22-1
CHAPTER 22
MASTER BUDGETS AND PLANNING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe the importance and
benefits of budgeting and the
process of budget
administration.
1, 2, 3, 4, 5, 6,
9, 12, 13, 14
22-2, 22-4
22–23
22-3, 22-5,
22–7
C2. Describe a master budget and
the process of preparing it.
7, 8, 10, 11
22-1
22–22
22-1, 22-2,
22-3, 22-4,
22-5, 22-6,
22-7
22-4, 22-8
Analytical objectives:
A1. Analyze expense planning
using activity-based budgeting.
22-7
22–24
22-6
Procedural objectives:
P1. Prepare each component of a
master budget and link each to
the budgeting process.
22-3, 22-6,
22-10, 22-11,
22-12, 22-14,
22-15, 22-16,
22-17, 22-18,
22-19, 22-23,
22-24, 22-25,
22–26– 22–27
22-1, 22-2,
22-3, 22-5,
22-6, 22-7,
22-11, 22-12,
22-13, 22-14,
22-15, 22-16
22-8, 22-9
P2. Link both operating and capital
expenditures budgets to
budgeted financial statements.
22-5, 22-13
22-4, 22-7,
22-17, 22-18
22-1, 22-2
P3 Prepare production and
manufacturing budgets.
(Appendix 22A)
11
22-8, 22-9,
22-20, 22-21,
22–22
22-8, 22-9,
22-10, 22-19,
22-20, 22-21,
22-25, 22-26,
22-27, 22-28
22-2
Additional Information on Related Assignment Material
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Corresponding problems in set B also relate to learning objectives identified in grid on previous page.
Problems 22-1A and 22-2A can be completed using EXCEL. The Serial Problem for Success Systems
starts in this chapter and continues throughout many chapters of the text. It is most readily solved
manually if you use the working papers that accompany text.
Narrated PowerPoint Correlation Guide
Learning Objective
Slides
C1
2-5
C2
6
P1
7-17
P2
18-36
A1
38
P3
39-42
Synopsis of Chapter Revision
• Freshii: NEW opener with new entrepreneurial assignment
22-3
Chapter Outline
I. Budget Process⎯Process of planning future business activities.
A. Strategic Budgeting
1. Budget⎯Formal statement of a company’s future short term
financial plans.
2. All managers should be involved.
3. Relevant focus of budgeting analysis is future.
4. Focus on future is important because daily operations may
divert management’s attention from planning.
5. Good budgeting system formalizes planning process and
demands relevant input; makes planning an explicit
management responsibility.
B. Benchmarking Budgets
1. Control function requires management to evaluate
(benchmark) business operations against some norm.
2. Evaluation involves comparing actual results against:
3. Evaluation assists management in identifying problems and
taking corrective actions if necessary.
4. Evaluation using expected performance is usually superior to
using past performance when deciding if actual results trigger
may affect current and future activities.
i. Changes in economic conditions.
ii. Shifts in competitive advantages within the industry.
iii. New product developments.
iv. Increased or decreased advertising.
v. Technological advances and innovations.
(participatory budgeting).
Notes
22-4
Chapter Outline
b. Budgeted levels of performance must be realistic (goals
must be attainable) to avoid discouraging employees.
c. Evaluation should be made carefully and allow affected
employees to explain reasons for apparent performance
deficiencies.
3. Management must be aware of negative outcomes
a. Employees may understate the sales budget and/or
overstate the expense budget to allow a budgetary slack in
unnecessary times to make sure their budgets are not
reduced in the next period
D. Budgeting as a Management Tool
1. Activities of all departments should contribute to meeting
2. Informal communication of business plans can create
uncertainty and confusion.
A. Budget Committee
1. Without active employee involvement, risk that employees
will feel as if budget fails to reflect their special problems and
needs.
2. Budget figures and estimates more useful if developed through
bottom-up process.
helps to ensure budgeted amounts are realistic and
coordinated.
figures that do not reflect efficient performance; originating
department should justify or adjust figures.
5. Ongoing communication should continue to ensure all parties
accept budget as reasonable, attainable, and desirable.
Notes
Chapter Outline
B. Budget Reporting
1. Usually coincides with the accounting period
2. Most companies prepare annual budgets; usually separated
into monthly or quarterly budgets.
3. Short-term budgets allow quick performance evaluation and
corrective action; reports compare actual results to budgets.
4. Variances are differences between actual and budgeted
amounts; management examines variances to identify areas for
improvement.
C. Budget Timing – Many companies apply continuous budgeting by
preparing rolling budgets; as each budget period passes:
1. New monthly or quarterly budgets are prepared to replace
those that have lapsed.
2. Entire set of budgets for months or quarters that remain is
III. The Master Budget⎯Formal, comprehensive plan for a company’s
future.
A. Master Budget Components
1. Contains several individual budgets that are linked with each
other to provide a coordinated plan for the company.
2. Typically includes individual budgets for sales, purchases or
other budgets are complete.
4. Undesirable outcomes might be revealed at any stage in
budgeting process; changes must be made to prior budgets and
previous steps repeated.
B. Operating Budgets⎯Four major types.
1. Sales budget
a. First step in preparing master budget.
c. Participatory budgeting approach ensures greater
commitment to goals, and draws on knowledge and
experience of people involved in activity.
d. More detailed than simple projections of total sales;
includes forecasts of both units sales and unit prices for
Notes
22-6
Chapter Outline
2. Merchandise Purchases Budget (Production and
Manufacturing Budgets in Appendix 22A)
a. Whether company manufacturers or purchases product
sold, budgeted future sales volume is primary factor in
inventory management decisions.
b. Budgets for just-in–time inventory systems cover short
periods to order just enough merchandise or materials to
satisfy immediate sales demand; inventory is held to a
minimum (zero in ideal situations).
c. Other companies keep enough inventory on hand to
reduce risk of running short (called safety stock); provides
protection against lost sales caused by unfulfilled
customer demands or delays in shipments from suppliers.
Expected unit sales
+ Budgeted ending inventory units
Total inventory units required
– Budgeted beginning inventory units
Inventory units to be purchased
Budgeted cost of merchandise purchases
e. Manufacturers (Appendix 22A) ⎯A manufacturer will
prepare a production budget instead of a purchases budget.
Sales budget used as basis for production budget.
i. Units to be produced is determined by:
Expected unit sales
manufacturing budgets.
Notes
Chapter Outline
iii. Direct Materials Budget:
Units to be produced
x Material requirements per unit
Materials needed for production
+ Desired ending inventory of direct materials
Total required materials
– Beginning inventory of direct materials
Direct materials to be purchased
x Materials price per unit of materials
a. Plan listing the type and amounts of selling expenses
expected during budget period.
b. Created to provide sufficient selling expenses to meet
sales goals reflected in sales budget.
4. General and Administrative Expense Budget
a. Plan showing predicted operating expenses not included in
selling expenses budget.
planned at this stage of budgeting process.
C. Capital Expenditures Budget
Notes
Chapter Outline
3. Capital budgeting is process of evaluating and planning for
capital (plant and equipment) expenditures, which involve
long-run commitments of large amounts.
4. Major effect on predicted cash flows and company’s need for
debt or equity financing; often linked with company’s ability
to take on more debt.
D. Financial Budgets
during budget period
Total available cash
– Budgeted cash expenditures
Preliminary cash balance
a. May include planned receipts from short-term loans (if
expected preliminary cash balance is inadequate), or use
v. Expected cash payments on accounts payable.
vi. Other expected cash payments such as owner’s
withdrawals or dividends, repayment of notes, etc
2. Budgeted Income Statement
Notes
22-9
Chapter Outline
3. Budgeted Balance Sheet
a. Final step in preparing master budget.
b. Shows predicted amounts for assets, liabilities, and
stockholders’ equity as of end of budget period.
c. Prepared using information from other budgets (see notes
to budgeted balance sheet for sources of amounts).
IV. Decision Analysis—Activity-Based Budgeting (ABB)-––budget
system based on expected activities.
A. Traditional budgets are based on figures from previous year,
adjusted for changes in operating conditions.
B. Activity-based budgeting requires management to list activities
and to understand the resources required to perform these
activities.
1. Helps management assess how much expenses will increase
with increases in activity levels.
2. Helps management reduce costs by eliminating non-value-
added activities.
Notes
22–10
Alternate Demo Problem Twenty-Two
ABC Company started business on January 1, 20xx. The company
estimated that sales for the first six months would be as follows:
Month
Units
Dollars
January
10,000
$ 50,000
February
8,000
40,000
March
15,000
75,000
April
17,000
85,000
May
22,000
110,000
June
30,000
150,000
The company sells all items on account and expects collections of
accounts receivable to be as follows: 60% in the month of the sale, and the
remaining 40% in the month after the sale.
Required:
(a) Compute the expected cash collections during the months of January,
February, March, April, May and June.
(b) The company has decided that finished goods inventory at the end of
each month should ideally be equal to 40% of next month’s sales. What
should budgeted production be for each of the first four months?
(c) It takes two pounds of raw material to make one unit of finished
product. The com pany wants to keep an ending inventory of raw
material equal to 30% of next month’s production needs. How many
pounds of raw material should be purchased in each of the first three
months?
(d) The raw material costs $2 per pound. The company pays for 70% of its
purchases during the month of purchase and the remainder in the
following month. How much cash will be disbursed during the month of
March for the purchase of raw material?
(e) The projected cash balance on March 1 is $13,500. What is the
estimated cash balance at the end of the month? (Prepare a formal
cash budget for the month of March.)
22–11
Solution: Alternate Demo Problem Twenty-Two
(a)
Collections
Month
Sales
Jan.
Feb.
March
April
May
June
Jan.
$ 50,000
$30,000
$20,000
Feb.
40,000
24,000
$16,000
March
75,000
45,000
$30,000
April
85,000
51,000
$ 34,000
May
110,000
66,000
$ 44,000
June
150,000
90,000
Total collected
$30,000
$44,000
$61,000
$81,000
$100,000
$134,000
(b)
Jan.
Feb.
March
April
Ending inventory
3,200
6,000
6,800
8,800
+
Estimated sales
10,000
8,000
15,000
17,000
=
Total requirements
13,200
14,000
21,800
25,800
–
Beginning inventory
0
3,200
6,000
6,800
=
Budgeted Production
13,200
10,800
15,800
19,000
(c)
Jan.
Feb.
March
Ending inventory
6,480
(1)
9,480
11,400
+
Budgeted production
26,400
(2)
21,600
31,600
=
Total requirements
32,880
31,080
43,000
–
Beginning inventory
0
6,480
9,480
=
Raw material needed
32,880
24,600
33,520
22–12
(d)
Jan.
Feb.
March
Purchases (in units)
$32,880
24,600
33,520
X
Price per pound
2.00
2.00
2.00
=
Purchase cost
$65,760
$49,200
$67,040
March cash disbursement equals 70% of March purchases plus 30% of
February purchases.
Therefore, March cash disbursements equal:
Purchases from:
February
30% x $49,200
$14,760
March
70% x $67,040
+
46,928
Total cash paid for materials
$61,688
(e)
ABC COMPANY
Cash Budget
For the Month of March 20xx
Beginning cash balance
$13,500
Cash receipts from customers
61,000
Total cash available
74,500
Cash disbursements
61,688
Ending cash balance
$12,812