Chapter 20 Master Budgets and Performance Planning
Chapter 20
Master Budgets and performance 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
20-2, 20-4
20–23
EC, TTN, ED
C2. Describe a master budget
and the process of preparing
it.
7, 8, 10, 11, 14
20-1, 20-3
20–22
20-1, 20-2,
20-3, 20-4,
20-5, 20-6
HTR, CIP
Analytical objectives:
A1. Analyze expense planning
using activity-based
budgeting.
20-7
20–24
TIA
Procedural objectives:
P1. Prepare each component of
a master budget and link
each to the budgeting
process.
20-3, 20-6, 20-10,
20-11, 20-12,
20-14, 20-15,
20-16, 20-17,
20-18, 20-19,20–23,
20-24, 20-25, 20-
26, 20-27
20-1, 20-2, 20-3,
20-5, 20-6, 20-7,
20-11, 20-12,
20-13, 20-14,
20-15, 20-16
20-1, 20-5,
20-7
HTR, GD
P2. Link both operating and
capital expenditures
budgets to budgeted
financial statements.
20-5, 20-13
20-4, 20-7, 20-17,
20–18
20-2, 20-3, 20-
4, 20-5, 20-7
RIA, CA
P3 Prepare production and
manufacturing budgets.
(Appendix 20A)
20-8, 20-9, 20-20,
20-21, 20-22
20-8, 20-9, 20-10,
20-19, 20-20,
20–21, 20-25,
20-26, 20-27,
20–28
20-6, 20-7
*See additional information below that pertains to these quick studies, exercises and problems.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a
website, in whole or part. 20-2
PowerPoint® Show Slides
Chapter Learning Objective
PowerPoint® Slides
C1
6-7
C2
8
P1
9-13
P2
14-39
A1
40
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a
website, in whole or part. 20-3
4. Focus on future is important because daily operations may
divert management’s attention from planning.
5. Good budgeting system formalizes the planning process and
demands relevant input; makes planning an explicit
B. Benchmarking Budgets
1. Control function requires management to evaluate
(benchmark) business operations against some norm.
2. Evaluation involves comparing actual results against:
a. past performance or
taking corrective actions if necessary.
4. Evaluation using expected budgeted performance is superior
to using past performance when deciding if actual results
trigger a need for corrective action.
1. Budgeting provides standards for evaluating performance and
can affect the attitudes of employees evaluated by them.
2. Three guidelines to ensure positive effect on employees’
attitudes.
b. Goals must be attainable. Budgeted levels of performance
must be realistic to avoid discouraging employees.
c. Evaluation should be made carefully and allow affected
employees to explain reasons for apparent performance
deficiencies.
d. Managers must also be aware of potential negative
outcomes of budgeting.
i. Some employees may understate sales budgets and
overstate expense budgets to allow budgetary slack
aid to aid in meeting targets.
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a
website, in whole or part. 20-5
1. Typically includes individual budgets for sales, purchases,
production, various expenses, capital expenditures and cash.
2. Sequence required; certain budgets cannot be prepared until
other budgets are complete.
3. Undesirable outcomes might be revealed at any stage in
budgeting process; changes must be made to prior budgets and
previous steps repeated.
planned sales units and the expected dollars from these
sales.
b. Requires careful analysis of forecasted economic and
market conditions, plant capacity, proposed selling
expenses, and predictions of unit sales.
c. Participatory budgeting approach ensures greater
includes forecasts of both unit sales and unit prices for
various products, regions, departments, and sales
representatives.
2. Merchandise Purchases Budget (Production and
Manufacturing Budget in Appendix 20A)
Chapter 20 Master Budgets and Performance Planning
Chapter Outline
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. This safety stock provides
protection against lost sales caused by unfulfilled
customer demands or delays in shipments from suppliers.
d. Merchandisers⎯Sales budget used as basis for
merchandise purchases budget.
i. Expressed in both units and dollars.
ii. Inventory to be purchased is determined by adding
budgeted ending inventory to budgeted sales, and then
subtracting beginning inventory.
iii. Multiply by budgeted cost per unit to obtain budgeted
cost of merchandise purchases.
3. Selling Expense Budget
a. Lists the types and amounts of selling expenses expected
during the 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.
b. Consists of either variable or fixed expenses in terms of
sales volume.
c. Interest expense and income tax expense cannot be
planned at this stage of budgeting process. Interest
expense can be predicted following the preparation of the
cash budget. Predicted income tax expense depends on
the budgeted amount of pretax income.
Notes
Chapter 20 Master Budgets and Performance Planning
Chapter Outline
5. Capital Expenditures Budget – the capital expenditures budget
is process of evaluating and planning for capital (plant assets)
expenditures, which involve long-run commitments of large
amounts. 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.
C. Financial Budgets – includes at least three financial budgets.
1. Cash Budget⎯shows expected cash inflows and outflows
during budget period. May include planned receipts from
a. Cash receipts:
i. Expected cash sales.
ii. Expected cash collections of accounts receivable.
b. Cash disbursements:
a. Final step in preparing master budget.
b. Shows predicted amounts for assets, liabilities, and equity
Notes
added activities.
VI. Production and Manufacturing Budgets – Appendix 20A
A. A manufacturer must prepare a production budget instead of a
merchandise budget.
B. Sales budget used as basis for production budget (similar to
merchandise purchases budget, except specifies only units to be
produced); used as basis for three manufacturing budgets.
C. Shows the number of units to be produced each month.
D. Similar to a merchandise purchases budget except the number of
units to be purchased each month is replaced with the number of
units to be manufactured each month.
direct labor budget and overhead budget.
G. Direct materials budget – driven by budgeted materials needed to
satisfy each month’s production requirement. Computed as
follows: budgeted production in units times material requirements
per unit equals materials needed for production; add desired
ending inventory, and subtract beginning inventory to obtain
rate.
I. Factory Overhead Budget: computed as: budgeted production in
units times variable manufacturing overhead rate equals budgeted
variable overhead; then add budgeted fixed overhead.
Chapter 20 Master Budgets and Performance Planning
Chapter 20 Alternate Demonstration Problem #1
ABC Company started business on January 1, 2013. 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 company 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.)
Chapter 20 Master Budgets and Performance Planning
Solution: Chapter 20 Alternate Demonstration Problem #1
(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
Chapter 20 Master Budgets and Performance Planning
Solution: Chapter 20 Alternate Demonstration Problem #1, Continued
(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:
(e)
ABC COMPANY
Cash Budget
For the Month of March 2013
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