223
CHAPTER 8
THE MASTER BUDGET
QUESTIONS
1. Budgeting translates goals and objectives into the resources, activities, and ar-
2. The strategic plan defines an organization’s basic purposes and goals. As such,
the strategic plan identifies the internal and external key variables that will
ity, outsourcing possibilities, and legislative and political climates. The long-
3. Longer term (strategic) plans contain insufficient detail to direct a business.
riod. Tactical plans are prepared with greater attention to current organizational
4. The budget represents the cornerstone for a company’s management planning
system. Budgeting originates with strategic planning and utilizes goals, objec-
budget becomes management’s master plan. The budget provides a basis
against which management can compare actual with forecasted outcomes. If the
5. An operating budget presents units expected to be sold or used by a company
and the price/costs associated with those units. Sales, production, and purchas-
lections/receipts portion of the (financial) cash budget. Both types of budgets are
224 Chapter 8
needed because the units contained in operating budgets have to be “translated”
6. The master budget begins with a “demand driven” estimate of sales. It is, how-
ever, possible that demand does not “exist” at the point the budget is prepared
The production budget is prepared next as it follows directly from the sales
budget. Production and purchases budgets are similar in that they begin with a
key variable to their particular area, add ending inventory, and subtract begin-
ning inventory. These budgets differ in that the key variable for the production
ly from sales budgets.
To prepare the overhead budget for a specific production volume, costs must be
separated into those that are volume dependent (variable costs) and those that
Selling and administrative budgets follow, and then the cash budget is pre-
pared. Managers estimate collections from sales through historical company da-
ta on collection patterns, industry trends/patterns, and judgment. Current
Cash collections are important in the budgeting process because of their impact
balance sheet position.
This sequence is necessary because the information from one budget is often a
primary input into another budget.
7. A firm’s production budget is influenced by the finished goods inventory poli-
cy because that policy dictates the quantity of goods that are expected to be on
Chapter 8 225
accessible website, in whole or in part.
nus beginning finished goods inventory.
8. Cash is an essential organizational resource because it is the medium of ex-
or sales of assets. When the cash budget indicates a potential shortage, the ac-
to borrow funds or defer payments.
9. The cash budget and budgeted statement of cash flows are similar in that they
both focus on the balance of cash and explain the change in cash balance over a
period of time. However, the cash budget typically covers shorter time periods
10. Continuous budgeting is becoming more popular because of the rapidity of
change. Rather than having a 12-month budget period that gets shorter as the
year progresses, continuous budgeting allows managers to always have a 12–
11. The process of developing a budget is important because managers are able to
ment’s control, but other times they are not—in which case, knowing the
12. Budgetary slack results from an overestimation of expected expenses or an un-
sufficient slack is contained in the budget. Two primary ways to reduce budget
13. The budget manual provides a “standard” methodology for preparing the budget
as well as a recognized standard for the budgeting process. The budget manual
ing process for lower-level managers.
226 Chapter 8
EXERCISES
14. Each student will have a different answer; however, the following types of
items might be included for each part.
operates?
What will it cost to open a new plant in Country X?
What will happen to net income if the price of an important raw material
increases by X%?
by several months?
What outsourcing opportunities are available, and how would using these
affect the company’s profitability and reputation?
or increase the number of salespeople?
How would advertising in a new medium affect company sales and profita-
bility?
15. a. A SWOT analysis is an internal and external environmental scan that de-
tails information on the company’s strengths, weaknesses, opportunities,
and weaknesses and should differentiate where the company is currently
and where it could be in the future (and what it would take to get the firm to
b. Each student will have a different answer. However, the following sites pro-
vide descriptions of SWOT analyses for four companies:
http://www.marketingteacher.com/SWOT/walmart-swot.htm
16. Each student will have a different answer. However, some possibilities are:
Reduce amounts spent for entertainment, including movies.
Put each person on an “allowance.”
Chapter 8 227
Set a maximum for gifts, and do not buy gifts for each other.
meats and pastries.
Vacation “on the cheap”—camping, visiting relatives, or enjoying home town.
17. a. Competitors’ actions are extremely important to business planning because
those actions will probably affect whether the planning company will suc-
ucts to also lower product prices or increase advertising that would explain
higher prices to consumers.
technology or labor needs.
force, and technological changes that could affect training needs.
18.
Business loans ($6,000,000 0.05)
$300,000
Consumer loans ($4,000,000 0.11)
440,000
Investments ($1,600,000 0.045)
72,000
Total projected revenue
$812,000
228 Chapter 8
19.
1st Quarter
2nd Quarter
3rd Quarter
Total
A
600,000
300,000
640,000
$17
$16
$14
$10,200,000
$ 4,800,000
$ 8,960,000
$29,480,000
B
400,000
700,000
250,000
$17
$16
$14
$ 6,800,000
$11,200,000
$ 3,500,000
$29,300,000
C
530,000
480,000
800,000
$17
$16
$14
$ 9,010,000
$ 7,680,000
$11,200,000
$30,170,000
developed for direct labor employees.
Scenario A might actually be a better situation because of the less dramatic ad-
justments between quarters.
20.
January
February
March
Budgeted sales
102,400
96,000
128,000
Ending inventory (5%)
4,800
6,400
7,680
Total required
107,200
102,400
135,680
Beginning inventory
(7,000)
(4,800)
(6,400)
Budgeted production
100,200
97,600
129,280
21.
QUARTER
Total
1st
2nd
3rd
4th
Sales
1,080,000
1,360,000
980,000
1,100,000
4,520,000
EI (10%)
136,000
98,000
110,000
120,000
120,000
Total
1,216,000
1,458,000
1,090,000
1,220,000
4,640,000
BI
(94,500)
(136,000)
(98,000)
(110,000)
(94,500)
Production
1,121,500
1,322,000
992,000
1,110,000
4,545,500
22. a.
January
February
March
April
Sales
300
700
1,000
900
EI
1,700
1,900
1,300
700
Total units needed
2,000
2,600
2,300
1,600
BI
(1,000)
(1,700)
(1,900)
(1,300)
Units produced
1,000
900
400
300
Chapter 8 229
b.
February
March
April
Units produced
900
400
300
Pounds of RM per unit
3
3
3
RM needed for production
2,700
1,200
900
EI
1,350
600
450
Pounds of RM needed
4,050
1,800
1,350
Pounds of RM in BI
(1,500)
(1,350)
(600)
Pounds of RM to purchase
2,550
450
750
Cost per pound
$2.00
$2.30
$2.40
Cost of RM purchases
$ 5,100
$ 1,035
$ 1,800
c.
February
March
April
Units produced
900
400
300
DLHs per unit
10
10
10
Total hours
9,000
4,000
3,000
Cost per DLH
$12
$12
$12
Cost of DL
$108,000
$48,000
$36,000
23. Sales of gowns
325,000
EI of gowns
15,800
Total
340,800
BI of gowns
(21,000)
Production
319,800
319,800 2.5 yards = 799,500 yards
Yards needed for production
799,500
Ending inventory
4,550
Total
804,050
Beginning inventory
(5,000)
Yards to purchase
799,050
Divided by yards in bolt
÷ 15
Necessary bolts
53,270
24. a. and b.
Sales (feet)
190,000
EI
10,000
Total
200,000
BI
(12,250)
Production
187,750
Concrete
Gravel
Production in feet
187,750
187,750
Pounds per foot
4
7.5
Pounds for production
751,000
1,408,125
EI
34,300
46,250
Total pounds needed
785,300
1,454,375
BI
(41,000)
(32,650)
Purchase (pounds)
744,300
1,421,725
Cost per pound
$0.10
$0.04
Total cost
$ 74,430
$ 56,869
230 Chapter 8
25. a.
Boxes
Trays
Production budget
Units of sales
42,000
30,000
Units desired in ending inv.
1,800
650
Units needed
43,800
30,650
Units in beginning inv.
(1,200)
(800)
Budgeted production
42,600
29,850
b.
Purchases budget—Material A
Pounds needed for production:
(42,600 2) + (29,850 1) = (85,200 + 29,850)
115,050
Desired ending inventory
1,500
Total requirements
116,550
Less beginning inventory
(1,780)
Pounds to be purchased
114,770
Cost per pound
$0.05
Total cost of Material A purchases
$5,738.50
Purchases budget—Material B
Pounds needed for production:
(42,600 1.5) + (29,850 0.8) = (63,900 + 23,880)
87,780
Desired ending inventory
1,400
Total requirements
89,180
Less beginning inventory
(5,000)
Pounds to be purchased
84,180
Cost per pound
$0.07
Total cost of Material B purchases
$5,892.60
Material purchases:
Material A
114,770 lbs.
$ 5,738.50
Material B
84,180 lbs.
5,892.60
Total
$11,631.10
c.
Direct labor budget
Required hours:
Boxes (42,600 0.3)
12,780
Trays (29,850 0.2)
5,970
Total DLHs
18,750
Average DL wage rate
$9.50
Total DL cost
$178,125
d.
Boxes
Trays
Total
Activity base (DLHs)
12,780
5,970
Multiplied by OH rate
$1.60
$1.60
Overhead applied
$20,448
$9,552
$30,000
26. Cost of goods sold
$600,000
Ending inventory
84,000
Beginning inventory
(60,000)
Budgeted purchases
$624,000
Monthly purchases: $624,000 ÷ 12 = $52,000
Chapter 8 231
Payment for current year purchases ($52,000 11)
$572,000
Beginning A/P balance
40,000
Total cash payments for purchases in 2014
$612,000
27.
Sept.
Oct.
Nov.
Aug. credit sales (60% $78,000 80%)
$37,440
Sept. cash sales (40% $80,000)
32,000
Sept. credit sales (60% $80,000 20%)
9,600
Sept. credit sales (60% $80,000 80%)
$38,400
Oct. cash sales (40% $95,000)
38,000
Oct. credit sales (60% $95,000 20%)
11,400
Oct. credit sales (60% $95,000 80%)
$45,600
Nov. cash sales (40% $91,000)
36,400
Nov. credit sales (60% $91,000 20%)
10,920
Total collections
$79,040
$87,800
$92,920
28. a.
January
February
March
Nov. sales (30% $83,000)
$24,900
Dec. sales (30% $76,000)
22,800
Dec. sales (30% $76,000)
$22,800
Jan. sales (40% $79,000 99%)
31,284
Jan. sales (30% $79,000)
23,700
Jan. sales (30% $79,000)
$23,700
Feb. sales (40% $88,000 99%)
34,848
Feb. sales (30% $88,000)
26,400
Mar. sales (40% $59,000 99%)
23,364
Total collections
$78,984
$81,348
$73,464
b.
Feb. sales to be collected in April (30% $88,000)
$26,400
March sales to be collected in April (30% $59,000)
17,700
March sales to be collected in May (30% $59,000)
17,700
Total A/R balance at March 31
$61,800
29. a.
October collections:
From A/R balance
$11,000
From October billings ($100,000 0.15)
15,000
Total October collections
$26,000
November collections:
From October billings ($100,000 0.55)
$55,000
From November billings ($65,000 0.15)
9,750
Total November collections
$64,750
December collections:
From October billings ($100,000 0.30)
$30,000
From November billings ($65,000 0.55)
35,750
From December billings ($15,000 0.15)
2,250
Total December collections
$68,000
232 Chapter 8
b.
October collections
$ 26,000
Less October business costs
(22,500)
Remainder 10/31
$ 3,500
November collections
64,750
Total
$ 68,250
Less November business costs
(22,500)
Remainder 11/30
$ 45,750
c. If Irby pays for the trip and if everything works out exactly as planned, she
would have $750 of cash on hand in the business. This is an exceptionally
small “cushion” and she should probably not make such a large cash ex-
penditure at the end of November.
Remainder 11/30
$ 45,750
December collections
68,000
Total
$113,750
Less December business costs
(22,500)
Remainder 12/31
$ 91,250
$5,000 and spending $450—saving a total of $4,550.
30. a. Balance at May 31
$119,600
Remainder of May credit sales
(90,000)
Remainder of April credit sales
$ 29,600
% of April credit sales uncollected at end of May
÷ 0.10
April sales on credit
$296,000
% of total sales made on credit
÷ 0.80
Total April sales
$370,000
b. Remainder of May credit sales
$ 90,000
% of May credit sales uncollected at end of May
÷ 0.30
May credit sales
$300,000
c. June collections of April credit sales (remainder)
$ 29,600
June collections of May credit sales ($300,000 20%)
60,000
June cash sales ($450,000 20%)
90,000
June collections of June credit sales ($450,000 80% =
$360,000 credit sales; $360,000 70%)
252,000
Total June collections
$431,600
d. Balance from May sales ($300,000 10%)
$ 30,000
Balance from June sales ($360,000 30%)
108,000
Total June 30 A/R balance
$138,000