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Master Budgets and Planning Chapter 22 PowerPoint Authors: Susan Coomer Galbreath, Ph

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Master Budgets and Planning Chapter 22 PowerPoint 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 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 22 - 2 C1 Enhances coordination so that activities of all units contribute to meeting the company’s overall goals. Provides a benchmark for evaluating performance. Converts long-term strategic plans into short-term financial plans. Promotes analysis and a focus on the future. Budget Process Communicates management plans throughout the organization. Motivates employees through participation in the budgeting process and the establishment of attainable goals. 22 - 3 C1 Budget Committee Consists of managers from all departments of the organization. Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. *Most of the 9% have eliminated annual budgeting in favor of rolling or continual budgeting. 22 - 4 C1 Budget Committee Top M anagem ent M i d d le M anagem ent S u p e r v is o r S u p e r v is o r M i d d le M anagem ent S u p e r v is o r S u p e r v is o r Flow of budget data is a bottom-up process. 22 - 5 C1 Budget Timing Operating Budget 2012 2013 The annual operating budget may be divided into quarterly or monthly budgets. A continuous or rolling budget is a twelve-month budget that rolls forward one month as the current month is completed. 2014 2015 22 - 6 C2 Master Budget Components 22 - 7 P1 Sales Budget Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel 22 - 8 P1 Sales Budget In September 2013, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months: 22 - 9 P1 Sales Budget HOCKEY DEN Monthly Sales Budget October 2013 – January 2014 September 2013 (actual) October 2013 November 2013 December 2013 Total January 2014 Budgeted Unit Sales 700 Budgeted Unit Price $ 100 Budgeted Total Sales $ 70,000 1,000 800 1,400 3,200 $ $ 100 100 100 100 $ 100,000 80,000 140,000 $ 320,000 900 $ 100 $ 90,000 22 - 10 P1 Merchandise Purchases Budget The quantity purchased will be affected by: Just-in-time inventory systems that enable purchases of smaller, frequently delivered quantities. Safety stock inventory systems that provide protection against lost sales caused by delays in supplier shipments. 22 - 11 P1 Merchandise Purchases Budget Inventory to be purchased = Budgeted ending inventory + Budgeted cost of sales for the period – Budgeted beginning inventory Hockey Den buys hockey sticks for $60 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. On September 30, 900 hockey sticks are on hand. Let’s prepare the purchases budget for Hockey Den. 22 - 12 P1 Merchandise Purchases Budget HOCKEY DEN Merchandise Purchases Budget October 2013 – December 2013 Next month's unit sales Ending inventory percentage Budgeted ending inventory units Add current month's unit sales Total units needed Deduct beginning inventory units Number of units to be purchased Budgeted cost per unit Budgeted cost of purchases October 800 × 90% 720 1,000 1,720 900 820 × $ 60 $ 49,200 November 1,400 × 90% 1,260 800 2,060 720 1,340 × $ 60 $ 80,400 Beginning inventory is last month's ending inventory. December 900 × 90% 810 1,400 2,210 1,260 950 × $ 60 $ 57,000 22 - 13 P1 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 selling expense budget for Hockey Den. 22 - 14 P1 Selling Expense Budget HOCKEY DEN Selling Expense Budget October 2013 – December 2013 Budgeted sales Sales commission % Sales commission Sales manager's salary Total selling expenses October $ 100,000 × 10% $ 10,000 2,000 $ 12,000 November $ 80,000 × 10% $ 8,000 2,000 $ 10,000 December $ 140,000 × 10% $ 14,000 2,000 $ 16,000 From Hockey Den’s sales budget $ × $ $ Total 320,000 10% 32,000 6,000 38,000 22 - 15 P1 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 administrative expense budget for Hockey Den. 22 - 16 P1 General and Administrative Expense Budget HOCKEY DEN General and Administrative Expense Budget October 2013 – December 2013 Administrative salaries Equipment depreciation Total October $ 4,500 1,500 $ 6,000 November $ 4,500 1,500 $ 6,000 December $ 4,500 1,500 $ 6,000 Total $ 13,500 4,500 $ 18,000 22 - 17 P1 Capital Expenditures Budget ? Hockey Den does not anticipate disposal of any plant assets through December 2013, but management is planning to acquire additional equipment for $25,000 cash in December 2013. ? Since this is the only budgeted capital expenditure for the quarter, no separate budget is shown. 22 - 18 P2 Cash Budget Expected Receipts and Disbursements Financial Budgets Budgeted Income Statement Budgeted Balance Sheet 22 - 19 P2 Budgeted Cash Receipts ? Forty percent of Hockey Den’s sales are for cash. ? The remaining 60 percent are credit sales that are collected in full in the month following the sale. Let’s prepare the cash receipts budget for Hockey Den. 22 - 20 P2 Budgeted Cash Receipts 60 percent of September sales are collected in October HOCKEY DEN Cash Receipts Budget October 2013 – December 2013 Budgeted sales Accounts receivable Cash receipts from: Cash sales Collection of receivables Total cash receipts September $ 70,000 $ 42,000 October $ 100,000 $ 60,000 November $ 80,000 $ 48,000 December $ 140,000 $ 84,000 $ 40,000 42,000 $ 82,000 $ 32,000 60,000 $ 92,000 $ 56,000 48,000 $ 104,000 From Hockey Den’s sales budget 60% of sales 40% of sales 22 - 21 P2 Cash Disbursements for Purchases ? Hockey Den’s purchases of merchandise are entirely on account. ? Full payment is made in the month following the purchase. ? The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. 22 - 22 P2 Cash Disbursements for Purchases HOCKEY DEN Cash Disbursements for Purchases October 2013 - December 2013 October payments (September 30 balance) November payments (October purchases) December payments (November purchases) $ 58,200 49,200 80,400 From merchandise purchases budget 22 - 23 P2 Cash Budget Beginning Cash Balance + Budgeted Cash Receipts – Budgeted Cash Disbursements = Preliminary Cash Balance ? If adequate, repay loans or buy securities. ? If inadequate, increase short-term loans. Hockey Den: – Has a September 30 cash balance of $20,000. – Will pay a cash dividend of $3,000 in November. Continue 22 - 24 P2 Cash Budget Hockey Den: – Has an income tax liability of $20,000 from the previous quarter that will be paid in October. – Will purchase $25,000 of equipment in December. – Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. – Pays interest each month 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. 22 - 25 P2 HOCKEY DEN Cash Budget October 2013 - December 2013 October November December $ 20,000 Because Hockey104,000 Den 82,000 92,000 $ 102,000maintains a minimum Beginning cash balance Receipts from customers Total cash available cash balance of $20,000, Disbursements Payments for merchandise $ 58,200 the$company 49,200 $ 80,400 must Sales commissions 10,000 borrow 8,000 14,000 $12,800. Sales salaries 2,000 2,000 2,000 Administrative salaries 4,500 4,500 4,500 Income taxes 20,000 From Cash Disbursements Dividends Fromfor Cash Receipts From General Budget and .01 × $10,000 Purchases From Selling Interest 100 Expense Budget Administrative Expense Budget Equipment purchase Depreciation is a Total disbursements $ 94,800 expense. Preliminary balance $ non-cash 7,200 22 - 26 P2 Cash Budget Continued HOCKEY DEN Cash Budget October 2013 - December 2013 Preliminary balance Additional borrowing Loan repayment Ending cash balance Ending loan balance October $ 7,200 12,800 November $ 20,000 $ 22,800 Ending cash balance for October is the beginning November balance. December 22 - 27 P2 HOCKEY DEN Cash Budget October 2013 - December 2013 October $ 20,000 82,000 $ 102,000 November $ 20,000 92,000 $ 112,000 December 58,200 10,000 2,000 4,500 20,000 $ 49,200 8,000 2,000 4,500 $ 80,400 14,000 2,000 4,500 Beginning cash balance Receipts from customers Total cash available Disbursements Payments for merchandise $ Sales commissions Sales salaries Administrative salaries Income taxes Dividends .01 × $22,800 Interest Equipment purchase Total disbursements $ Preliminary balance $ 100 3,000 228 94,800 7,200 $ 66,928 $ 45,072 104,000 Cash balance is sufficient to repay the $22,800 loan. 22 - 28 P2 Cash Budget Continued HOCKEY DEN Cash Budget October 2013 - December 2013 Preliminary balance Additional borrowing Loan repayment Ending cash balance Ending loan balance October $ 7,200 12,800 $ 20,000 $ 22,800 November $ 45,072 December (22,800) $ 22,272 $ 0 Ending cash balance for November is the beginning December balance. 22 - 29 P2 HOCKEY DEN Cash Budget October 2013 - December 2013 Beginning cash balance Receipts from customers Total cash available Disbursements Payments for merchandise Sales commissions Sales salaries Administrative salaries Income taxes Dividends Interest Equipment purchase Total disbursements Preliminary balance October $ 20,000 82,000 $ 102,000 November $ 20,000 92,000 $ 112,000 December $ 22,272 104,000 $ 126,272 $ 58,200 10,000 2,000 4,500 20,000 $ 49,200 8,000 2,000 4,500 $ 80,400 14,000 2,000 4,500 100 $ 94,800 $ 7,200 3,000 228 $ 66,928 $ 45,072 25,000 $ 125,900 $ 372 22 - 30 P2 Cash Budget Continued HOCKEY DEN Cash Budget October 2013 - December 2013 Preliminary balance Additional borrowing Loan repayment Ending cash balance Ending loan balance October $ 7,200 12,800 $ 20,000 $ 22,800 November $ 45,072 (22,800) $ 22,272 $ 0 December $ 372 19,628 $ 20,000 $ 19,628 22 - 31 P2 Budgeted Income Statement Cash Budget m o C pl ed t e Budgeted Income Statement Let’s prepare the budgeted income statement for Hockey Den. 22 - 32 P2 From the Sales Budget HOCKEY DEN Budgeted Income Statement For Three Months Ended December 31, 2013 Sales (3,200 units @ $100) Cost of goods sold (3,200 units @ $60) Gross profit Operating expenses: From the Merchandise Sales commissions $ 32,000 Purchases Budget Sales salaries 6,000 Administrative salaries 13,500 Equipment depreciation 4,500 Interest expense 328 From the General and Administrative Net income before taxes From the Selling Expense Budget Income tax expense Expense Budget $71,672 × .40 Depreciation is a non-cash expense. Net income $ 320,000 192,000 $ 128,000 56,328 $ 71,672 28,669 $ 43,003 22 - 33 P2 Budgeted Balance Sheet Budgeted Income Statement m o C pl Budgeted Balance Sheet ed t e Let’s prepare the budgeted balance sheet for Hockey Den. 22 - 34 P2 Preparing a Budgeted Balance Sheet Hockey Den reports the following account balances on September 30 prior to preparing its budgeted financial statements: – Equipment – Accumulated depreciation – Common stock – Retained earnings $200,000 $ 36,000 $150,000 $ 41,800 Let’s prepare the budgeted balance sheet for Hockey Den. 22 - 35 P2 HOCKEY DEN Budgeted Balance Sheet December 31, 2013 From the Merchandise Purchases $200,000 September 30 balance plus Assets Budget (810 units @Budget $60) the Cash December acquisition Cash the $25,000From Accounts receivable Inventory From the Cash Receipts Budget Equipment $ 225,000 Less accumulated depreciation 40,500 Total assets $ 20,000 84,000 48,600 184,500 $ 337,100 Liabilities and Equity $36,000 September 30 balance plus Liabilities thepayable $4,500 from the General$ and Accounts 57,000 Expense Budget IncomeAdministrative taxes payable 28,669 Bank loan payable Stockholders' equity Common stock Retained earnings Total liabilities and equity 19,628 $ 150,000 81,803 $ 105,297 231,803 $ 337,100 22 - 36 P2 HOCKEY DEN Budgeted Balance Sheet December 31, 2013 Assets Cash Accounts receivable Inventory Equipment From the Merchandise Less accumulated depreciation From the Budgeted Purchases Budget Total assets $ 20,000 84,000 48,600 $ 225,000 40,500 184,500 $ 337,100 Income Statement Beginning retained earnings $ 41,800 and Equity theLiabilities Cash Budget AddFrom net income 43,003 Liabilities Deduct dividends (3,000) Accounts payable $ 57,000 Ending retained earnings $ 81,803 Income taxes payable 28,669 Bank loan payable Stockholders' equity Common stock Retained earnings Total liabilities and equity 19,628 $ 150,000 81,803 $ 105,297 231,803 $ 337,100 22 - 37 Global View Royal Phillips Electronics of the Netherlands is a diversified company. Preparing budgets and evaluating progress helps the company achieve its goals. In a recent annual report, the company reports that it budgets sales to grow at a faster pace than overall economic growth. Based on this sales target, company managers prepare detailed operating, capital expenditures, and financial budgets. Budgeted and actual results of companies that do business globally are impacted by changes in foreign currency exchange rates as well as global and political uncertainties. Forecasting in that environment is difficult. 22 - 38 A1 Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. 22 - 39 P3 Appendix 22A: Production and Manufacturing Budgets Toronto Sticks Company Production Budget October 2013 – December 2013 Next month's budgeted unit sales Ratio of inventory to future sales Budgeted ending inventory units Add budgeted sales for the month Required units of available production Deduct beginning inventory units Number of units to be produced October 800 × 90% 720 1,000 1,720 900 820 November 1,400 × 90% 1,260 800 2,060 720 1,340 December 900 × 90% 810 1,400 2,210 1,260 950 22 - 40 P3 Appendix 22A: Production and Manufacturing Budgets Toronto Sticks Company Direct Materials Budget October 2013 – December 2013 Budgeted unit production Materials requirement per unit Materials needed for production (units) Add budgeted ending inventory (units) Total materials requirements (units) Deduct beginning inventory (units) Materials to be purchased (units) Materials price per unit Total cost of direct materials purchases October 820 × 0.5 410 335 745 205 540 $ 20 $ 10,800 November 1,340 × 0.5 670 237.5 907.5 335 572.5 $ 20 $ 11,450 December 950 × 0.5 475 225 700 237.5 462.5 $ 20 $ 9,250 22 - 41 P3 Appendix 22A: Production and Manufacturing Budgets Toronto Sticks Company Direct Labor Budget October 2013 – December 2013 Budgeted unit production Labor requirements per hour (hours) Total labor hours needed Labor rate per hour Total cost of labor October 820 × 0.25 205 $ 12 $ 2,460 November 1,340 × 0.25 335 $ 12 $ 4,020 December 950 × 0.25 237.5 $ 12 $ 2,850 22 - 42 P3 Appendix 22A: Production and Manufacturing Budgets Toronto Sticks Company Factory Overhead Budget October 2013 – December 2013 Budgeted unit production Variable factory overhead rate Budgeted variable overhead Budgeted fixed overhead Total cost of overhead October 820 × $2.50 $ 2,050 1,500 $ 3,550 November 1,340 × $2.50 $ 3,350 1,500 $ 4,850 December 950 × $2.50 $ 2,375 1,500 $ 3,875 22 - 43