Chapter 13The Master Budget

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Chapter 13: Objectives

•Assess the importance of budgeting.•Prepare a master budget. •Discuss the uses of a rolling budget. •Explain how standard costs are used in preparing budgets and assessing responsibility. •Calculate material and labor variances for purposes of control and performance evaluation.

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The process of budgeting is the interpretation of future plans into monetary amounts so that progress toward organizational goals can be determined.

A budget is a financial plan for the future .

Budgeting

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Top Down

Participatory

Ways of Budgeting

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Master BudgetMaster Budget

Operating BudgetsSales Budget

Production BudgetPurchases Budget

Direct Labor BudgetOverhead BudgetCapital Budget

Cash BudgetCash Collections from SalesCash Payments for Purchases

Budgeted Financial StatementsCost of Goods Manufactured

Income Statement Balance Sheet

Statement of Cash Flows

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EXHIBIT 13.2Fast-Food Funthings Sales Budget 

January February March Quarter April MaySales in units 200,000 150,000 90,000 440,000 50,000 70,000Unit sales price $2.00 $2.00 $2.00 $2.00 $2.00 $2.00Sales in dollars $400,000 $300,000 $180,000 $880,000 $100,000 $140,000

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EXHIBIT 13.3

Fast-Food Funthings Production Budget 

  January February March Quarter April May

Sales in units 200,000 150,000 90,000 440,000 50,000 70,000

Desired EI (10%) 15,000 9,000 5,000 5,000 7,000  

Total needed 215,000 159,000 95,000 445,000 57,000  

BI (Exh. 13.1) (20,000) (15,000) (9,000) (20,000) (5,000)  

Production in units 195,000 144,000 86,000 425,000 52,000  

EXHIBIT 13.4Fast-Food Funthings Purchases Budget 

  January February March Quarter April

Finished Units          

Production in units 195,000 144,000 86,000 425,000 52,000

Desired EI in units (15%) 21,600 12,900 7,800 7,800  

Total needed 216,600 156,900 93,800 432,800  

BI units (Exh. 13.1) (29,250) (21,600) (12,900) (29,250)  

Purchases in units 187,350 135,300 80,900 403,550  

Raw Materials          

Ounces per unit × 3 × 3 × 3 × 3  

Total ounces to purchase 562,050 405,900 242,700 1,210,650  

Cost per ounce × $.20 × $.20 × $.20 × $.20  

Total cost of plastic $112,410 $81,180 $48,540 $242,130  

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EXHIBIT 13.5Fast-Food Funthings Direct Labor Budget 

  January February

March Quarter

Production in units 195,000 144,000 86,000 425,000

DL hours needed per unit × .01 × .01 × .01 × .01

Total DL hours 1,950 1,440 860 4,250

DL wage rate per hour × $9 × $9 × $9 × $9

Total DL cost (cash) $17,550 $12,960 $7,740 $38,250

         

EXHIBIT 13.6Fast-Food Funthings Overhead Budget 

  January February March Quarter

Production in units 195,000 144,000 86,000 425,000

Variable cost per unit x $.084 x $.084 x $.084 x $.084

Total production OH cost $16,380 $12,096 $7,224 $35,700

         

Sales in dollars $400,000 $300,000 $180,000 $880,000

Variable commission rate x .05 x .05 x .05 x .05

Variable commission cost $ 20,000 $ 15,000 $ 9,000 $ 44,000

Fixed salesperson salary cost 2,000 2,000 2,000 6,000

Fixed administrative salary cost 9,000 9,000 9,000 27,000

Fixed depreciation expense 1,000 1,000 1,000 3,000

Total S&A cost $32,000 $27,000 $21,000 $ 80,000

         

Total production OH cost $16,380 $12,096 $ 7,224 $ 35,700

Total S&A cost 32,000 27,000 21,000 80,000

Total OH cost $48,380 $39,096 $28,224 $115,700

         

Total OH cash cost (no depr.) $47,380 $38,096 $27,224 $112,700

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EXHIBIT 13.7Fast-Food Funthings Capital Budget  January February March Quarter

Equipment acquisitions $ 0 $300,000 $ 0 $300,000

Cash payments for plant assets $ 0 $210,000 $90,000 $300,000

EXHIBIT 13.8Fast-Food Funthings Schedule of Cash Collections from Sales    January February March Quarter

Collection of Nov. sales        

($84,000 x 10%) $ 8,400     $ 8,400

Collection of Dec. sales        

($76,000 x 60%) 45,600     45,600

($76,000 x 10%)   $ 7,600   7,600

Collection of Jan. sales        

($400,000 x 30%) 120,000     120,000

($400,000 x 60%)   240,000   240,000

($400,000 x 10%)     $ 40,000 40,000

Collection of Feb. sales        

($300,000 x 30%)   90,000   90,000

($300,000 x 60%)     180,000 180,000

Collection of March sales        

($180,000 x 30%) 54,000 54,000

Total collections $174,000 $337,600 $274,000 $785,600

         

EXHIBIT 13.9Fast-Food Funthings Schedule of Cash Payments for Purchases 

  January February March Quarter

         

Payment for Dec. purchases        

($90,000 x 80%) $72,000     $ 72,000

Payment for Jan. purchases        

($112,410 x 20%) 22,482     22,482

($112,410 x 80%)   $ 89,928   89,928

Payment for Feb. purchases        

($81,180 x 20%)   16,236   16,236

($81,180 x 80%)     $64,944 64,944

Payment for March purchases        

($48,540 x 20%) 9,708 9,708

Total payments $94,482 $106,164 $74,652 $275,298

         

EXHIBIT 13.10Fast-Food Funthings Cash Budget    January February March

 

Beginning cash balance $ 5,000 $ 5,588 $ 5,180 

Cash collections (Exh. 13.8) 174,000 337,600 274,000  

Cash available $179,000 $343,188 $279,108 

        

Cash paid for       

--DL (Exh. 13.5) (17,550) (12,960) (7,740) 

--OH (Exh. 13.6) (47,380) (38,096) (27,224) 

--PA (Exh. 13.7) (0) (210,000) (90,000) 

--Purchases (Exh. 13.9) (94,482) (106,164) (74,652) 

Cash available (needed) $ 19,588 $(24,032) $79,492 

Borrow (repay)   15,000 (15,000) 

Sell (acquire) investments (14,000) 14,000 (59,000) 

Interest received (paid) 0 140* (150)** 

Remainder (minimum $5,000) $ 5,588 $ 5,108 $ 5,342 

        

*Interest on investment for one month ($14,000 x .01 = $140)**Interest on borrowing for one month ($15,000 x .01 = $150)

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Fast-Food FunthingsPro Forma Schedule of Cost of Goods Manufactured

For the Quarter Ending March 31, 2004 Beginning work in process inventory (1/1/04) $ 0Direct material used: Beginning balance of DM (Exh. 13.1) $ 17,550 + Purchases (Exh. 13.3) 242,130 - Ending balance of DM (Note A) (4,680) = DM used 255,000Direct labor (Exh. 13.5) 38,250Production overhead (Exh. 13.6) 35,700Total costs to be accounted for $328,950Ending work in process inventory (0)Cost of goods manufactured (Note B) $328,950 Note A:Ending balance of direct material in units (Exh. 13.5) 7,800Number of ounces needed for one unit x 3Total number of ounces 23,400Cost per ounce x $.20Ending balance of direct material in dollars $4,680

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Pro Forma Income Statement 

Fast-Food FunthingsPro Forma Income Statement

(For the Quarter Ending March 31, 2004 Sales (Exh. 13.2) $880,000Cost of goods sold Beginning finished goods inventory (Exh. 13.1)$ 15,000 Cost of goods manufactured 328,950 Ending finished goods inventory (Note A) (3,870) (340,080)Gross margin $539,920Expenses Selling and administrative expenses (Exh. 13.6)$(80,000) Interest expense (net) (Exh. 13.10) (10) (80,010)Income before income taxes $459,910Income taxes (assumed rate of 30%) (137,973)Net income $321,937 Note A: Units in ending FG (Exh. 13.3) x Cost per unit (Exh. 13.11; Note B)

5,000 x $.774 = $3,870

Fast-Food FunthingsPro Forma Balance Sheet

March 31, 2004 

Assets Cash (Exh. 13.10) $ 5,342Accounts Receivable (10% x $300,000 + 70% x $180,000) 156,000Inventories Direct Material (Exh. 13.4*) $ 4,680 Finished Goods (Exh. 13.11) 3,870 8,550Investment (Exh. 13.10) 59,000Plant Assets (Exh. 13.1 and 13.7) $400,000Less Accumulated Depreciation (Exh. 13.1 and 13.6) (33,000) 367,000Total Assets $595,892 

Liabilities and Stockholders' EquityAccounts Payable (80% x $48,540) $ 38,832Taxes Payable (Exh. 13.12) 137,973Common Stock (Exh. 13.1 $ 80,000Retained Earnings (Exh. 13.1 and 13.12) 339,087 419,087

Total Liabilities and Stockholders' Equity $595,892

Pro Forma Statement of Cash FlowsFor the Quarter Ending March 31, 2004

 Operating Activities: Net income $321,937 + Depreciation (Exh. 13.6) 3,000 - Increase in Accounts Receivable ($61,600 - $156,000) (94,400) + Decrease in DM Inventory ($17,550 - $4,680) 12,870 + Decrease in FG Inventory ($15,000 - $3,870) 11,130 - Decrease in Accounts Payable ($72,000 - $38,832) (33,168) + Increase in Taxes Payable ($0 - $137,973) 137,973 Net cash inflow from operations $359,342Investing Activities: Purchase of plant assets (Exh. 13.7) $(300,000) Short-term cash investment (Exh. 13.10) (59,000) Net cash outflow from investing (359,000)Financing Activities: Issuance of short-term note (Exh. 13.10) $ 15,000 Repayment of short-term note (Exh. 13.10) (15,000) Net cash flow from financing 0Net increase in cash $ 342Beginning cash balance (Exh. 13.1) 5,000

Ending cash balance (Exh. 13.13) $ 5,342

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Variance AnalysisA standard is simply a norm or average.

A standard cost is the budgeted cost to make one unit of product (or perform one unit of service).

Variance analysis is the process of determining the standard-to-actual differences and assessing whether that difference is favorable or unfavorable.

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Figure 13.1Material Variance Calculations Actual Cost Standard Cost AP x AQ SP x AQ SP x SQ Material Price Variance Material Quantity Variance

Total Material Variance 

Where AP = actual priceAQ = actual quantitySP = standard price

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Figure 13.2Labor Variance Calculations Actual Cost Standard Cost AP x AQ SP x AQ SP x SQ Labor Rate Variance Labor Efficiency Variance

Total Labor Variance 

Where AP = actual price (rate of pay)AQ = actual quantity (hours of work)SP = standard price (rate of pay)SQ = standard quantity (hours of work)