000 27,600
18,400
Cost of goods available for sale 138,000 257,600 161,000
483,000
Deduct: End. finished-goods inventory46,000 27,600
23,000 23,000
Cost of goods sold 92,000$ 230,000$ 138,000$ 460,000$
Revenue (100,000 × $10)1,000,000$
Cost of goods sold 460,000

Gross margin540,000
Operating expenses:
Selling and admin. expenses260,000$
Interest expense838
Net income279,162$
Breakers, Inc.
Cash flows from operating activities:
Cash receipts from customers170,000$ 400,000$ 335,000$
905,000$
Cash payments:
To suppliers of raw material(40,000) (72,300) (72,700)
(185,000)
For direct labor(24,000) (36,800) (24,000) (84,800)
For manufacturing-overhead expenditures(56,000) (76,000)
(59,000) (191,000)
For selling and administrative expenses(70,000) (85,000)
(75,000) (230,000)
For interest- - (838) (838)
Total cash payments(190,000) (270,100) (231,538)
(691,638)
Net cash flow from operating activities (20,000)$ 129,900$
103,462$ 213,362$
Cash flows from investing activities:
Purchase of equipment- (143,700) (48,300)
(192,000)
Net cash used by investing activities -$ (143,700)$
(48,300)$ (192,000)$
Cash flows from financing activities:
Payment of dividends(25,000) - -
(25,000)
Principle of bank loan35,000 13,800 -
48,800

Repayment of bank loan- - (48,800)
(48,800)
Net cash provided by financing activities10,000$ 13,800$
(48,800)$ (25,000)$
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 month30,000$ 30,000$ 36,362$
36,362$
Breakers, Inc.
June 30
Current assets
Cash36,362$
Accounts receivable75,000
Raw materials inventory4,600
Work-in-process inventory17,000
Finished goods inventory23,000
Total current assets155,962
Property and equipment
Land50,000
Building148,000
Equipment192,000
Total property and equipment390,000
Total assets545,962$
Accounts payable28,400$
Common stock217,000
Retained earnings300,562
Total liabilities and equities545,962$
Beginning balance
46,400
$
Add: net income
279,162

Deduct: dividends
(25,000)
Ending balance
300,562
$
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
Middle
Management
Top Management

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