Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 9 - Ronald W. Hilton, David E. Platt

Chapter 9
Financial Planning
and Analysis: The
Master Budget

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Financial Planning and
Analysis (FP&A) Systems
A financial  planning and 
financial  planning and 
analysis (FP&A) system 
analysis (FP&A) system 
helps managers assess the
company’s future and know if
they are reaching their
performance goals. A
complete FP&A system
includes subsystems for (1)
planning, (2) measuring and
recording results, and (3)
evaluating performance.

The planning component
of the FP&A system is
called the master budget.
It is intended to help
ensure that plans are
consistent and yield a
result that makes sense

for the organization.

9­2


Purposes of Budgeting Systems
Budget
Budget

1. Planning
a detailed plan, expressed in
2. Facilitating
quantitative terms, that
Communication and
specifies how resources will
be acquired and used during a
Coordination
specified period of time.
3. Allocating Resources
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives
9­3


Sales of Services or Goods
Ending
Inventory

Budget

Production
Budget

Work in Process
and Finished
Goods

Ending
Inventory
Budget

Direct Materials

Direct
Materials
Budget

Direct
Labor
Budget

Overhead
Budget

Cash Budget

Selling and
Administrative

Budget

Budgeted Income
Statement

Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9­4


Activity-Based Costing versus ActivityBased Budgeting
Resources
Resources

Resources
Resources
Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)

Activities
Activities

Cost objects:
Cost objects:
products and services

products and services
produced, and
produced, and
customers served.
customers served.

Activities
Activities
Activity-Based
Activity-Based
Budgeting
Budgeting (ABB)
(ABB)

Forecast of products
Forecast of products
and services to be
and services to be
produced and
produced and
customers served.
customers served.
9­5


Sales Budget
Breakers,
Breakers, Inc.
Inc. is
ispreparing

preparingbudgets
budgetsfor
forthe
thequarter
quarterending
ending
June
June30.
30.
Budgeted
Budgetedsales
salesfor
forthe
thenext
nextfive
fivemonths
monthsare:
are:
April
April
May
May
June
June
July
July
August
August

20,000

20,000units
units
50,000
50,000units
units
30,000
30,000units
units
25,000
25,000units
units
15,000
15,000units.
units.

The
Theselling
sellingprice
priceis
is$10
$10per
perunit.
unit.
9­6


Sales Budget
April
Budgeted
sales (units)

20,000
Selling price
per unit
$
10
Total
Revenue
$ 200,000

May

June

50,000
$

10

$ 500,000

Quarter

30,000
$

10

$ 300,000

100,000

$

10

$ 1,000,000

9­7


Production Budget
The
Themanagement
managementof
of Breakers,
Breakers, Inc.
Inc. wants
wantsending
ending
inventory
inventoryto
tobe
beequal
equal to
to20%
20%of
of the
thefollowing
following
month’s
month’sbudgeted

budgetedsales
salesin
inunits.
units.
On
OnMarch
March31,
31, 4,000
4,000units
unitswere
wereon
onhand.
hand.
Let’s
Let’sprepare
preparethe
theproduction
productionbudget.
budget.

9­8


Production Budget
From
sales
budget

Sales in units
Add: desired

end. inventory
Total needed
Less: beg.
inventory
Units to be
produced

April
20,000

May
50,000

June
30,000

Quarter
100,000

10,000
30,000

Ending inventory becomes
6,000beginning 5,000
5,000
inventory the next
56,000
35,000
105,000
month

4,000

10,000

6,000

4,000

26,000

46,000

29,000

101,000

March 31
ending inventory
9­9


Direct-Material Budget

At
AtBreakers,
Breakers,five
fivepounds
poundsof
ofmaterial

material are
arerequired
requiredper
per

unit
unitof
ofproduct.
product.

Management
Managementwants
wantsmaterials
materialson
onhand
handat
atthe
theend
endof
ofeach
each
month
monthequal
equal to
to10%
10%of
ofthe
thefollowing
followingmonth’s
month’s

production.
production.

On
OnMarch
March31,
31,13,000
13,000pounds
poundsof
ofmaterial
material are
areon
onhand.
hand.
Material
Material cost
cost$.40
$.40per
perpound.
pound.
Let’s
Let’sprepare
preparethe
thedirect
directmaterials
materialsbudget.
budget.
9­10

From our
production
budget

Direct-Material Budget

10% of the following
month’s production

March 31
inventory
9­11


Direct-Material Budget
July Production
Sales in units
Add: desired ending inventory
Total units needed
Less: beginning inventory
Production in units

25,000
3,000
28,000
5,000
23,000

June Ending Inventory
July production in units

23,000
Materials per unit
5
Total units needed
115,000
Inventory percentage
10%
June desired ending inventory
11,500

9­12


Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hours of

direct labor.

The Company has a “no layoff” policy so all employees

will be paid for 40 hours of work each week.

In exchange for the “no layoff” policy, workers agreed to a

wage rate of $8 per hour regardless of the hours worked
(No overtime pay).

For the next three months, the direct labor workforce will

be paid for a minimum of 3,000 hours per month.

Let’s prepare the direct labor budget.
9­13


Direct-Labor Budget

From our
production
budget

This is the greater of
labor hours required or
labor hours guaranteed.
9­14


Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.

9­15


Selling and Administrative Expense
Budget

At
AtBreakers,
Breakers,variable
variableselling

sellingand
andadministrative
administrative

expenses
expensesare
are$0.50
$0.50per
perunit
unitsold.
sold.

Fixed
Fixedselling
sellingand
andadministrative
administrativeexpenses
expensesare
are$70,000
$70,000
per
permonth.
month.

The
The$70,000
$70,000fixed
fixedexpenses
expensesinclude
include$10,000

$10,000in
in
depreciation
depreciationexpense
expensethat
thatdoes
doesnot
notrequire
requireaacash
cash
outflow
outflowfor
forthe
themonth.
month.

9­16


Selling and Administrative Expense
Budget

From our
Sales budget
9­17


Cash Receipts Budget

At

AtBreakers,
Breakers,all
all sales
salesare
areon
onaccount.
account.

The
Thecompany’s
company’scollection
collectionpattern
patternis:
is:

70%
70%collected
collectedin
inthe
themonth
monthof
ofsale,
sale,
25%
25%collected
collectedin
inthe
themonth
monthfollowing
followingthe

thesale,
sale,
5%
5%is
isuncollected.
uncollected.


The
TheMarch
March31
31accounts
accountsreceivable
receivablebalance
balanceof
of$30,000
$30,000

will
will be
becollected
collectedin
infull.
full.

9­18


Cash Receipts Budget

9­19


Cash Disbursement Budget

Breakers
Breakerspays
pays$0.40
$0.40per
perpound
poundfor
forits
itsmaterials.
materials.

One-half
One-halfof
ofaamonth’s
month’spurchases
purchasesare
arepaid
paidfor
forin
inthe
the

month
monthof
ofpurchase;
purchase;the

theother
otherhalf
halfis
ispaid
paidin
inthe
thefollowing
following
month.
month.

No
Nodiscounts
discountsare
areavailable.
available.

The
TheMarch
March31
31accounts
accountspayable
payablebalance
balanceis
is$12,000.
$12,000.

9­20

Cash Disbursement Budget

140,000 lbs. × $.40/lb. = $56,000
9­21


Cash Disbursement Budget
Breakers:
Breakers:

Maintains
Maintainsaa12%
12%open
openline
lineof
ofcredit
creditfor
for$75,000.
$75,000.

Maintains
Maintainsaaminimum
minimumcash
cashbalance
balanceof
of$30,000.
$30,000.

Borrows
Borrowsand

andrepays
repaysloans
loanson
onthe
thelast
lastday
dayof
ofthe
themonth.
month.

Pays
Paysaacash
cashdividend
dividendof
of$25,000
$25,000in
inApril.
April.

Purchases
Purchases$143,700
$143,700of
ofequipment
equipmentin
inMay
Mayand
and$48,300
$48,300in
inJune

June

paid
paidin
incash.
cash.

Has
Hasan
anApril
April11cash
cashbalance
balanceof
of$40,000.
$40,000.

9­22


Cash Budget

From our Cash
Receipts Budget
(Collections and Disbursements)

From our Cash Disbursements
Budget
From our Direct Labor
Budget
From our Overhead Budget

From our Selling and
Administrative Expense
Budget

To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
9­23


Cash Budget
(Collections and Disbursements)

Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.

9­24


Cash Budget
(Collections and Disbursements)
At the end of June, Breakers
has enough cash to repay
the $48,800 loan plus interest
at 12%.

9­25