Chapter 22
Master Budgets
Review Questions
1. List the four budgeting objectives.
The four budgeting objectives are:
2. One benefit of budgeting is coordination and communication. Explain what this means.
The budget coordinates a company’s activities. Creating a budget facilitates coordination and
3. How is benchmarking beneficial?
Budgets provide a benchmark that motivates employees and helps managers evaluate performance,
4. What is budgetary slack? Why might managers try to build slack into their budgets?
Budgetary slack occurs when managers intentionally understate expected revenues or overstate
5. Explain the difference between strategic and operational budgets.
A strategic budget is a long-term financial plan used to coordinate the activities needed to achieve
the long-term goals of the company. Strategic budgets often span 3 to 10 years. Because of their
6. Explain the difference between static and flexible budgets.
A static budget is a budget prepared for only one level of sales volume. All revenue and expense
7. What is a master budget?
8. What are the three types of budgets included in the master budget? Describe each type.
The master budget includes the operating budget, capital expenditures budget, and financial budget.
9. Why is the sales budget considered the cornerstone of the master budget?
The sales budget is the first component of the operating budget and is the cornerstone of the master
10. What is the formula used to determine the number of units to be produced?
The formula to determine the number of units to be produced is as follows:
11. What is the formula used to determine the amount of direct materials to be purchased?
The formula to determine the amount of direct materials to be purchased is as follows:
12. What are the two types of manufacturing overhead? How do they affect the manufacturing overhead
budget calculations?
The two types of manufacturing overhead—indirect manufacturing costs—are variable costs and
13. How is the predetermined overhead allocation rate determined?
The predetermined overhead allocation rate is determined as follows:
14. What is the capital expenditures budget?
The capital expenditures budget presents the company’s plans for purchasing property, plant,
15. What are the three sections of the cash budget?
16. What are the budgeted financial statements? How do they differ from regular financial statements?
The budgeted financial statements are the budgeted income statement, budgeted balance sheet, and
17. What is sensitivity analysis? Why is it important for managers?
Sensitivity analysis is a what-if technique that asks what a result will be if a predicted amount is not
achieved or if an underlying assumption changes. The master budget models the company’s planned
18A. How does the master budget for a merchandising company differ from a manufacturing company?
Many of the calculations and budgets are the same for a merchandising company’s master budget
and a manufacturing company’s master budget, but in some ways the master budget for a
19A. What is the formula used to determine the amount of merchandise inventory to be purchased?
The formula to determine the amount of merchandise inventory to be purchased is as follows:
20A. What budgets are included in the financial budget for a merchandising company?
Included in the financial budget for a merchandising company are the cash budget, budgeted
income statement, budgeted balance sheet, and budgeted statement of cash flows.
Short Exercises
S22-1 Budgeting benefits
Learning Objective 1
List the three key benefits companies get from preparing a budget.
SOLUTION
and benchmarking.
S22-2 Budgeting types
Learning Objective 2
Consider the following budgets and budget types.
Which budget or budget type should be used to meet the following needs?
a. Upper management is planning for the next five years.
b. A store manager wants to plan for different levels of sales.
c. The accountant wants to determine if the company will have sufficient funds to pay expenses.
d. The CEO wants to make companywide plans for the next year.
SOLUTION
Budget or Budget Type
Strategic budget
b.
Flexible budget
Cash budget
d.
Master budget
S22-3 Preparing an operating budget—sales budget
Learning Objective 3
Yogi Company manufactures luggage sets. Yogi sells its luggage sets to department stores. Yogi expects
to sell 1,650 luggage sets for $320 each in January and 2,050 luggage sets for $320 each in February. All
sales are cash only. Prepare the sales budget for January and February.
SOLUTION
YOGI COMPANY
Sales Budget
For the Two Months Ended February 28
S22-4 Preparing an operating budget—production budget
Learning Objective 3
Yandell Company expects to sell 1,650 units of finished product in January and 2,000 units in February.
The company has 240 units on hand on January 1 and desires to have an ending inventory equal to 60%
of the next month’s sales. March sales are expected to be 2,050 units. Prepare Yandell’s production
budget for January and February.
SOLUTION
YANDELL COMPANY
Production Budget
For the Two Months Ended February 28
S22-5 Preparing an operating budget—direct materials budget
Learning Objective 3
Yosko expects to produce 1,950 units in January and 2,114 units in February. The company budgets $85
per unit for direct materials. Indirect materials are insignificant and not considered for budgeting
purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is
$50,000. Yosko desires the ending balance in Raw Materials Inventory to be 40% of the next month’s
direct materials needed for production. Desired ending balance for February is $51,400. Prepare Yosko’s
direct materials budget for January and February.
SOLUTION
YOSKO COMPANY
Direct Materials Budget
For the Two Months Ended February 28
S22-6 Preparing an operating budget—direct labor budget
Learning Objective 3
Yancey Company expects to produce 1,920 units in January and 1,974 units in February. Yancey
budgets two direct labor hours per unit. Direct labor costs average $20 per hour. Prepare Yancey’s direct
labor budget for January and February.
SOLUTION
YANCEY COMPANY
Direct Labor Budget
For the Two Months Ended February 28
S22-7 Preparing an operating budget—manufacturing overhead budget
Learning Objective 3
Yasmin Company expects to produce 2,110 units in January that will require 6,330 hours of direct labor
and 2,280 units in February that will require 6,840 hours of direct labor. Yasmin budgets $8 per unit for
variable manufacturing overhead; $1,300 per month for depreciation; and $33,820 per month for other
fixed manufacturing overhead costs. Prepare Yasmin’s manufacturing overhead budget for January and
February, including the predetermined overhead allocation rate using direct labor hours as the allocation
base.
SOLUTION
YASMIN COMPANY
Manufacturing Overhead Budget
For the Two Months Ended February 28
S22-8 Preparing an operating budget—cost of goods sold budget
Learning Objective 3
Young Company expects to sell 1,800 units in January and 1,900 units in February. The company
expects to incur the following product costs:
The beginning balance in Finished Goods Inventory is 260 units at $137 each for a total of $35,620.
Young uses FIFO inventory costing method. Prepare the cost of goods sold budget for Young for
January and February.
SOLUTION
Manufacturing cost per unit in January and February:
Direct materials cost per unit
$ 45
Direct labor cost per unit
Manufacturing overhead cost per unit
Total projected manufacturing cost per unit
$ 137
Beginning inventory, 260 units
Total budgeted cost of goods sold
S22-9 Preparing a financial budget—schedule of cash receipts
Learning Objective 4
Yeaman expects total sales of $333,000 in January and $407,000 in February. Assume that Yeaman’s
sales are collected as follows:
60% in the month of the sale
30% in the month after the sale
8% two months after the sales
2% never collected
November sales totaled $260,000, and December sales were $330,000. Prepare a schedule of cash
receipts from customers for January and February. Round answers to the nearest dollar.
SOLUTION
Schedule of Cash Receipts from Customers
January
February
Total
Total sales
$ 333,000
$ 407,000
$ 740,000
January
February
Cash Receipts from Customers:
Nov. sales––$260,000, 8% collected in Jan.
$ 20,800
Dec. sales—$330,000, 30% collected in Jan.
Dec. sales—$330,000, 8% collected in Feb.
$ 26,400
Jan. sales—$333,000, 60% collected in Jan.
Jan. sales—$333,000, 30% collected in Feb.
Feb. sales—$407,000, 60% collected in Feb.
Total cash receipts from customers
$ 319,600
$ 370,500
$ 690,100
Net Accounts Receivable balance, February 28: $181,060
Jan. sales—$333,000, 8% collected in Mar.
Feb. sales—$407,000, 30% collected in Mar.
122,100
Feb. sales—$407,000, 8% collected in Apr.
S22-10 Preparing a financial budget—schedule of cash payments
Learning Objective 4
Yada Company budgeted direct materials purchases of $192,340 in January and $138,260 in February.
Assume Yada pays for direct materials purchases 30% in the month of purchase and 70% in the month
after purchase. The Accounts Payable balance on January 1 is $40,000. Prepare a schedule of cash
payments for purchases for January and February. Round to the nearest dollar.
SOLUTION
Schedule of Cash Payment for Purchases
January
February
Total
Total direct materials purchases
$ 330,600
January
February
Cash Payments
Direct Materials:
Accounts Payable balance, January 1
$ 40,000
Total payments for direct materials
$ 273,818
Accounts Payable balance, February 28: $96,782 (70% of February’s direct materials purchases)
S22-11 Preparing a financial budget—cash budget
Learning Objective 4
Yates has $13,500 in cash on hand on January 1 and has collected the following budget data:
Assume direct labor costs and manufacturing overhead costs are paid in the month incurred.
Additionally, assume Yates has cash payments for selling and administrative expenses including salaries
of $45,000 per month plus commissions that are 2% of sales, all paid in the month of sale. The company
requires a minimum cash balance of $10,000. Prepare a cash budget for January and February. Round to
the nearest dollar. Will Yates need to borrow cash by the end of February?
SOLUTION
YATES COMPANY
Cash Budget
For the Two Months Ended February 28
January
February
Total
Beginning cash balance
$ 13,500
$ 31,374
$ 13,500
Cash receipts
442,400
502,800
945,200
Cash available
455,900
534,174
958,700
Cash payments:
Purchases of direct materials
Direct labor
111,760
Total cash payments
424,526
381,792
806,318
Ending cash balance before financing
Minimum cash balance desired
Projected cash excess (deficiency)
142,382
142,382
Financing:
0
0
0
Borrowing
0
0
0
Principal repayments
Total effects of financing
Ending cash balance
Yates will not need to borrow cash by the end of February because the ending cash balance before
financing is $142,382 greater than the $10,000 minimum required.
(a)
Manufacturing overhead costs, less depreciation of $2,100 per month
(b)
$45,000
+
(2% × sales)
=
Cash payments for S&A expenses
$45,000
+
(2% × $528,000)
=
$45,000
+
(2% × $560,000)
=
Note: Short Exercise S22-9 must be completed before attempting Short Exercise S22-12.
S22-12 Using sensitivity analysis in budgeting
Learning Objective 5
Refer to the Yeaman’s schedule of cash receipts from customers that you prepared in Short Exercise
S22-9. Now assume that Yeaman’s sales are collected as follows:
50% in the month of the sale
30% in the month after the sale
18% two months after the sale
2% never collected
Prepare a revised schedule of cash receipts for January and February.
SOLUTION
Schedule of Cash Receipts from Customers
January
February
Total
Total sales
$ 333,000
$ 407,000
$ 740,000
January
February
Cash Receipts from Customers:
Nov. sales––$260,000, 18% collected in Jan.
$ 46,800
Dec. sales—$330,000, 30% collected in Jan.
Dec. sales—$330,000, 18% collected in Feb.
$ 59,400
Jan. sales—$333,000, 50% collected in Jan.
Jan. sales—$333,000, 30% collected in Feb.
Feb. sales—$407,000, 50% collected in Feb.
203,500
Total cash receipts from customers
$ 312,300
$ 362,800
$ 675,100
Net Accounts Receivable balance, February 28: $255,300
Jan. sales—$333,000, 18% collected in Mar.
$ 59,940
Feb. sales—$407,000, 30% collected in Mar.
122,100
Feb. sales—$407,000, 18% collected in Apr.
S22-13 Using sensitivity analysis in budgeting
Learning Objective 5
Riverside Sporting Goods Store has the following sales budget:
Suppose June sales are expected to be $82,000 rather than $66,000. Revise Riverside’s sales budget.
SOLUTION
RIVERSIDE SPORTING GOODS STORE
Sales Budget
Four Months Ended July 31
S22A-14 Understanding the components of the master budget
Learning Objective 6
Appendix 22A
The following are some of the components included in the master budget of a merchandising company.
a. Budgeted balance sheet
b. Sales budget
c. Capital expenditures budget
d. Budgeted income statement
e. Cash budget
f. Inventory, purchases, and cost of goods sold budget
g. Budgeted statement of cash flows
h. Selling and administrative expense budget
List the items of the master budget in order of preparation.
SOLUTION
S22A-15 Preparing an operating budget—sales budget
Learning Objective 6
Appendix 22A
Climbers sells its rock-climbing shoes worldwide. Climbers expects to sell 4,500 pairs of shoes for $190
each in January and 3,200 pairs of shoes for $230 each in February. All sales are cash only. Prepare the
sales budget for January and February.
SOLUTION
CLIMBERS
Sales Budget
For the Two Months Ended February 28
S22A-16 Preparing an operating budget—inventory, purchases, and cost of goods sold budget
Learning Objective 6
Appendix 22A
Smith Company expects to sell 5,500 units for $195 each for a total of $1,072,500 in January and 3,000
units for $210 each for a total of $630,000 in February. The company expects cost of goods sold to
average 70% of sales revenue, and the company expects to sell 4,000 units in March for $210 each.
Smith’s target ending inventory is $14,000 plus 50% of the next month’s cost of goods sold. Prepare
Smith’s inventory, purchases, and cost of goods sold budget for January and February.
SOLUTION
SMITH COMPANY
Inventory, Purchases, and Cost of Goods Sold Budget
$ 750,750
$ 1,191,750
$ 595,875
$ 1,110,375
Calculations:
(a)
$14,000
+
(50% × Next month COGS)
=
Desired ending
merchandise inventory
(50% × $441,000)
[50% × (4,000 units × $210/pair × 70%)]
(b)
S22A-17 Preparing a financial budget—schedule of cash receipts
Learning Objective 7
Appendix 22A
Packers expects total sales of $697,500 for January and $345,000 for February. Assume that Packers’s
sales are collected as follows:
60% in the month of the sale
20% in the month after the sale
17% two months after the sale
3% never collected
November sales totaled $389,000, and December sales were $401,000. Prepare a schedule of cash
receipts from customers for January and February. Round answers to the nearest dollar.
SOLUTION
PACKERS
Budgeted Cash Receipts from Customers
For the Two Months Ended February 28
S22A-18 Preparing a financial budget—schedule of cash payments
Learning Objective 7
Appendix 22A
Johnson Company has budgeted purchases of merchandise inventory of $456,250 in January and
$531,250 in February. Assume Johnson pays for inventory purchases 70% in the month of purchase and
30% in the month after purchase. The Accounts Payable balance on December 31 is $97,575. Prepare a
schedule of cash payments for purchases for January and February.
SOLUTION
JOHNSON COMPANY
Budgeted Cash Payments for Purchases
For the Two Months Ended February 28
S22A-19 Preparing a financial budget—cash budget
Learning Objective 7
Appendix 22A
Williams Company has $14,000 in cash on hand on January 1 and has collected the following budget
data:
Assume Williams has cash payments for selling and administrative expenses including salaries of
$36,000 plus commissions of 3% of sales, all paid in the month of sale. The company requires a
minimum cash balance of $10,500. Prepare a cash budget for January and February. Will Williams need
to borrow cash by the end of February?
SOLUTION
WILLIAMS COMPANY
Cash Budget
For the Two Months Ended February 28
Note: Short Exercise S22A-17 must be completed before attempting Short Exercise S22A-20.
S22A-20 Using sensitivity analysis in budgeting
Learning Objective 7
Appendix 22A
Refer to the Packers schedule of cash receipts from customers that you prepared in Short Exercise
S22A-17. Now assume that Packers’s sales are collected as follows:
50% in the month of the sale
20% in the month after the sale
25% two months after the sale
5% never collected
Prepare a revised schedule of cash receipts for January and February.
SOLUTION
PACKERS
Revised Budgeted Cash Receipts from Customers
For the Two Months Ended February 28