Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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 benefits of
budgeting and the process of
budget administration.
1, 2, 3, 4, 5, 6,
9, 12, 13, 14
22-1, 22-2
22-1
22-3, 22-5,
22-7
C2. Describe a master budget and
the process of preparing it.
7, 8, 10, 11
22-3
22-2
22-1
22-4, 22-8
Analytical objectives:
A1. Analyze expense planning
using activity-based budgeting.
22-31, 22-32
22-35
22-6
Procedural objectives:
components of a master budget
— for a manufacturing
22-7, 22-8,
22-9, 22-11,
22-12, 22-13,
22-16, 22-17,
22–18, 22-33
22-5, 22-6,
22-7, 22-8,
22-9, 22-10,
22-13, 22-14,
22-15, 22-16
P2. Prepare a cash budget.
11
22-6, 22-10,
22-21, 22-22,
22-23, 22-24
22-17, 22-18,
22-21, 22-22,
22–23
22-1, 22-2
P3 Prepare budgeted financial
statements.
22–25
22-33, 22-34
P4 Prepare each component of a
the budgeting process—for a
merchandising company.
(Appendix 22A)
22-26, 22-27,
22–30
22-24, 22-5,
22-28, 22–29,
22-30, 22–31,
22-32,
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
The Serial Problem (SP) for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Synopsis of Chapter Revision
NEW opener—TaTa Topper and entrepreneurial assignment.
Revised discussion, with new exhibit, of budgeting as a management tool.
Revised discussion of benefits of budgeting.
Added graphic on benefits of budgeting.
Revised discussion of budgeting and human behavior.
New Decision Insight on zero-based budgeting.
New NTK on the benefits and potential costs of budgeting.
Revised master budget process exhibit to reflect types of activities.
Added graphics showing formulas to compute direct materials requirements and direct labor cost.
Revised discussions of direct materials, direct labor, and factory overhead budgets.
Added discussion and exhibits of estimated cash receipts with alternative collection timing and uncollectible
accounts.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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.
3. Useful in controlling operations.
4. Budgetary control process refers to management’s use of
budgets to see that planned objectives are met.
B. Benefits of Budgeting—fulfill key managerial functions of
planning and controlling. Benefits include:
1. Focuses on future opportunities and threats to the
3. Helps coordinate activities so all employees and departments
understand and work towards company’s overall goals.
4. Written budget effectively communicate management’s
5. Budgets can be used to motivate employees. Provide goals to
attain or exceed.
C. Budgeting and Human Behavior
2. Three guidelines to ensure positive effect on employees’
attitudes.
a. Employees affected by budget should be involved in its
preparation to increase commitment to meeting it
(participatory budgeting).
b. Goals should be challenging but attainable.
D. Potential Negative Outcomes of Budgeting
1. Managers must be aware of negative outcomes
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
a. Employees may understate the sales budget and/or
overstate the expense budget to allow a budgetary slack in
meeting targets.
E. Budget Reporting and Timing
2. To help control operations, the annual budget usually is
separated into quarterly or monthly budgets.
4. Variances are differences between actual and budgeted
5. Budget Timing – Many companies apply continuous budgeting
by preparing rolling budgets. In continuous budgeting:
a. Company continually revises its budgets as time passes.
c. Management is continuously planning ahead.
II. 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.
3. Typically begins with the sales budgets and ends with the cash
budget and budgeted financial statements.
4. Sequence required; certain budgets cannot be prepared until
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
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
b. Comes from a careful analysis of forecasted economic and
market conditions, business capacity and advertising
plans.
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.
b. Companies will 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.
c. A manufacturer will prepare a production budget. Sales
budget used as basis for production budget.
d. Production budget does not show costs – it is always
expressed in units of product.
e. Units to be produced is determined by:
Budgeted unit sales
f. Use these three steps to complete the production budget:
i. Compute budgeted ending inventory, based on the
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
g. The production budgeted is used as basis for three
manufacturing budgets.
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.
Budgeted units to be produced
x Material requirements per unit
4. Direct Labor Budget:
shows budgeted costs for direct labor that will be needed to
satisfy the period’s estimated production.
Budgeted units to be produced
5. Factory Overhead Budget:
shows budgeted costs for factory overhead that will be needed
to complete the estimated production:
6. Product cost per unit:
With the information from the 3 manufacturing
budgets, the product cost per unit can be computed.
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
7. Selling Expense Budget:
a. Based on sales volume (either dollars or units depending
8. General and Administrative Expense Budget:
a. Plan showing predicted operating expenses not included in
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
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
Notes
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Chapter Outline
b. Budgeted cash receipts include:
i. Expected cash sales – from sales budget.
ii. Expected cash collections of accounts receivable.
iii. Other expected cash receipts such as interest revenue,
sale of assets, etc.
c. Budgeted cash payments include:
i. Budgeted cash payments from selling expense budget
and general and administrative expense budget.
ii. Expected cash payments 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.
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
3. Budgeted Balance Sheet
a. Final step in preparing master budget.
b. Shows predicted amounts for assets, liabilities, and
D. Using the Master Budget
1. Planning: the master budget is clearly a plan for future
activities
Notes
Notes
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
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,
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.
2. Helps management reduce costs by eliminating non-value-
added activities.
Notes
V. Appendix 22A – 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
x Ratio of inventory to future sales
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 22 Alternate Demo Problem
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.)
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 22 Solution: Alternate Demo Problem
(a)
Collections
Month
Sales
Jan.
Feb.
March
April
May
June
Jan.
$ 50,000
$30,000
$20,000
(b)
Jan.
Feb.
March
April
Ending inventory
3,200
6,000
6,800
8,800
Estimated sales
8,000
15,000
Total requirements
21,800
3,200
6,000
6,800
Budgeted Production
15,800
(c)
Jan.
Feb.
March
Ending inventory
6,480
(1)
9,480
11,400
Budgeted production
(2)
31,600
Total requirements
43,000
Raw material needed
33,520
$16,000
March
$30,000
May
June
Total collected
$30,000
$44,000
$61,000
$81,000
$100,000
$134,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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(d)
Jan.
Feb.
March
Purchases (in units)
$32,880
24,600
33,520
(e)
ABC COMPANY
Cash Budget
For the Month of March 20xx
Beginning cash balance
$13,500
Cash receipts from customers
Total cash available
Cash payments
$12,812
X
Price per pound
=
Purchase cost
$65,760
Purchases from:
February
March
+
Total cash paid for materials