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Chapter Outline
1. Selling Expense Budget
a. Based on sales volume (either dollars or units depending
how rate is given)
b. Plan listing the type and amounts of selling expenses
expected during budget period.
c. Created to provide sufficient selling expenses to meet
sales goals reflected in sales budget.
2. General and Administrative Expense Budget
a. Plan showing predicted operating expenses not included in
selling expenses budget.
b. Consists of items variable or fixed in terms of sales
volume (expected units or sales dollars).
c. Interest expense and income tax expense cannot be
planned at this stage of budgeting process.
C. Capital Expenditures Budget
1. Shows estimated amounts to be received from plant asset
disposals, and estimated amounts to be spent on purchasing
additional plant assets; assumes proposed production program
is carried out.
2. Prepared after the operating budgets are prepared.
3. Shows expected investing activities in plant assets.
4. Affected by long-range plans for business instead of short-
term sales budgets.
5. Capital budgeting is process of evaluating and planning for
capital (plant and equipment) expenditures, which involve
long-run commitments of large amounts.
6. 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
1. Cash Budgetshows expected cash inflows and outflows
during budget period
Beginning cash balance
+ Budgeted cash receipts
Total available cash
- Budgeted cash disbursements
Preliminary Cash balance
+ or – Loan activity
Ending Cash Balance
a. May include planned receipts from short-term loans (if
expected preliminary cash balance is inadequate), or use
of cash to repay loans or acquire short-term investments
(if preliminary cash balance is in excess of requirements).
Notes
Chapter Outline
b. Budgeted cash receipts include:
i. Expected cash sales.
ii. Expected cash collections of accounts receivable.
iii. Other expected cash receipts such as interest revenue,
sale of assets, etc.
c. Budgeted cash disbursements include:
i. Budgeted cash disbursements from selling expense
budget and general and administrative expense
budget.
ii. Expected cash disbursements for interest expense and
income taxes.
iii. Expected cash purchases for a merchandiser.
iv. Expected direct materials, direct labor and overhead
payments (excluding depreciation) for a manufacturer.
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
a. Managerial accounting report showing predicted amounts
of sales and expenses.
b. Summarizes the income effects of the budgeted activities
c. Information comes from already prepared budgets.
d. Income tax expense predicted at this level.
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).
E. Using the Master Budget
1. Planning: the master budget is clearly a plan for future
activities
2. Controlling: managers typically compare actual results to
budgeted results. The differences are called variances. They
examine theses variances, especially the large ones, to identify
areas for improvement and take corrective action.
Notes
Notes
Chapter Outline
III. 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
IV. Appendix 20A – Merchandise Purchases Budget
A. MerchandisersSales budget used as basis for merchandise
purchases budget.
B. The merchandiser will express the purchases budge in both units
and dollars.
Expected unit sales
+ Budgeted ending inventory units
Required units of available merchandise
- Beginning inventory units
Total units to be purchased
x Budgeted cost per unit
Budgeted cost of merchandise purchases (dollars)
Alternate Demo Problem 20
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 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.)
Solution: Alternate Demo Problem 20
(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
Note: 60% of sales collected in month of sale; 40% in the following month.
(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
Note: Ending inventory is equal to 40% of next month’s sales (in units), and
beginning inventory is equal to last month’s ending inventory.
(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
Note: It takes two pounds of raw material to make one unit of product and
ending inventory should equal 30% of next month’s production.
(1) 6,480 = 10,800 units x 2 pounds x 30%
(2) 26,400 = 13,200 units x 2 pounds
(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
