SCM-4-Master Budget PDF
SCM-4-Master Budget PDF
SCM-4-Master Budget PDF
Terminologie
s:
• Budgets – are financial plans for the future and are a key component of planning. They identify
objectives and the actions needed to achieve them.
• Strategic plan – plots a direction for an organization’s future activities and operations; it generally
covers at least 5 years. The overall strategy is then translated into the long and short term objectives
that form the basis of the budget.
• Planning – looking ahead to see what actions should be taken to realize particular
goals.
• Control – looking backward, determining what actually happened and comparing it with the
previously planned outcomes.
• Master Budget – the comprehensive financial plan for the organization as a whole. Typically, the
master budget is for a 1-year period, corresponding to the fiscal year of the company.
• Continuous Budget – a moving 12 month budget. As a month expires in the budget, an additional
month in the future is added so that the company always has a 12-month plan on hand. It forces
managers to plan ahead constantly – something especially needed when firms operate in rapidly
changing environments.
• Budget committee – reviews the budget, provides policy guidelines and budgetary goals,
resolves differences that arise as the budget is prepared, approves the final budget, and
monitors the actual performance of the organization as the year unfolds.
• Budget director – the controller, the person responsible for directing and coordinating the
organization’s overall budgeting process.
Key
points:
Advantages of
Budgeting
• Planning – encourages managers to develop an overall direction for the organization, foresee
problems, and develop future policies.
• Information for Decision Making – For example, a restaurant owner who knows the expected
revenues and the costs of meat, vegetables, cheeses, and so on might make menu changes that
play up the less expensive items and reduce the use of more expensive ingredients.
• Standards for Performance Evaluation – budget set standards that can control the use of a
company’s resources and motivate employees. A large difference between actual and planned
results is feedback that prompts managers to take corrective actions.
• Improved Communication and Coordination – the budgets serve to communicate and coordinate
the plans of the organization to each employee. Accordingly, employees can be aware of their
particular role in achieving those objectives.
The Master
Budget
Illustration: (Note that these are interrelated problems. This illustration shows the flow of the
preparation of a master budget.
A. Operating
Budget
1. Sales Budget – used to determine units to be sold and forecast prices for the
coming year.
Information: Prepare the sales budget for Texas Rex’s standard t-shirt line. For simplicity, assume
that Texas Rex has only one product: a standard short-sleeved t-shirt with the Texas Rex logo screen
printed on the back. Budgeted units to be sold for each quarter of the year 2014: 1,000, 1,200, 1,500, and
2,000. Selling price is P10 per t-shirt.
Solution
:
Note: This reveals that Texas Rex’s sales fluctuate seasonally. Most sales take place in the summer and
fall quarters. This is due to the popularity of the t-shirts in the summer and the sales promotions that
Texas Rex puts on for “back to school” and Christmas.
2. Production Budget – once a sales budget has been prepared, a production budget tells
managers how many units must be produced to satisfy anticipated sales and ending inventory needs.
Information: Budgeted units to be sold for each quarter: 1,000, 1,200, 1,500, and 2,000. Assume
that company policy requires 20% of the next quarter’s sales in ending inventory and that beginning
inventory of t-shirts for the first quarter of the year was 180. Assume also that sales for the first quarter of
2015 are estimated at 1,000 units.
Require
d:
a. Calculate the desired ending inventory in units for each quarter of the year. What is the
ending
inventory in unit for the year? b. Prepare a production budget for
each quarter and for the year.
Solution
:
Note: Notice that it does not allow for less than 100% repayment of accounts payable. The ethical firm
always intends to repay its debts. A disbursement that is typically not included in the disbursements
section is interest on short-term borrowing. This interest expenditure is reserved for the section on loan
repayments.
• Preparing a Cash Budget – this is critically important to the survival of businesses. It tells
managers how much cash is available to cover anticipated expenses. Shortfalls of cash must be
aniticpated and handled through reduction in expenses or financing.
Information: Refer to the previous budgets: Direct labor budget, Overhead budget, S&A
expenses budget, Budgeted Income Statement, Schedule showing cash receipts from sales,
schedule showing anticipated payments for accounts payable for materials. Refer as well to the
following details: a. A P1,000 minimum cash balance is required for the end of each quarter.
Money can be borrowed and
repaid in multiples of P1,000. Interest is 12% per year. Interest payments are made only for the
amount of the principal being repaid. All borrowing takes place at the beginning of a quarter, and
all repayment takes place at the end of a quarter. b. Budgeted depreciation is P540 per quarter
for overhead and P150 per quarter for selling and
administrative expenses. c. The capital budget for 2020 revealed plans to purchase additional screen
printing equipment. The cash outlay for the equipment, P6,500, will take place in the first quarter.
The company plans to finance the acquisition of the equipment with operating cash,
supplementing it with short-term loans as necessary. d. Corporate income taxes are
approximately P3,469 and will be paid at the end of the fourth quarter. e. Beginning cash balance
equals 5,200. f. All amounts in the budget are rounded to the nearest dollar.
Required: Prepare a cash budget for
Texas Rex. Solution:
Texas Rex Inc. Cash Budget For
the Year Ended December 31, 2020
Quarter Year Source*
1,000 8
(1,000
) (60) 9
(60)
9
P6,58
4 9
1,000 1
(1,000
) (60) 2
(60)
P6,58 3
4
4
1,000
(1,000 5
) (60)
(60) 6
P6,58
7
4
1,000 8
(1,000
) (60) 9
(60)
P6,58 9
4
9 7
1
8
2
9
3
9
4
9
5 1
6 2
7 3
8 4
9 5
9 6
9 7
1
8
2
9
3
9
4
9
5 1
6 2
7 3
8 4
9 5
9 6
9 7
1
8
2
9
3
9
4
9
5 1
6 2
3 9
4 9
5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7
2 8
3 9
4 9
5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7
2 8
3 9
4 9
5 9
1
6
2
7
3
8
4
5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7
2 8
3 9
4 9
5 9
1
6
2
7
3
8
4
9
5
9
6
9
1 7
2 8
3 9
4 9
5 9
1
6
2
7
3
8
4
9
5
9
6
7 3
8 4
9 5
9 6
9 7
1
8
2
9
3
9
4
9
5 1
6 2
7 3
8 4
9 5
9 6
9 7
1
8
2
9
3
9
4
9
5 1
6 2
7 3
8 4
9 5
9 6
9 7
1
8
2
9 6
9 7
9 8
1
9
2
9
3
9
4
5
Source* 1 – e
2 – Schedule for Cash Collections on A/R 3 – Schedule for Cash Payments on A/P 4 – Direct Labor Budget 5 – b, Overhead
Budget 6 – b, S&A Expenses Budget 7 – d, Budgeted Income Statement 8 – c 9 – a
Note: The information reveals that much of the information needed to prepare the cash budget comes
from the operating budgets and from schedules for cash receipts on accounts receivable and cash
payments on accounts payable. It is important to recall that only cash expenditures are included in the
cash budget. The operating budgets for overhead and selling and administrative expenses included
depreciation expense, which is a noncash expense. Therefore, depreciation expense was subtracted from
the totals to yield the cash expenditures for overhead and for selling and administrative expense.
The cash budget underscores the importance of breaking down the annual budget into smaller time
periods. The cash budget for the year gives the impression that sufficient operating cash will be available
to finance the acquisition of the new equipment. Quarterly information, however, shows the need for
short-term borrowing (P1,000) because of both the acquisition of the new equipment and the timing of the
firm’s cash flows. Most firms prepare monthly cash budgets, and some even prepare weekly and daily
budgets.
Texas Rex’s cash budget provides another piece of useful information. By the end of the third quarter, the
firm has more cash (P3,762) than needed to meet operating needs. Management should consider
investing the excess cash in an interest-bearing account. Once plans are finalized for use of the excess
cash, the cash budget should be revised to reflect those plans. Budgeting is a dynamic process. As the
budget is developed, new information becomes available, and better plans can be formulated.
2. Budgeted Balance Sheet – depends on information contained in the current balance sheet and in the
other budgets in the master budget.
Texas Rex Inc. Balance Sheet December 31, 2019 Assets Current Assets:
Cash Accounts Receivable Raw materials inventory Finished goods inventory
Total current assets Property, plant, and equipment (PP&E):
Land Building and equipment Accumulated depreciation
Total PP&E Total Assets
P5,200 1,350 252 1,251
P1,100 30,000 (5,000)
P8,053
26,100 P34,153 Liabilities and Owner’s Equity Current liabilities:
Accounts payable Owner’s equity:
Retained earnings Total Liabilities and Owner’s Equity
P1,000
33,153 P34,153
Texas Rex Inc. Balance Sheet December 31, 2020 Assets Current Assets:
Cash Accounts Receivable Raw materials inventory Finished goods inventory
Total current assets Property, plant, and equipment (PP&E):
Land Building and equipment Accumulated depreciation
Total PP&E Total Assets
P6,584a 1,500b 424c 1,390d
P1,100e 36,500f (7,760)g
P9,898
29,840 P39,738 Liabilities and Owner’s Equity Current liabilities:
Accounts payable Owner’s equity:
Retained earnings Total Liabilities and Owner’s Equity
P1,381h
38,357i P39,738
a. Ending balance in the Cash Budget b. Ten percent of fourth-quarter credit sales (0.75 x P20,000) See sales budget and cash
budget c. From Direct Materials Purchases Budget [(106 x P3) + (530 x 0.20)] d. From Ending Finished Goods Inventory Budget e.
From the December 31, 2019, balance sheet f. December 31, 2019, balance (P30,000) plus new equipment acquisition of P6,500 (
see the 2019 ending balance sheet and cash
budget) g. From the December 31, 2019, balance sheet, overhead budget, and S&A expenses budget (P5,000 + P2,160 + P600) h.
Twenty percent of fourth-quarter purchases (0.20 x P6,904) – see direct material purchases budget and cash budget i. P33,153
+P5,204 (December 31, 2019, balance plus net income from budgeted income statement.
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