ACCT 130 – Principles of Managerial Accounting

Fall 2023, Section 5 & 6

Handout 8 – Chapter 8 Master Budgeting
Sales Budget
 Royal Company is preparing budgets for the quarter ending June 30th. Budgeted sales for the next
five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units
 The selling price is $10 per unit. The sales of April, May, and June are summed to obtain the
total budgeted sales in units and dollars for the quarter ended June 30th
 Royal’s collection pattern is:
70% collected in the month of sale,
30% collected in the month following sale,
 In April, the March 31st accounts receivable balance of $30,000 will be collected in full.

Q. What is the Expected Cash Collection from April-June (Quarter 2)?

April May June Quarter
Account Receivables $30,000
April Sales 140,000
60,000
May Sales 350,000
150,000
June Sales 210,000

Total Cash Collections $170,000 $410,000 $360,000 $940,000

Production Budget
• The management at Royal Company wants ending inventory to be equal to 20% of the
following month’s budgeted sales in units.
• On March 31st, 4,000 units were on hand. Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units

Q. Prepare Production Budget for April-June (Quarter 2) in units.

April May June Quarter
Budgeted Sales 100,000
Add: Desired Ending
Inventory 5,000
Total Needs 105,000
Less: Beginning Inventory 4,000
Required Production 26,000 46,000 29,000 101,000

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Direct Material Budget
• At Royal Company, five pounds of material are required per unit of product.
• Management wants materials on hand at the end of each month equal to 10% of the following
month’s production.
• On March 31, 13,000 pounds of material are on hand. Material cost is $0.40 per pound.

Q. Prepare the Direct Material Budget for April-June (Quarter 2) in units.

April May June Quarter
Production 101,000
Materials per unit (pounds) 5
Production needs 505,000
Add: Desired Ending Inventory 11,500
Total needed 516,500
Less: Beginning inventory 13,000
Materials to be purchased 503,500

Cash Disbursement for Materials

• Royal pays $0.40 per pound for its materials.
• One-half of a month’s purchases is paid for in the month of purchase; the other half is paid in the
following month.
• The March 31 accounts payable balance is $12,000.
April May June Quarter
Account Payables $12,000
April Purchases 28,000
28,000
May Purchases 44,300
44,300
June Purchases 28,400
Total Cash disbursements $185,000

Q. Calculate expected cash disbursements from April-June (Quarter 2).

Direct Labor Budget

• At Royal, each unit of product requires 0.05 hours (3 minutes) of direct labor.
• The Company pays at the rate of $10 per hour regardless of the hours worked.

Q. Prepare direct labor budget from April-June (Quarter 2).

April May June Quarter

Units of Production 101,000
Direct labor per unit 0.05
Labor hours required 5,050
Hourly wage rate $10
Total direct labor costs $50,500

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 Manufacturing Overhead Budget
• At Royal, manufacturing overhead is applied to units of product based on direct labor hours.
• The variable manufacturing overhead rate is $20 per direct labor hour.
• Fixed manufacturing overhead is $50,000 per month, which includes $20,000 of noncash costs
(primarily depreciation of plant assets).
Q. Prepare manufacturing overhead budget from April-June (Quarter 2).

April May June Quarter

Budgeted DLH 5,050
Variable manufacturing Overhead rate $20
Variable manufacturing Overhead costs $101,000
Fixed manufacturing Overhead costs 150,000
Total manufacturing Overhead costs 251,000
Less: noncash costs (60,000)
Cash Disbursements for manufacturing
overheads $191,000
Ending Finished Goods Inventory
Quantity Cost Total
Production Costs Per Unit
Direct Material
Direct Labor
Manufacturing Overhead

Budgeted Finished Goods Inventory

Ending inventory in Units
Unit product cost
Ending finished goods inventory

Selling and Administrative Expense Budget

• At Royal, the selling and administrative expense budget is divided into variable and fixed
components.
• The variable selling and administrative expenses are $0.50 per unit sold.
• Fixed selling and administrative expenses are $70,000 per month.
• The fixed selling and administrative expenses include $10,000 in costs – primarily depreciation –
that are not cash outflows of the current month.

Q. Calculate the selling and administrative cash expenses for the quarter.
April May June Quarter
Budgeted Sales 100,000
Variable Selling and Administration expenses
rate $0.5
Variable Expenses $50,000
Fixed Selling and Administration expenses
rate 210,000
Total Selling and Administration expenses
rate 260,000
Less: noncash expenses 30,000
Cash Selling and Administration expenses $230,000
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Cash Budget
Assume the following information for Royal:
• Maintains a 16% open line of credit for $75,000.
• Maintains a minimum cash balance of $30,000.
• Borrows on the first day of the month and repays loans on the last day of the month.
• Pays a cash dividend of $49,000 in April.
• Purchases $143,700 of equipment in May and $48,300 in June (both purchases paid in cash).
• Has an April 1 cash balance of $40,000.

Q. Prepare Cash Budget for the Quarter.

April May June Quarter
Beginning Cash Balance $40,000
Add: Cash Collections 940,000
Total Cash Available $980,000

Less Cash Disbursements:

Materials 185,000
Direct labor 50,500
Manufacturing Overhead 191,000
Selling and administrative 230,000
Equipment Purchase
192,000
Dividend 49,000
Total Disbursement 897,500
Excess/Deficiency 82,500

Financing
Borrowing 48,000
Repayments (48,000)
Interest (1,920)
Total Financing (1,920)
Ending Cash Balance $80,500

Assigned Reading from Chapter 8 (testable):

LO9 and 10 - Preparing budgeted Income Statement and Balance Sheet