Chapter 09 – Financial Planning and Analysis: The Master Budget
9-1
CHAPTER 9
Financial Planning and Analysis:
The Master Budget
ANSWERS TO REVIEW QUESTIONS
9-1 A budget facilitates communication and coordination by making each manager
9-2 An example of using the budget to allocate resources in a university is found in the
area of research funds and grants. Universities typically have a limited amount of
9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all
phases of an organization’s operations for a specified period of time. The master
9-5 General economic trends are important in forecasting sales in the airline industry.
The overall health of the economy is an important factor affecting the extent of
9-6 Operational budgets specify how an organization’s operations will be carried out to
meet the demand for its goods and services. The operational budgets prepared in a
Chapter 09 – Financial Planning and Analysis: The Master Budget
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Flowchart for Review Question 9-4
Operational
Budgets
Ending
Inventory
Budget:
Gasoline
Materials Budget:
Gasoline and
Related Products
Labor
Budget
Overhead
Budget
Selling and
Administrative
Expense
Budget
Sales Budget:
Chapter 09 – Financial Planning and Analysis: The Master Budget
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9-7 Application of activity-based costing to the budgeting process yields activity-based
budgeting (ABB). In the logic of activity-based costing, the company engages in a
9-8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under
this approach the information needed to construct a budget is gathered via the
9-9 The city of Boston could use budgeting for planning purposes in many ways. For
example, the city’s personnel budget would be important in planning for required
9-10 The budget director, or chief budget officer, specifies the process by which budget
data will be gathered, collects the information, and prepares the master budget. To
9-11 The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to
9-12 A company’s board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval,
Chapter 09 – Financial Planning and Analysis: The Master Budget
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9-13 A master budget is based on many assumptions and predictions of unknown
parameters. For example, the sales budget is built on an assumption about the
9-14 The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
9-15 An organization can reduce the problem of budgetary slack in several ways. First, it
9-16 The idea of participative budgeting is to involve employees throughout an
organization in the budgetary process. Such participation can give employees the
9-17 This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge in
9-5
9-18 In developing a budget to meet your college expenses, the primary steps would be to
project your cash receipts and your cash disbursements. Your cash receipts could
9-19 Firms with international operations face a variety of additional challenges in
preparing their budgets.
• A multinational firm’s budget must reflect the translation of foreign currencies
9-20 Most of the differences in budgeting between manufacturing and non-manufacturing
firms derive from the need for inventories in manufacturing. Because of this,
additional budget schedules are generally required in manufacturing firms. These
often include:
(a) Production budget
Chapter 09 – Financial Planning and Analysis: The Master Budget
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SOLUTIONS TO EXERCISES
EXERCISE 9-21 (20 MINUTES)
1.
The total required production is 131,144 units, computed as follows:
Budgeted Sales
(in units)
Planned Ending Inventory
(in units)
June
32,000 (40,000 80%)
July
40,000 (given)
August
October
Sales in units:
July ………………………………………………………………………………………………….
August ……………………………………………………………………………………………..
September ………………………………………………………………………………………..
44,100
Total for third quarter ………………………………………………………………………..
126,100
Add: Desired ending inventory, September 30 ……………………………………
Subtotal ……………………………………………………………………………………………
163,144
Total required production ………………………………………………………………….
131,144
2.
Assumed production during third quarter (in units) …………………………...
120,000
Raw-material requirements per unit of product (in pounds) ………………..
4
Raw material required for production in third quarter (in pounds) ……….
480,000
Subtotal ……………………………………………………………………………………………
600,000
Deduct: Ending raw-material inventory, June 30 …………………………………
Raw material to be purchased during third quarter (in pounds) …………..
460,000
Total raw-material purchases during third quarter ………………………………
9-7
EXERCISE 9-22 (25 MINUTES)
1.
Cash collections in October:
Month of Sale
Amount Collected in October
July ……………………………………………………..
$150,000 4%
$ 6,000
August …………………………………………………
17,500
October ………………………………………………..
225,000 70%
157,500
2.
Cash collections in fourth quarter from credit sales in fourth quarter.
Amount Collected
Month of Sale
Credit
Sales
October
November
December
October ……………………………………..
$225,000
$157,500
$ 33,750
$ 22,500
November ………………………………….
–
December ………………………………….
–
Total ………………………………………….
$157,500
$208,750
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-23 (20 MINUTES)
1.
July
August
September
Sales …………………………………………………..
$240,000
$180,000
$270,000a
Cash receipts:
From cash sales ………………………………
$ 120,000b
$ 90,000c
$135,000
From sales on account …………………….
108,000d
102,000
117,000e
2.
Accounts payable, 12/31/x0 ……………………………………………………….
€ 600,000
Purchases of goods and services on account during 20×1 ………….
2,400,000
Payments of accounts payable during 20×1 ……………………………….
Accounts payable, 12/31/x1 ……………………………………………………….
3.
Accounts receivable, 12/31/x0 ……………………………………………………
¥ 1,700,000
Sales on account during 20×1 ……………………………………………………
4,500,000
Collections of accounts receivable during 20×1 ………………………….
4.
Accumulated depreciation, 12/31/x0 …………………………………………..
$ 405,000
Depreciation expense during 20×1 …………………………………………….
75,000
Accumulated depreciation, 12/31/x1 …………………………………………..
$ 480,000
5.
Retained earnings, 12/31/x0 ………………………………………………………
$1,537,500
Net income for 20×1 ……………………………………………………….…………
Dividends paid in 20×1 ………………………………………………………………
0
Retained earnings, 12/31/x1 ………………………………………………………
$1,837,500
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-24 (15 MINUTES)
1.
Production (in units) required for the year:
Sales for the year ………………………………………………………………………………
3,360,000
Add: Desired ending finished-goods inventory on December 31 ………….
Deduct: Beginning finished-goods inventory on January 1 ………………….
560,000
Required production during the year ………………………………………………….
3,150,000
2.
Purchases of raw material (in units), assuming production of 3,500,000 finished units:
Add: Desired ending inventory on December 31 ………………………………….
Deduct: Beginning inventory on January 1 …………………………………………
245,000
Required raw-material purchases during the year ……………………………….
7,070,000
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-25 (20 MINUTES)
1.
WHITE MOUNTAIN FURNITURE SHOWROOM
EXPECTED CASH COLLECTIONS
NOVEMBER
Month
Sales
Percent
Expected
Collections
September ………………………………….
$150,000
9%
$ 13,500
October ………………………………………
195,000
November …………………………………..
165,000
2.
WHITE MOUNTAIN FURNITURE SHOWROOM
EXPECTED CASH DISBURSEMENTS
NOVEMBER
October purchases to be paid in November …………………………………………
$135,000
Less: 2% cash discount ……………………………………………………………………..
2,700
Net …………………………………………………………………………………………………
$132,300
Cash disbursements for expenses ………………………………………………………
3.
WHITE MOUNTAIN FURNITURE SHOWROOM
EXPECTED CASH BALANCE
NOVEMBER 30
Balance, November 1 ………………………………………………………………………….
$ 55,000
Add: Expected collections ………………………………………………………………….
168,000
Less: Expected disbursements …………………………………………………………..
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-26 (30 MINUTES)
Answers will vary widely, depending on the governmental unit selected and the budgetary
EXERCISE 9-27 (30 MINUTES)
1.
Budgeted cash collections for December:
Month of Sale
Collections in December
2.
Budgeted income (loss) for December:
Sales revenue ……………………………………………………………..
$440,000
Less: Cost of goods sold (75% of sales) ……………………….
330,000
Gross margin (25% of sales) ………………………………………..
$110,000
Less: Operating expenses: ………………………………………….
Bad debts expense (2% of sales) ………………………..
Depreciation ($432,000/12) ………………………………….
Other expenses ………………………………………………….
Total operating expenses ……………………………………
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-27 (CONTINUED)
3.
Projected balance in accounts payable on December 31:
The December 31 balance in accounts payable will be equal to December’s purchases of
merchandise. Since the store’s gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
Sales
Cost of
Goods
Sold
Amount Purchased in December
December ………………..
$440,000
$330,000
$330,000 20%
$ 66,000
January …………………..
240,000
Therefore, the December 31 balance in accounts payable will be $306,000.
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-28 (20 MINUTES)
Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject:
Budgetary slack
Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
9-14
EXERCISE 9-29 (20 MINUTES)
1.
Total Sales in January 20×5
$200,000
$260,000
$320,000
Cash receipts in January, 20×5
From December sales on account …………
$ 14,250*
$ 14,250
$ 14,250
From January cash sales ……………………..
150,000†
From January sales on account ……………
*$14,250 = $380,000 .25 .15
**$40,000 = $200,000 .25 .80
2.
Operational plans depend on various assumptions. Usually there is uncertainty about
EXERCISE 9-30 (25 MINUTES)
1.
Direct professional labor budget for the month of June:
Professional services in June:
Total direct professional labor ……………………………………….
hours
Total direct professional labor cost ……………………………….
Chapter 09 – Financial Planning and Analysis: The Master Budget
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EXERCISE 9-30 (CONTINUED)
2.
Cash collections during June:
May
June
Half-hour visits (4,000 80%) ………………………………………..
3,200
3,200
Billing rate ……………………………………………………………………
$60
$60
Total billings for half-hour visits …………………………………….
$192,000
$192,000
800
800
Billing rate ……………………………………………………………………
Total billings for one-hour visits …………………………………….
$ 84,000
$ 84,000
Total billings during month ……………………………………………
$276,000
$276,000
Collections during June ………………………………………………..
$ 27,600
$248,400
3. Overhead and administrative expense budget for June:
Patient registration and records (4,000 visits $3.00 per visit) …. $12,000
Chapter 09 – Financial Planning and Analysis: The Master Budget
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SOLUTIONS TO PROBLEMS
PROBLEM 9-31 (30 MINUTES)
1. Schedule of cash collections:
January
February
March
Collection of accounts receivable:
$165,000 x 20% …………………………………..
$ 33,000
Collection of January sales ($450,000):
60% in January; 35% in February ………..
$157,500
Collection of February sales ($540,000):
60% in February; 35% in March …………..
$189,000
Collection of March sales ($555,000):
60% in March ……………………………………..
Sale of equipment ……………………………………
15,000
Total cash collections ………………………..
$303,000
$481,500
$537,000
2. Schedule of cash disbursements:
January
February
March
Payment of accounts payable ………………….
$ 66,000
Payment of January purchases ($270,000):
70% in January; 30% in February ………..
$ 81,000
Payment of February purchases ($300,000):
70% in February; 30% in March …………..
$ 90,000
Payment of March purchases ($420,000):
70% in March ……………………………………..
Cash operating costs ………………………………
93,000
72,000
Total cash disbursements …………………..
$348,000
$363,000
$519,000
Chapter 09 – Financial Planning and Analysis: The Master Budget
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PROBLEM 9-31 (CONTINUED)
3. Schedule of cash needs:
January
February
March
Beginning cash balance……………………….
$ 60,000
$ 60,000
$132,900
Total receipts…………………………………….
303,000
481,500
537,000
$541,500
$669,900
Less: Total disbursements……………………
348,000
363,000
519,000
$ 15,000
$178,500
$150,900
Financing:
45,000
(600)*
$ 60,000
$132,900
$150,900
Chapter 09 – Financial Planning and Analysis: The Master Budget
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PROBLEM 9-32 (40 MINUTES)
1.
Production and direct-labor budgets
SHADY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Month
January
February
March
Quarter
Sales (units) ……………………………………………..
20,000
24,000
16,000
60,000
Add: Ending inventory* ……………………………..
32,000
25,000
27,000
27,000
Total needs ……………………………………………….
52,000
49,000
43,000
87,000
Deduct: Beginning inventory ……………………..
32,000
32,000
25,000
32,000
Units to be produced …………………………………
20,000
17,000
18,000
55,000
Total hours of direct labor
time needed ………………………………………….
20,000
17,000
13,500
50,500
Direct-labor costs:
Wages ($16.00 per DLH)† ……………………….
$320,000
$272,000
$216,000
$808,000
($.50 per DLH) …………………………………..
Workers’ compensation
insurance ($.20 per DLH) ……………………
Employer’s social security
(at 7%) ………………………………………………
22,400
19,040
15,120
56,560
Pension contributions
Chapter 09 – Financial Planning and Analysis: The Master Budget
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PROBLEM 9-32 (CONTINUED)
2.
Use of data throughout the master budget (excluding financial statement budgets):
Components of the master budget, other than the production budget and the direct-
labor budget, that would also directly or indirectly use the sales data include the
following:
• Sales budget
• Cost-of-goods-sold budget
• Selling and administrative expense budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also directly or indirectly use the production data include the
following:
• Direct-material budget
• Production-overhead budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also directly or indirectly use the direct-labor-hour data
include the following:
• Production-overhead budget (for determining the overhead application rate)
• Cash budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also directly or indirectly use the direct-labor cost data
include the following:
• Production-overhead budget (for determining the overhead application rate)
• Cost-of-goods-sold budget
• Cash budget
Chapter 09 – Financial Planning and Analysis: The Master Budget
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PROBLEM 9-32 (CONTINUED)
3. Production overhead budget:
SHADY SHADES, INC.
PRODUCTION OVERHEAD BUDGET
FOR THE FIRST QUARTER OF 20X1
Month
January
February
March
Quarter
Shipping and handling ……………
$ 60,000
$ 72,000
$48,000
$180,000
Total production overhead ………
$360,000
$327,000
$957,750
PROBLEM 9-33 (40 MINUTES)
1. Niagra Chemical Company’s production budget (in gallons) for the three products for
20×2 is calculated as follows:
Yarex
Darol
Norex
Sales for 20×2 ………………………………………
Total required ………………………………………
Deduct: Inventory, 12/31/x1
Required production in 20×2 …………………
2. The company’s conversion cost budget for 20×2 is shown in the following schedule:
Conversion hours required:
Yarex (120,800 × .07) …………………………….
Darol (79,200 × .10) ………………………………
Norex (50,800 × .16) ……………………………..
Total hours ………………………………………….