Question: developing a master budget plan is a lengthy process. Where carry out companies start when preparing a master budget?

Answer: Study figure 9.1 “Master budget plan Schedules” carefully, as it serves together the road map for the master budget plan presented transparent this chapter because that Jerry’s ice cream Cream. Notice that the budgeting procedure starts v the sales budget. Also, keep in mind that the budgets defined next are for a production company. Production companies have tendency to have much more budget schedules than other types of organizations due to the fact that their to work are an ext complex. When you understand budgeting in a manufacturing environment, friend can easily modify the process to carry out budgeting in various other organizations, as disputed later in the chapter. Together we work through the master budget for Jerry’s ice Cream, i think the agency prepares quarterly budgets.

You are watching: The usual starting point for preparing a master budget is forecasting or estimating


Sales Budget

Question: The sales spending plan is the beginning point for the understand budget, as shown in figure 9.1 “Master spending plan Schedules”. What is a sales budget, and also how is it prepared?

Answer: The sales spending plan is an estimate of devices of product the company expects to offer times the supposed sales price every unit. This is perhaps the many important budget plan as it drives most of the other budgets. Because that example, the manufacturing budget and related materials, labor, and also overhead budgets are based upon expected sales.

Forecasting sales often entails extensive research and numerous sources. Companies, such together Jerry’s ice cream Cream, frequently start with their sales staff due to the fact that salespeople have actually daily contact with customers and direct information around customer demand. Some suppliers pay for sector trend data come learn around industry and product trends. Plenty of organizations hire sector research consultants to obtain and review industry data and also ultimately come predict customer demand. Larger companies sometimes employ financial experts to develop advanced models offered to job sales. Smaller, less sophisticated organizations just base their estimates on previous trends. Figure 9.2 “Estimating Sales” shows how companies acquire sales info from sales people, sector research consultants, and economists.

Tom Benson, sales manager in ~ Jerry’s ice cream Cream, talked through his salespeople and reviewed industry trends for ice cream cream using data obtained from a sector research firm. His estimate, shown in number 9.3 “Sales budget for Jerry’s ice Cream”, assumes the company will boost sales 15 percent this coming year. Thus, to acquire projected sales for quarter 1, Tom merely multiplied critical year’s first quarter sales by 1.15. The mean price every unit critical year to be $6 (1 unit = 1 gallon), and Tom go not mean any readjust in this price. The sales spending plan is presented in figure 9.3 “Sales budget plan for Jerry’s ice cream Cream”.


Figure 9.3 Sales budget plan for Jerry’s ice Cream


Production Budget

Question: The production budget plan is arisen next and is based upon sales budget plan projections. What is a production budget, and also how is it prepared?

Answer: If the organization supplies a just-in-time manufacturing system, where production occurs just in time to ship the commodities to the customer, units created each quarter would certainly be precisely the very same as projected sales. However, many companies, including Jerry’s ice cream Cream, preserve a details level of finished goods inventory. Therefore production is generally not the same as projected sales. The production budget plan is an calculation of devices to it is in produced and also is based on sales projections to add an estimate of preferred ending finished goods inventory less beginning finished items inventory, as summarized in the following:


Key Equation

Units to beproduced=Expected salesin units+Desired unitsof ending inventory−Units inbeginning inventory


Jerry’s ice Cream to plan to market 40,000 devices in the first quarter, as shown in number 9.3 “Sales spending plan for Jerry’s ice Cream”. For the services of simplicity, assume work-in-process inventory is insignificant, and also therefore beginning and also ending work-in-process perform is zero. (We assume beginning and also ending work-in-process inventory is zero throughout this chapter.) The management prefers to preserve 10 percent of next quarter’s sales in ending inventory. Therefore 4,800 devices will it is in in inventory in ~ the finish of the very first quarter (= 48,000 unit sales in second quarter × 10 percent). Units needed for the very first quarter complete 44,800 (= 40,000 unit sales + 4,800 units wanted ending inventory). However, Jerry’s will not develop 44,800 units because inventory will certainly be left end from the 4th quarter of last year. This beginning inventory will certainly be 4,000 devices (= 40,000 unit sales in first quarter × 10 percent). For this reason actual production will complete 40,800 units:

40,800=40,000+4,800−4,000Units to beproduced=Expected salesin units+Desired units ofending inventory−Units inbeginning inventory

Figure 9.4 “Production budget plan for Jerry’s ice Cream” presents the production budget plan for every of the 4 soldier of the comes year. Study this figure carefully, an especially the last heat labeled units to it is in produced. Lynn Young, the manufacturing manager, will certainly be concerned about the spike in production throughout the 3rd quarter that 59,200 units. The third quarter, indigenous July 1 v September 30, is the height sales season for ice cream cream. It will be challenging for Lynn to plan for this increase in production from the very first and 2nd quarters come the third quarter. However, this is specifically why providers prepare budgets—to setup for the future!


Figure 9.4 Production spending plan for Jerry’s ice cream Cream

*Information from number 9.3 “Sales budget for Jerry’s ice Cream”.

**Desired finishing inventory = 10 percent × following quarter sales; for the an initial quarter, 4,800 = 0.10 × 48,000. Fourth quarter wanted ending inventory of 4,400 devices is based on an estimate of sales in the very first quarter of following year.

***Beginning inventory = list at finish of ahead quarter; because that example, 2nd quarter start inventory = first quarter ending inventory.


Once Jerry’s ice Cream to know how plenty of units it must produce each quarter, budgets are established for the individual components of production: direct materials, straight labor, and manufacturing overhead. We present these budgets next.


Review difficulty 9.3

Carol’s cookie produces cookie for resale at grocery store stores throughout phibìc America. The company is right now in the procedure of developing a master spending plan on a quarterly basis for this coming fiscal year, which end December 31. Prior year quarterly sales were as adheres to (1 unit = 1 batch):


First quarter64,000 units
Second quarter76,800 units
Third quarter96,000 units
Fourth quarter83,200 units

Unit sales space expected to boost 25 percent, and also each unit is intended to sell for $8. The administration prefers to maintain finishing finished products inventory same to 10 percent of next quarter’s sales. I think finished items inventory at the end of the 4th quarter budget duration is approximated to it is in 9,000 units.

Prepare a sales budget plan for Carol’s Cookies making use of a format comparable to figure 9.3 “Sales spending plan for Jerry’s ice cream Cream”. (Hint: be sure to boost last year unit sales by 25 percent.)Prepare a production budget plan for Carol’s Cookies using the format displayed in number 9.4 “Production spending plan for Jerry’s ice Cream”.

Solution come Review problem 9.3


Direct products Purchases Budget

Question: The variety of units of finished goods to be produced each quarter from the production budget is the beginning point because that the direct materials purchase budget. What is a straight materials purchase budget, and how is it prepared?

Answer: The direct materials purchases budget plan is an estimate of raw products needed to attain a wanted level the production. Figure 9.4 “Production budget for Jerry’s ice cream Cream”, the manufacturing budget, reflects that 40,800 finished units will be created in the an initial quarter. We will now create a straight materials purchases spending plan that answers the questions: how plenty of pounds of product must be purchased throughout the an initial quarter to attain this production, and what is the expense of this materials?

Assume 2 pounds of material are forced to create one unit that product. Thus the quantity of materials compelled to develop 40,800 systems of ice cream cream is 81,600 pounds (= 40,800 units × 2 pounds every unit). This quantity is labeled as materials necessary in production in the direct materials purchases budget shown in figure 9.5 “Direct materials Purchases spending plan for Jerry’s ice cream Cream”. (To simplify this example, assume street is the only product used. However, other materials, such together cream and vanilla, are commonly required to create ice cream.)


Figure 9.5 direct Materials Purchases spending plan for Jerry’s ice Cream

*Information from number 9.4 “Production budget for Jerry’s ice Cream”.

**Desired ending inventory = 20 percent × following quarter production needs; for the first quarter, 19,680 = 0.20 × 98,400. Fourth quarter wanted ending inventory of 20,000 pounds is based on an estimate of materials needed in production first quarter of next year.

***Beginning inventory = inventory at finish of ahead quarter; for example, 2nd quarter start inventory = an initial quarter ending inventory.

****$2 straight materials price per unit = 2 pounds that materials compelled per unit × $1 per pound.


Will the company buy 81,600 pounds of product in the first quarter? more than likely not. Jerry’s will have materials in beginning raw products inventory and also prefers to keep a certain level the ending raw products inventory. Thus straight materials purchased is based on materials essential in production plus an calculation of desired ending raw materials inventory less beginning raw products inventory. Us summarize this in the complying with equation. An alert the similarity that this equation come the perform equation presented previously for the manufacturing budget.


Key Equation

Materials tobe purchased=Materials neededin production+Desired materialsin ending inventory−Materials inbeginning inventory


Assume the management prefers to keep raw materials ending inventory same to 20 percent of following quarter’s products needed in production. For this reason 19,680 pounds of material will it is in in inventory at the finish of the first quarter (= 98,400 pounds of materials needed in manufacturing in 2nd quarter × 20 percent). Products needed in inventory complete 101,280 pounds (= 81,600 pounds of products needed in production + 19,680 pounds of material in wanted ending inventory). However, Jerry’s will certainly not acquisition 101,280 pounds that materials due to the fact that inventory will certainly be left over from the fourth quarter of critical year. This beginning inventory will certainly be 16,320 pounds (= 81,600 pounds of material needed in manufacturing in an initial quarter × 20 percent). Thus straight materials purchased in the an initial quarter will full 84,960 pounds:

84,960=81,600+19,680−16,320Materials=Materials neededin production+Desired materialsin ending inventory−Materials inbeginning inventory

To calculation the price of to buy 84,960 pounds of material, main point the variety of pounds to it is in purchased by the price per pound. I think the cost per pound of product for jerry is $1. This outcomes in a cost of $84,960 for products to be purchased throughout the first quarter, as presented at the bottom of number 9.5 “Direct products Purchases budget plan for Jerry’s ice Cream” (= 84,960 pounds to be purchased × $1 per pound).

Review the straight materials purchases budget plan shown in figure 9.5 “Direct products Purchases budget plan for Jerry’s ice Cream” carefully, specifically the line labeled direct products to be purchased. The to buy manager in ~ Jerry’s ice cream Cream supplies this information, together with the price every pound, come negotiate the purchase of materials with suppliers.


Direct labor Budget

Question: The direct materials purchases budget plan is the an initial of three sustaining budgets because that production. The second is the direct labor budget. What is the straight labor budget, and also how is it prepared?

Answer: The direct labor budget plan is an estimate of straight labor hours, and also related costs, vital to accomplish a preferred level of production. Learning Jerry’s ice cream Cream to plan to produce 40,800 units of ice cream cream throughout the very first quarter, this spending plan answers the questions: how plenty of direct labor hours will be necessary to achieve this production, and what will this job cost?

Assume the takes 0.10 direct labor hrs (or 6 minutes) to create 1 unit that product. For this reason 4,080 hrs of direct labor will be forced to develop 40,800 units of product (= 40,800 perfect units produced × 0.10 straight labor hrs per unit). Given an typical hourly rate of $13, the direct labor price for the very first quarter totals $53,040 (= 4,080 hrs × $13 per hour). This information is shown in the direct labor spending plan presented in figure 9.6 “Direct Labor budget plan for Jerry’s ice cream Cream”.


Figure 9.6 straight Labor budget plan for Jerry’s ice cream Cream

*From figure 9.4 “Production spending plan for Jerry’s ice cream Cream”.

**$1.30 straight labor price per unit = 0.10 straight labor hours per unit × $13 per hour.


Carefully review the straight labor spending plan shown in number 9.6 “Direct Labor spending plan for Jerry’s ice cream Cream”. The production manager in ~ Jerry’s ice cream Cream, Lynn Young, provides this info to ensure the appropriate number of employees is obtainable to meet production goals. Notification that the number of direct labor hrs needed in manufacturing for the 3rd quarter is significantly greater than every of the two previous quarters. Again, this is why organizations prepare budgets: to setup for these varieties of events. Lynn will have to start planning because that this spike in direct labor hours, one of two people by asking employees to occupational overtime or by hiring extr employees.


Manufacturing Overhead Budget

Question: The production overhead budget plan is the third of three supporting production budgets. What is a manufacturing overhead budget, and how is the prepared?

Answer: The production overhead spending plan is an calculation of all production costs, other than direct materials and also direct labor, essential to achieve a desired level of production. This budget is presented in figure 9.7 “Manufacturing Overhead budget for Jerry’s ice cream Cream”. An alert that overhead prices are separated into variable and also fixed components.


Figure 9.7 production Overhead budget for Jerry’s ice Cream

*From figure 9.4 “Production budget plan for Jerry’s ice cream Cream”.

**$1.20 = $240,480 total overhead cost ÷ 200,400 devices to be created for the year.

^Deduct depreciation to obtain the yes, really cash payment for overhead. This details is essential for the cash budget presented in figure 9.11 “Cash spending plan for Jerry’s ice Cream”.


By definition, full variable overhead costs readjust with changes in production and are calculation by multiplying devices to be created by the cost per unit. For example, indirect materials expense for the very first quarter the $6,120 is calculated by taking 40,800 units to be produced × $0.15 expense per unit. Fixed costs generally carry out not adjust with alters in production and also therefore remain the same each quarter. (Note: In part situations, fixed overhead prices can readjust from one quarter to the next. For example, hiring extr salaried personnel during the year would increase fixed overhead costs, and purchasing equipment throughout the year would rise depreciation costs. In this example, we assume solved overhead expenses do not adjust during the year.)

Depreciation is deducted at the bottom of the manufacturing overhead budget to recognize cash payments for overhead due to the fact that depreciation is not a cash transaction. We usage this info later in the chapter for the cash budget.


Review difficulty 9.4

Carol’s Cookies, the firm featured in the last review problem and also in the next three, is currently preparing the spending plan for direct materials purchases, straight labor, and also manufacturing overhead.

Direct products Purchases budget plan Information

Each unit of product calls for 1.5 pounds of direct materials every unit, and the cost of straight materials is $2 per pound. Monitoring prefers to maintain finishing raw materials inventory equal to 30 percent of next quarter’s products needed in production. Assume raw products inventory in ~ the end of the fourth quarter budget period is approximated to be 41,000 pounds.

Direct Labor spending plan Information

Each unit that product calls for 0.20 straight labor hours at a cost of $12 every hour.

Manufacturing Overhead spending plan Information

Variable overhead costs are:


Indirect materials$0.20 every unit
Indirect labor$0.15 per unit
Other$0.35 every unit

Fixed overhead costs each quarter are:


Salaries$28,000
Rent$22,000
Depreciation$16,165

Prepare a straight materials purchases budget for Carol’s Cookies utilizing the format displayed in number 9.5 “Direct products Purchases budget plan for Jerry’s ice Cream”.Prepare a direct labor budget for Carol’s Cookies utilizing the format presented in figure 9.6 “Direct Labor budget plan for Jerry’s ice cream Cream”.Prepare a manufacturing overhead budget for Carol’s Cookies making use of the format presented in figure 9.7 “Manufacturing Overhead budget plan for Jerry’s ice Cream”.

Solution to Review trouble 9.4


Selling and also Administrative Budget

Question: now that the sales and production-related budgets space complete, the is time to estimate selling and administrative costs. What is a selling and also administrative budget, and how is that prepared?

Answer: The selling and administrative spending plan is an calculation of all operating prices other 보다 production. This budget plan is gift in figure 9.8 “Selling and also Administrative budget for Jerry’s ice cream Cream”.

Although numerous organizations may have variable and also fixed prices in this budget, Jerry’s ice Cream treats every selling and administrative prices as solved costs. When again, depreciation is deducted in ~ the bottom of this budget to determine cash payments for selling and also administrative costs, which us use later on in the chapter because that the cash budget.


Figure 9.8 Selling and Administrative budget plan for Jerry’s ice cream Cream

*Deduct depreciation to get the really cash payment because that selling and administrative costs.

**This info is required for the cash budget presented in figure 9.11 “Cash budget plan for Jerry’s ice cream Cream”.


Budgeted income Statement

Question: Budgets perfect to this suggest include sales (Figure 9.3 “Sales spending plan for Jerry’s ice cream Cream”), production (Figure 9.4 “Production spending plan for Jerry’s ice cream Cream”), direct materials (Figure 9.5 “Direct products Purchases budget plan for Jerry’s ice Cream”), direct labor (Figure 9.6 “Direct Labor budget plan for Jerry’s ice cream Cream”), production overhead (Figure 9.7 “Manufacturing Overhead spending plan for Jerry’s ice cream Cream”), and also selling and administrative (Figure 9.8 “Selling and also Administrative spending plan for Jerry’s ice cream Cream”). Jerry’s ice Cream now has sufficient information to prepare the budgeted earnings statement. What is a budgeted earnings statement, and also how is that prepared?

Answer: The budgeted earnings statement is an estimate of the organization’s benefit for a given budget period. Most organizations, consisting of Jerry’s ice cream Cream, prepare the budgeted revenue statement utilizing the accrual communication of accounting: earnings are recorded as soon as earned and expenses space recorded as soon as incurred. The budgeted revenue statement because that Jerry’s ice cream Cream is gift in number 9.9 “Budgeted income Statement for Jerry’s ice cream Cream”. The cash spending plan we prepare later in the chapter will display when cash is received and also paid.


Figure 9.9 Budgeted income Statement for Jerry’s ice cream Cream

*Cost of goods sold = every unit cost of $4.50 (see above) × Units sold (from figure 9.3 “Sales spending plan for Jerry’s ice Cream”); for the first quarter, $180,000 cost of goods sold = $4.50 unit expense × 40,000 units.


The very first line in the budgeted income statement, sales, originates from the sales budget plan in number 9.3 “Sales budget for Jerry’s ice cream Cream”. The following line, cost of items sold, is calculated by multiply unit sales from figure 9.3 “Sales budget plan for Jerry’s ice cream Cream” by the expense per unit. The cost per unit calculation is presented at the bottom of number 9.9 “Budgeted income Statement because that Jerry’s ice cream Cream”. Carefully review this calculation. Since Jerry’s ice cream Cream offers full-absorption costing, all manufacturing costs related to items sold are consisted of (or totally absorbed) in cost of products sold. Number 9.5 “Direct materials Purchases spending plan for Jerry’s ice cream Cream”, figure 9.6 “Direct Labor spending plan for Jerry’s ice Cream”, and also Figure 9.7 “Manufacturing Overhead budget for Jerry’s ice Cream” administer this info on a per unit communication for straight materials, straight labor, and manufacturing overhead, respectively.

The 3rd line, gross margin, is simply sales minus price of products sold. The fourth line, selling and also administrative costs, comes from the selling and administrative budget in number 9.8 “Selling and Administrative budget plan for Jerry’s ice Cream”. The bottom line of the budgeted revenue statement, net income, is gross margin minus selling and also administrative costs. Income tax cost is not had in this example for the services of simplicity. However, earnings taxes can considerably reduce projected net income and also cash flows.

Question: How do companies use the budgeted earnings statement to boost operations?

Answer: The budgeted earnings statement is maybe the most very closely scrutinized component of the master budget. The management and employees throughout the organization use this info for to plan purposes and to evaluate company performance. The board of directors and budget committee room responsible for giving the budget and also often review periodic reports comparing yes, really net earnings to budgeted net revenue to recognize if profit purposes are gift achieved. Lenders and also owners frequently review the spending plan to for sure the organization is on track to accomplish its goals. The budgeted revenue statement answers the question: what profits does the organization expect come achieve?

After perfect the budgeted income statement, just three budgets remain: the funding expenditures budget, the cash budget, and the budgeted balance sheet. We talk about the capital expenditures budget plan next.


Review problem 9.5

Carol’s Cookies estimates that all selling and administrative expenses are fixed. Quarterly selling and administrative price estimates for the comes year are


Prepare a selling and administrative spending plan for Carol’s Cookies making use of the format shown in number 9.8 “Selling and also Administrative spending plan for Jerry’s ice Cream”.Prepare a budgeted revenue statement for Carol’s Cookies using the format presented in number 9.9 “Budgeted earnings Statement for Jerry’s ice cream Cream”.

Solution to Review problem 9.5


Capital expenditure Budget

Question: What is a funding expenditures budget, and also how is the prepared?


Figure 9.10 capital Expenditures spending plan for Jerry’s ice cream Cream

Note: this acquisitions will have no impact on depreciation cost in the 4th quarter. Items will be purchased at the end of the year. Therefore depreciation starts the following year.


Because permanent asset purchases take place at the finish of the year, depreciation will start the adhering to year. Therefore depreciation displayed in the manufacturing overhead and selling and administrative budgets will certainly not be influenced until the following year. The cash outlay compelled to make these purchase is reflect in the cash budget plan presented next.


Cash Budget

Question: What is a cash budget, and also how is the prepared?

Answer: The cash budget plan is an calculation of the amount and timing that cash inflows and also outflows for the budget plan period. Back the budgeted revenue statement provides an calculation of profitability, it stops short of providing cash flow information. Because that example, some of the $240,000 in first quarter sales revenue will certainly be built up during the an initial quarter and some will be collected the adhering to quarter. A section of the cash budget plan will display when cash indigenous sales will be received.

The cash spending plan has the following sections, every of i m sorry is described after figure 9.11 “Cash budget for Jerry’s ice Cream”:

Cash collections from salesCash payments for purchases of materialsOther cash collections and payments

Figure 9.11 “Cash budget plan for Jerry’s ice cream Cream” shows the cash spending plan for Jerry’s ice Cream. Quantities shown in parentheses stand for cash outflows; amounts without parentheses stand for cash inflows.


Figure 9.11 Cash budget for Jerry’s ice cream Cream

*Based ~ above sales budget shown in number 9.3 “Sales budget plan for Jerry’s ice cream Cream”. All sales room on credit: 60 percent accumulated in the quarter of sale and also 40 percent collected the following quarter.

**Based on purchases budget shown in figure 9.5 “Direct materials Purchases spending plan for Jerry’s ice cream Cream”. All purchases room on credit: 70 percent paid in the 4 minutes 1 of purchase and 30 percent payment the complying with quarter.

***Does not encompass depreciation due to the fact that depreciation cost does not involve a cash payment. Watch related figures for calculations.

^Excess the collections end payments = Cash collections from sales – Cash payment for products purchases – various other cash payments.

^^ start cash balance = Cash balance at finish of ahead period. Balance for an initial quarter is given.

^^^ finishing cash balance = excess of collections end payments because that the quarter + beginning cash balance.


Cash collections from Sales

Question: Assume all sales in ~ Jerry’s ice cream Cream space on credit. How lengthy does that take, on average, for Jerry’s to collect on credit transaction sales?

Answer: on average, 60 percent of credit transaction sales are collected in the 4 minutes 1 sold and also the remaining 40 percent is gathered the following quarter. These percentage approximates are based upon previous experience and take into factor to consider credit terms available to customers. Due to the fact that Jerry’s ice cream Cream just sells to client with great credit record, the anticipates no poor debts.

As you study the cash collection from sales section of jerry’s cash budget, notice that $180,000 in cash will certainly be built up in the first quarter regarded credit sales do in the previous 4 minutes 1 (this quantity is given). Next, girlfriend will view $144,000 in cash collected in the very first quarter related to an initial quarter sales (= 60 percent collected in quarter of revenue × $240,000 an initial quarter sales). The remaining $96,000 will be accumulated in the 2nd quarter, as shown in number 9.11 “Cash budget plan for Jerry’s ice cream Cream” (= 40 percent × $240,000 very first quarter sales).


Cash Payments because that Purchases the Materials

Question: Assume all purchases at Jerry’s ice Cream are on credit. How long does it take, on average, because that Jerry’s come pay for these credit purchases?

Answer: top top average, 70 percent the purchases room paid in the quarter purchased and also the remaining 30 percent is paid the following quarter. This percentage approximates are based on previous experience and also take right into account credit terms available by suppliers.

As you look in ~ the cash payments for purchases the materials ar of jerry cash budget, notification that $30,000 in cash will be paid in the very first quarter regarded purchases do in the previous 4 minutes 1 (this lot is given). Next, friend will see $59,472 in cash paid in the very first quarter associated to an initial quarter to buy (= 70 percent paid in 4 minutes 1 purchased × $84,960 very first quarter purchases). The continuing to be $25,488 will certainly be payment in the 2nd quarter, as shown in number 9.11 “Cash budget for Jerry’s ice cream Cream” (= 30 percent × $84,960 an initial quarter purchases). Figure 9.5 “Direct products Purchases budget plan for Jerry’s ice Cream” shows exactly how cash flows right into the agency for client sales and out that the company for purchase of materials.


Other Cash Collections and also Payments

Question: What various other cash collections and also cash payments must be taken into consideration at Jerry’s ice Cream?

Answer: i think Jerry’s ice cream Cream has actually other cash payments yet no various other cash collections. Direct labor cash payments are from number 9.6 “Direct Labor budget for Jerry’s ice Cream”. Manufacturing overhead cash payments space from number 9.7 “Manufacturing Overhead budget for Jerry’s ice Cream”. Recall that depreciation was subtracted from full overhead expenses in figure 9.7 “Manufacturing Overhead budget for Jerry’s ice cream Cream” to calculate the cash payments for overhead. Selling and administrative cash payments room from figure 9.8 “Selling and also Administrative budget for Jerry’s ice cream Cream”, whereby a comparable depreciation adjustment was made. Capital expenditure cash payments are from figure 9.10 “Capital Expenditures budget for Jerry’s ice cream Cream”.

The other cash collections and also payments ar is likewise where organizations incorporate financing activities such as cash collections from the sale of bonds or cash payments because that the repayment of financial institution loans. Jerry’s ice Cream does not have any kind of of this financing activities.

The bottom ar of the cash budget plan is wherein the finishing cash balance is calculated because that each spending plan period. The manager responsible for cash planning, typically the treasurer, scrutinizes this ar carefully. Some establishments must borrow cash to money the timing difference in between when cash is supplied for production and when cash is got from sales. The cash spending plan will signal as soon as short-term borrowing is vital and permits time for the treasurer come arrange for financing. The cash budget plan presented in number 9.11 “Cash budget plan for Jerry’s ice cream Cream” mirrors that Jerry’s will certainly not must borrow cash in any of the four quarters. In fact, Jerry’s ice Cream will have a hefty to make reservation of cash totaling $155,576 in ~ the finish of the fourth quarter.


Review trouble 9.6

Carol’s Cookies has the following information pertaining come the funding expenditures and cash budgets.

Capital Expenditures

The firm plans to purchase selling and also administrative devices totaling $20,000 and production devices totaling $28,000. Both will be purchased in ~ the finish of the 4th quarter and will not affect depreciation price for the coming year.

Cash Budget

All sales room on credit. The company expects to collection 70 percent of sales in the quarter of sale, 25 percent of sales in the quarter complying with the sale, and 5 percent will not be built up (bad debt). Account receivable at the end of last year totaled $200,000, every one of which will certainly be collected in the first quarter the this coming year.

All direct materials purchases room on credit. The agency expects to salary 80 percent of purchase in the 4 minutes 1 of purchase and 20 percent the complying with quarter. Account payable at the finish of last year totaled $50,000, every one of which will certainly be payment in the first quarter that this coming year.

The cash balance at the end of last year totaled $20,000.

Prepare a resources expenditures spending plan for Carol’s Cookies using the format displayed in figure 9.10 “Capital Expenditures budget for Jerry’s ice cream Cream”.Prepare a cash budget for Carol’s Cookies using the format shown in figure 9.11 “Cash budget plan for Jerry’s ice Cream”.

Solution come Review trouble 9.6


Budgeted Balance Sheet

Question: The budgeted balance paper is the last piece of the budget plan process. What is the budgeted balance sheet, and also how is the prepared?

Answer: The budgeted balance paper is an calculation of the ending balances for every balance paper accounts. Managers use this to evaluate the affect that budgeted sales and costs will have on the financial condition of the organization. We existing the budgeted balance sheet because that Jerry’s ice cream Cream in figure 9.12 “Budgeted Balance Sheet for Jerry’s ice cream Cream”.

Information essential to prepare the budgeted balance sheet for Jerry’s ice cream Cream is presented throughout the chapter and also is referenced in figure 9.12 “Budgeted Balance Sheet for Jerry’s ice Cream”. Added information is provided here:

Plant and equipment (net) expected at the end of the budget period (December 31) is $530,000.Common stock issued and outstanding in ~ the end of the budget duration (December 31) is supposed to it is in $650,000.Actual retained revenue at the finish of critical year totaled $101,600, and also no cash dividends will certainly be paid throughout the present budget period ending December 31.

Figure 9.12 Budgeted Balance Sheet for Jerry’s ice Cream

*$124,800 = $312,000 in 4th quarter sales (Figure 9.3 “Sales budget for Jerry’s ice Cream”) × 40 percent come be built up next 4 minutes 1 (Figure 9.11 “Cash budget for Jerry’s ice Cream”).

**$20,000 = 20,000 pounds (Figure 9.5 “Direct materials Purchases spending plan for Jerry’s ice cream Cream”) × $1 per pound (Figure 9.5 “Direct products Purchases spending plan for Jerry’s ice Cream”).

***$19,800 = 4,400 devices (Figure 9.4 “Production budget for Jerry’s ice Cream”) × $4.50 (Figure 9.9 “Budgeted income Statement for Jerry’s ice cream Cream”).

^Given.

^^ $30,576 = $101,920 in 4th quarter purchases (Figure 9.5 “Direct products Purchases spending plan for Jerry’s ice Cream”) × 30 percent to be paid following quarter (Figure 9.11 “Cash budget for Jerry’s ice Cream”).

^^^$169,600 = $101,600 in retained earnings at finish of last year (given) + $68,000 budgeted net income for the year (Figure 9.9 “Budgeted revenue Statement for Jerry’s ice cream Cream”).


Computer Application

Using Excel to develop an operating Budget

Managers regularly use spreadsheets to build operating budgets. Spreadsheets aid managers carry out what-if evaluation by linking the contents of the understand budget and also automatically making transforms to spending plan schedules when particular estimates space revised. For example, if supervisors at Jerry’s ice Cream wanted to see what would occur if sales in units were reduced by 10 percent from the early stage projection presented in number 9.3 “Sales budget for Jerry’s ice cream Cream”, castle would just reduce sales by 10 percent, and also all budget schedules impacted by this adjust would immediately be update in the spreadsheet.

An instance of exactly how to usage Excel to construct an operating budget plan for Jerry’s ice Cream follows. Notice the tabs at the bottom of the spreadsheet. The an initial tab is for the sales spending plan worksheet, the second tab is for the production spending plan worksheet, the following tab is for the direct materials purchases budget worksheet, and also so on. Every these worksheets are attached so changes to particular estimates are reflected in the ideal budget schedules.



Spreadsheet programs are not the only way managers use technology to facilitate the budgeting process. As shown in note 9.30 “Business in activity 9.2” the web is also a helpful tool as soon as it involves efficient budgeting.


Business in activity 9.2

Moving from Spreadsheets to Intranet Budgeting

The Pacific Northwest nationwide Laboratory (PNNL) is one of nine multiprogram national laboratories of the U.S. Department of Energy. PNNL is operated by Battelle scientific research and an innovation International, a global science and modern technology enterprise the conducts $3,000,000,000 precious of research and advancement annually.

The framework & to work (F&O) company Office in ~ PNNL has actually over 130 budget activities, every of which calls for an yearly budget. The total annual budget is $70,000,000. Prior to 2000, activity managers were forced to usage Excel to procedure budget information. The F&O company Office climate uploaded this information to build the division’s budget.

As the F&O organization Office began the budget process for 2001, management determined to construct a Web-based, or intranet, budget and planning system. The new system enabled managers to usage the net to input budget information directly, thus eliminating the must upload initial budgets and subsequent spending plan changes.

Moving to intranet budgeting benefits PNNL’s F&O service Office in several ways. Activity managers no longer had to use Excel to enter spending plan information, which conserved 450 hours. The F&O company Office conserved 60 hours by no longer having to upload Excel spending plan information. Budget plan reports are basic to create, and the system offers real-time reports for evaluation and job management.

Many establishments are adopting intranet budgeting together the primary resource of planning and also control. As the gaue won specialist at PNNL stated, intranet budgeting gives “a tool that is simple to use, accurate, and an easy and will proceed to save us time and also money.”


Sources: mar F. Astley, “Intranet Budgeting,” Strategic Finance, may 2003; Pacific Northwest national Laboratory, “Home Page,” http://www.pnl.gov.


Review trouble 9.7

Assume Carol’s Cookies will collect 25 percent of 4th quarter budgeted sales in full next year (this represents account receivable at the end of the 4th quarter). The adhering to account balances space expected in ~ the end of the fourth quarter:

Property, plant, and also equipment (net): $320,000Common stock: $450,000

Retained income at the finish of critical year totaled $56,180, and also no cash dividends are anticipated for the budget period ending December 31.

Prepare a budgeted balance sheet because that Carol’s Cookies making use of the format shown in number 9.12 “Budgeted Balance Sheet for Jerry’s ice Cream”.

Solution come Review problem 9.7


*$208,000 = $832,000 in 4th quarter sales (from sales budget) × 25 percent to be collected next quarter (given).**$82,000 = 41,000 pounds × $2 per pound (from direct materials budget).***$60,840 = 9,000 systems (from production budget) × $6.76 price per unit (from budgeted income statement).

^Given.

^^ $59,492 = $297,460 in fourth quarter purchases (from straight materials budget) × 20 percent to be paid next quarter (given).

^^^ $208,180 = $56,180 in kept earnings finish of last year (given) + $152,000 budgeted net revenue (from budgeted earnings statement).


Jerry:Tom, i recall you speak we should expect growth in between 10 percent and 25 percent following year. Have you been able to small this under a bit?
Tom:Yes, i have talked with our salespeople and industry contacts. We additionally obtained tendency data native a sector research firm. Based on this information, sales should increase around 15 percent this comes year. Most agree this growth is a an outcome of our high-quality product and our capability to quickly change flavors to accommodate consumer tastes.
Jerry:This is an excellent news. That looks like our ice cream is really catching on!
Michelle:I received Tom’s estimate a couple of days back and currently have a preliminary budget plan for next year. Lynn, you will need to do some significant planning come guarantee us have enough materials and employees because that the third quarter spike in sales.
Lynn:Yes, i realize we have actually some work-related to execute to ensure we have sufficient resources to meet budgeted manufacturing levels.
Jerry:Can’t we simply hire a couple of more employees and let ours suppliers understand we will certainly need more materials?
Lynn:The difficulty is that we have a spike in production during the 3rd quarter. Production goes native 49,200 devices in the second quarter to 59,200 devices in the third quarter and ago down to 51,200 devices in the fourth quarter. Ns don’t think materials will be an issue—our providers has already assured me this will certainly not be a problem. However I can’t just hire new employees in the 3rd quarter and also fire them in the fourth quarter.
Jerry:Perhaps ours existing employees deserve to work overtime, or we have the right to hire momentary employees.
Lynn:Hiring momentary employees would certainly be my preference, an especially since college students are searching for part-time work throughout the summer months. Functioning overtime would certainly really cause problems through our budgeted hourly price of $13.
Jerry:Michelle, execute we have any kind of cash flow difficulties with the anticipated growth?
Michelle:Fortunately not. If every goes together planned, we should have more than $90,000 in the bank at the end of each quarter.
Jerry:Excellent! Let’s perform our best to remain on track. Michelle, I’d favor an update at the end of the first quarter to see if actual benefit meets or exceeds budgeted profit.
Michelle:No problem. I’ll have actually it because that you as soon as the books are closed because that the an initial quarter.
Jerry:Now that we all have actually some idea of what to mean this comes year, we can make certain the sources are in ar to make it happen. This have to be an interesting and daunting year for us. Let’s fulfill again following month to discuss our progression in preparing for following year.

This narrative provides an instance of just how the master budget is provided for planning purposes. It is much more efficient to arrangement in advancement for far-reaching increases in sales and also production 보다 to wait and resolve production issues as castle occur. The master budget can also be used for control purposes through evaluating agency performance. We comment on the manage phase the budgeting additional in chapter 10 “How Do managers Evaluate power Using expense Variance Analysis?”.

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Key Takeaway

The master budget plan for a manufacturing agency includes budget schedules because that sales, production, straight materials, direct labor, manufacturing overhead, selling and also administrative, the income statement, capital expenditures, cash, and also the balance sheet. The sales budget is many important due to the fact that sales projections journey the other budgets.