Financial and Managerial Accounting, 8th Edition
20-1
CHAPTER 20
MASTER BUDGETS AND PERFORMANCE PLANNING
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
AA and
BTN
Conceptual objectives:
C1. Describe the benefits of budgeting
1, 2, 3, 4, 5, 6,
20-1, 20-2
20-2
BTN 20-1, BTN 20-2,
Analytical objectives:
A1. Analyze expense planning using
activity-based budgeting.
16
20-35
BTN 20-4
Analytical objectives:
20-31
20-16
P1. Prepare the operating budget of a
7, 8, 11, 15
20-3, 20-4,
20-1, 20-3,
AA 20-2, BTN 20-6
P3 Prepare budgeted financial
statements.
20-25
20-33, 20-34
AA 20-1
P4 Prepare each component of a master
20-26, 20-27,
20-24, 20-5,
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
Budget Reporting and Timing
1:38
0:58
1:07
Activity-Based Budgeting
1:56
Prepare the operating budget of a master budget — for a manufacturing company.
Sales Budget
Production Budget
Direct Materials Budget
Direct Labor Budget
Factory Overhead Budget
Selling Expense Budget
General and Admin. Expense Budget
Capital Expenditures Budget
Financial and Managerial Accounting, 8th Edition
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
20-1
Budgeting Benefits
0:32
20-2
Production Budget
0:53
20-3
Direct Materials and Direct Labor Budgets
2:03
20-4
Selling and General and Administrative Expense Budgets
1:24
20-5
Cash Budget
2:59
20-8
Merchandise Purchases Budget
0:58
Concept Overview Videos
LO
Title
Time
C1
Describe the benefits of budgeting and the process of budget administration.
Budgeting Process
2:22
Budgeting and Human Behavior
1:31
Financial and Managerial Accounting, 8th Edition
20-3
P2
Prepare a cash budget—for a manufacturing company.
Cash Budget
1:40
Cash Receipts from Sales
1:53
Cash Payments for Materials
1:00
Preparing the Cash Budget
1:33
Loan Activity
1:58
P3
Prepare budgeted financial statements.
Budgeted Income Statement
1:31
Budgeted Balance Sheet
0:27
Merchandise Purchases Budget
Synopsis of Chapter Revisions
NEW opener—Misfit Juicery and entrepreneurial assignment.
Added T-accounts and steps to exhibit margins.
Added numbered steps to several exhibits.
Financial and Managerial Accounting, 8th Edition
20-4
Chapter Outline
I. Budging as a Management Tool—ensures that activities of employees and departments contribute to
meeting the company’s overall goals. Budgeting is the process of planning future business actions and
expressing them as formal plans.
A. Budget Process⎯process of planning future business activities.
1. Budget⎯Formal statement of a company’s plans, expressed in monetary terms.
B. Benefits of Budgeting—benefit key managerial functions of planning and controlling.
1. Planning: focuses on future opportunities and threats to the organization. Makes management
C. Budgeting and Human Behavior
1. Budgeting provides standards for evaluating performance and can affect the attitudes of
employees evaluated by them.
D. Potential Negative Outcomes of Budgeting
1. Managers must be aware of negative outcomes.
a. Employees may understate the sales budget and/or overstate the expense budget to allow a
E. Budget Reporting and Timing
1. Usually coincides with the company’s fiscal year.
Financial and Managerial Accounting, 8th Edition
20-5
5. Budget Timing – Many companies apply continuous budgeting by preparing rolling budgets. In
continuous budgeting:
II. 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
B. Operating Budgets⎯Four major types.
1. Sales budget
a. First step in preparing master budget – shows planned unit sales and expected dollars from
those sales
2. Production Budget – shows number of units to be produced in a period. Is based on the budgeted
unit sales in the sales budget and inventory considerations.
a. Whether company manufacturers or purchases the products it sells, budgeted future sales
volume is primary factor in inventory management decisions.
Financial and Managerial Accounting, 8th Edition
20-6
f. Use these three steps to complete the production budget:
3. Direct Materials Budget:
shows budgeted costs for direct materials that will be needed to be purchased to satisfy the
estimated production for the period.
4. Direct Labor Budget:
shows budgeted costs for direct labor that will be needed to satisfy the period’s estimated
production.
5. Factory Overhead Budget:
shows budgeted costs for factory overhead that will be needed to complete the estimated
production:
Financial and Managerial Accounting, 8th Edition
20-7
6. Product cost per unit:
With the three manufacturing budgets, the product cost per unit can be computed. This
7. Selling Expense Budget:
8. General and Administrative Expense Budget:
a. Plan showing predicted operating expenses not included in selling expenses budget.
9. Capital Expenditures Budget:
a. 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.
C. Financing Budgets
1. Cash Budget⎯shows expected cash inflows and outflows during budget period. Managing cash
is vital for the firm’s success. Helps company meet cash balance goal.
Beginning cash balance
+ Budgeted cash receipts
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).
b. Budgeted cash receipts include:
Financial and Managerial Accounting, 8th Edition
20-8
c. Budgeted cash payments include:
i. Budgeted cash payments from selling expense budget and general and administrative
expense budget.
d. Loan Activity: if company has agreement with bank to keep a minimum cash balance,
company will need to borrow if preliminary balance is less than this minimum amount.
They will need to repay any loan balance when preliminary balance is greater than the
minimum amount.
2. Budgeted Income Statement
a. Managerial accounting report showing predicted amounts of sales and expenses.
3. Budgeted Balance Sheet
a. Final step in preparing master budget.
1. Planning: the master budget is clearly a plan for future activities
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.
III. Budgeting for Service Companies – service providers also use master budgets. Master budgets for
service provider includes:
A. Sales, Direct Labor, Factory Overhead, Capital expenditures, Cash, and Selling and general and
administrative expenses.
Financial and Managerial Accounting, 8th Edition
20-9
V. Appendix 20A – Merchandise Purchases Budget
A. Merchandisers⎯Sales budget used as basis for merchandise purchases budget.
B. Preparing the merchandise purchases budget: expressed in both units and dollars.
Next month’s budgeted unit sales
Financial and Managerial Accounting, 8th Edition
20-10
Chapter 20 Alternate Demo Problem
ABC Company started business on January 1, 2019. The company estimated that sales
for the first six months would be as follows:
Month
Units
Dollars
January
10,000
$ 50,000
February
March
15,000
17,000
30,000
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.
(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?
Financial and Managerial Accounting, 8th Edition
20-11
Chapter 20 Solution: Alternate Demo Problem
(a)
Collections
Month
Sales
Jan.
Feb.
March
April
May
June
Jan.
$ 50,000
$30,000
$20,000
$16,000
March
$30,000
May
June
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
8,000
15,000
17,000
Total requirements
21,800
25,800
3,200
6,000
6,800
(c)
Jan.
Feb.
March
Ending inventory
6,480
(1)
9,480
11,400
Budgeted production
(2)
21,600
31,600
Total requirements
31,080
43,000
6,480
9,480
Raw material needed
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.
Financial and Managerial Accounting, 8th Edition
(d)
Jan.
Feb.
March
Purchases (in units)
X
Price per pound
=
Purchase cost
Therefore, March cash payments equal:
Purchases from:
February
March
+
Total cash paid for materials
(e)
ABC COMPANY
Cash Budget
For the Month of March 2019
Beginning cash balance
$13,500
Cash receipts from customers
Total cash available
Cash payments
$12,812