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Master Budgets and Planning

Master Budgets and Planning. Chapter. 23. Learning objectives. Budget Process Budget Administration Master Budget Decision Analysis: Activity-Based Budget. 1. Budget Process. Defines goals and objectives. Communicates plans and instructions.

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Master Budgets and Planning

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  1. Master Budgets and Planning Chapter 23

  2. Learning objectives • Budget Process • Budget Administration • Master Budget • Decision Analysis: • Activity-Based Budget

  3. 1. Budget Process Defines goals and objectives Communicates plansand instructions Promotes analysis anda focus on the future Advantages Coordinates business activities Motivates employees Provides a basis forevaluating performance againstpast or expected results

  4. 2. Budget Administration - Budget Committee Consists of managers from all departmentsof the organization. Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated.

  5. Budget Committee Flow of Budget Data is abottom-upprocess.

  6. Budget Timing Operating Budget 1999 2000 2001 2002 The annual operating budget may be divided into quarterly or monthly budgets.

  7. Budget Timing Continuous or Rolling Budget 1999 2000 2001 2002 The budget may be a twelve-month budget that rolls forward one month as the current month is completed.

  8. Salesbudget MerchandisePurchases • Prepare financial budgets: • cash • income • balance sheet Prepareselling andgeneraladministrativebudgets Preparecapitalexpenditurebudget 3. Master Budget - Master Budget Components

  9. SalesBudget EstimatedUnit Sales EstimatedUnit Price 3. Master Budget - Sales Budget Analysis of economic and market conditions+Forecasts of customer needs from marketing personnel

  10. Sales Budget In September 2005, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months:

  11. Sales Budget Exh. 23-6

  12. 3. Master Budget - Merchandise Purchases Budget The quantity purchased is affected by: Just-in-time inventory systemsthat enable purchases of smaller, frequently delivered quantities. Safety stock inventory systems that provide protection against lost sales caused by delays in supplier shipments.

  13. Merchandise Purchases Budget Exh. 23-7 Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks are on hand on September 30. Inventory to be purchased Budgeted ending inventory Budgeted cost of salesfor the period Budgetedbeginning inventory = + – Let’s prepare the purchases budget for Hockey Den.

  14. Merchandise Purchases Budget Exh. 23-8

  15. Merchandise Purchases Budget Exh. 23-8

  16. Merchandise Purchases Budget Exh. 23-8

  17. Merchandise Purchases Budget Exh. 23-8

  18. 3. Master Budget - Selling Expense Budget • Hockey Den pays sales commissions equal to 10 percent of total sales. • Hockey Den pays a monthly salary of $2,000 to its sales manager. Let’s prepare the sales budget for Hockey Den.

  19. Selling Expense Budget Exh. 23-9 From Hockey Den’s sales budget

  20. 3. Master Budget- General and Administrative Expense Budget • General and administrative salaries are $4,500 per month. • Depreciation of equipment is $1,500 per month. Let’s prepare the general and administrativeexpense budget for Hockey Den.

  21. General and Administrative Expense Budget Exh. 23-10

  22. Cash Budget ExpectedReceipts andDisbursements BudgetedIncomeStatement BudgetedBalanceSheet 3. Master Budget - Financial Budgets

  23. Budgeted Cash Receipts • Forty percent of Hockey Den’s sales are for cash. • The remaining sixty percent are credit sales that are collected in full in the month following sale. Let’s prepare the cash receipts budget for Hockey Den.

  24. Budgeted Cash Receipts Exh. 23-12 60 percent of September sales are collected in October From Hockey Den’s sales budget

  25. Budgeted Cash Receipts Exh. 23-12 40% of sales 60% of sales

  26. Budgeted Cash Receipts Exh. 23-12

  27. Cash Disbursements for Purchases • Hockey Den’s purchases of merchandise are entirely on account. • Full payment is made in the month following purchase. • The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursementsfor purchases for Hockey Den.

  28. Cash Disbursements for Purchases Exh. 23-13 From merchandise purchases budget

  29. Continue Cash Budget Hockey Den: • Will pay a cash dividend of $3,000 in November. • Will purchase $25,000 of equipment in December. • Has an income tax liability of $20,000 from the previous quarter that will be paid in October. • Has a September 30 cash balance of $20,000. • Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000.

  30. Cash Budget Hockey Den: • Pays interest equal to one percent of the prior month’s ending loan balance. • Repays loans when the ending cash balance exceeds $20,000. • Owes $10,000 on this loan arrangement on September 30. • Has 40 percent income tax rate. • Will pay taxes for current quarter next year. Let’s prepare the cash budget for Hockey Den.

  31. Exh. 23-11 From Cash Receipts Budget

  32. Exh. 23-11 From Cash Disbursementsfor Purchases

  33. Exh. 23-11 From Selling Expense Budget

  34. Exh. 23-11 From General andAdministrative Expense BudgetDepreciation is anon-cash expense.

  35. Exh. 23-11 Because Hockey Denmaintains a minimumcash balance of $20,000, the company must borrow $12,800. .01 × $10,000

  36. Cash Budget Continued Exh. 23-11 Ending cash balance for October is the beginning November balance.

  37. Exh. 23-11 Cash balanceis sufficientto repay the$22,800 loan. .01 × $22,800

  38. Cash Budget Continued Exh. 23-11 Ending cash balance for November is the beginning December balance.

  39. Exh. 23-11

  40. Cash Budget Continued Exh. 23-11

  41. Budgeted Income Statement Cash Budget Budgeted Income Statement Completed Let’s prepare the budgeted incomestatement for Hockey Den.

  42. From the Sales Budget Exh. 23-14

  43. From the Merchandise Purchases Budget Exh. 23-14

  44. Exh. 23-14 From the SellingExpense Budget

  45. From the General and Administrative Expense BudgetDepreciation is a non-cash expense. Exh. 23-14

  46. Exh. 23-14 From the Cash Budget

  47. Exh. 23-14 $71,672 × .40

  48. Budgeted Balance Sheet Budgeted Income Statement Budgeted Balance Sheet Completed Let’s prepare the budgeted balancesheet for Hockey Den.

  49. Preparing a Budgeted Balance Sheet Hockey Den reports the following account balances on September 30 prior to preparing its budgeted financial statements: • Equipment $200,000 • Accumulated depreciation $ 36,000 • Common stock $150,000 • Retained earnings $ 41,800 Let’s prepare the budgeted balancesheet for Hockey Den.

  50. Exh. 23-15

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