Slide 1PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 7
BUDGETING FUNDAMENTALS
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Planning
Organization
Control
Coordination
Communication
Motivation
Operating Expenses Budget
Capital Use Budget
Financial Statement Budget
Budgeted Income Statement
Budgeted Balance Sheet
Cash Flow Budget
Cash Receipts
Cash Payments
MASTER BUDGET
C 2
The master budget typically includes individual budgets for sales, purchases, production, various expenses, capital expenditures, and cash. A company’s budgeting process begins with a sales budget. The success of all subsequent steps in the process depends on an accurate sales forecast. This slide describes the components of the master budget for a merchandiser. The final result of the budgeting process is a set of budgeted financial statements.
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We are going to prepare the Master Budget for Rose Company for the first Quarter of 2013 (January, February and March)
In order to do this, we will also have to look at the month before (December) and after (April)
MASTER BUDGET
CLASS EXAMPLE
December
30,000
70,000
100,000
January
21,000
49,000
70,000
February
27,000
63,000
90,000
March
24,000
56,000
80,000
April
18,000
42,000
60,000
Hockey Den sold 700 hockey sticks at $100 each in September 2011. Using this pricing information and the forecasted unit sales for the colder months of the fall season, the sales budget for the remaining three months of the year can be prepared. The sales budget includes January 2012 because the purchasing department relies on estimated January sales to plan December 2011 inventory purchases.
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ILLUSTRATION
70,000
Hockey Den sold 700 hockey sticks at $100 each in September 2011. Using this pricing information and the forecasted unit sales for the colder months of the fall season, the sales budget for the remaining three months of the year can be prepared. The sales budget includes January 2012 because the purchasing department relies on estimated January sales to plan December 2011 inventory purchases.
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ILLUSTRATION
70,000
90,000
Hockey Den sold 700 hockey sticks at $100 each in September 2011. Using this pricing information and the forecasted unit sales for the colder months of the fall season, the sales budget for the remaining three months of the year can be prepared. The sales budget includes January 2012 because the purchasing department relies on estimated January sales to plan December 2011 inventory purchases.
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ILLUSTRATION
70,000
90,000
80,000
Hockey Den sold 700 hockey sticks at $100 each in September 2011. Using this pricing information and the forecasted unit sales for the colder months of the fall season, the sales budget for the remaining three months of the year can be prepared. The sales budget includes January 2012 because the purchasing department relies on estimated January sales to plan December 2011 inventory purchases.
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Purchases Budget implies-Merchandising Business
How much do we need to Purchase to meet Budgeted Sales?
PURCHASES BUDGET
P 1
Once we have completed the sales budget, we can prepare the merchandise purchases budget that will incorporate Hockey Den’s sales demand and inventory policy. To prevent potential stock-outs of inventory items, and to have a good selection of merchandise on hand for its customers, Hockey Den always wants its ending inventory for a month to be equal to 90 percent of the next month’s sales. On September 30, 900 hockey sticks were on hand, an amount equal to 90 percent of the 1,000 hockey sticks budgeted for October sales.
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Jan
Feb
March
Dec
42,000
Jan
Feb
March
Dec
42,000
54,000
Jan
Feb
March
Dec
42,000
54,000
48,000
Jan
Feb
March
Dec
42,000
54,000
48,000
60,000
42,000
42,000
54,000
42,000
54,000
48,000
If inadequate, increase short-term loans.
Now that we have completed the cash receipts budget and the cash disbursements budget for merchandise purchases, we are ready to complete the cash budget. When preparing a cash budget, we add expected cash receipts to the beginning cash balance and deduct expected cash disbursements. If the expected ending cash balance is inadequate, additional cash requirements appear in the budget as planned increases from short-term loans. If the expected ending cash balance exceeds the desired balance, the excess is used to repay loans or to acquire short-term investments.
Some additional events affecting Hockey Den’s cash are displayed on your screen. You may need to make a few notes from this information to keep from referring back to this screen as we use this information. We will continue with the additional information on the next slide.
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91,000
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91,000
76,000
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91,000
76,000
87,000
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BUDGETED CASH DISBURSEMENTS-PURCHASED INVENTORY ILLUSTRATION
Dec . Purchases 54,600 x80%=43,680
Payments for Inventory are made 20% this month and 80% next month.
Jan
Feb
March
Purchases
45,600
52,800
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BUDGETED CASH DISBURSEMENTS-PURCHASED INVENTORY ILLUSTRATION
Dec . Purchases 54,600 x80%=43,680
Payments for Inventory are made 20% this month and 80% next month.
Jan
Feb
March
Purchases
45,600
52,200
52,800
46,920
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BUDGETED CASH DISBURSEMENTS-PURCHASED INVENTORY ILLUSTRATION
Dec . Purchases 54,600 x80%=43,680
Payments for Inventory are made 20% this month and 80% next month.
Jan
Feb
March
Purchases
45,600
52,200
44,400
52,800
46,920
50,640
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BUDGETED CASH DISBURSEMENTS OPERATING EXPENSES ILLUSTRATION
Salaries are paid in month earned, but commissions are paid next month.
Depreciation is a non-cash expense and is not included. Rent, insurance and misc. are all paid in month incurred.
Jan
Feb
March
18.750
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BUDGETED CASH DISBURSEMENTS OPERATING EXPENSES ILLUSTRATION
Salaries are paid in month earned, but commissions are paid next month.
Depreciation is a non-cash expense and is not included. Rent, insurance and misc. are all paid in month incurred.
Jan
Feb
March
18.750
16,750
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BUDGETED CASH DISBURSEMENTS OPERATING EXPENSES ILLUSTRATION
Salaries are paid in month earned, but commissions are paid next month.
Depreciation is a non-cash expense and is not included. Rent, insurance and misc. are all paid in month incurred.
Jan
Feb
March
18.750
16,750
18,250
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