Financial and Managerial
Accounting
Wild, Shaw, and Chiappetta
Fourth Edition
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 20
Master Budgets and
Performance Planning
Conceptual Learning
Objectives
C1: Describe the importance and benefits
of budgeting and the process of
budget administration.
C2: Describe a master budget and the
process of preparing it.
20-3
Analytical Learning Objectives
A1: Analyze expense planning using
activity-based budgeting.
20-4
Procedural Learning
Objectives
P1: Prepare each component of a master
budget and link each to the budgeting
process.
P2: Link both operating and capital
expenditures budgets to budgeted
financial statements.
P3: Appendix 20A: Prepare production
and manufacturing budgets.
20-5
C1
Budget Process
Defines goals
and objectives
Communicates plans
and instructions
Promotes analysis and
a focus on the future
Advantages
Coordinates
business activities
Motivates employees
Provides a basis for
evaluating performance against
past or expected results
20-6
C1
Budget Timing
Continuous or
Rolling Budget
2011
2012
2013
2014
The budget may be a twelve-month
budget that rolls forward one month
as the current month is completed.
20-7
C2
Master Budget Components
Sales
budget
Merchandise
Purchases
Prepare
financial
budgets:
 cash
 income
 balance sheet
Prepare
capital
expenditure
budget
Prepare
selling and
general
administrative
budgets
20-8
P1
Sales Budget
HOCKEY DEN
Monthly Sales Budget
October 2011 – January 2012
September 2011 (actual)
October 2011
November 2011
December 2011
Total
January 2012
Budgeted
Unit Sales
700
Budgeted
Budgeted
Unit Price Total Sales
$
100 $
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
20-9
Merchandise Purchases
Budget
P1
Inventory
to be
purchased
=
Budgeted
ending
inventory
+
Budgeted
cost of sales
for the period
–
Budgeted
beginning
inventory
Hockey Den buys hockey sticks for $60.00 each and
maintains an ending inventory equal to 90 percent of
the next month’s budgeted sales. 900 hockey sticks
are on hand on September 30.
Let’s prepare the purchases budget for Hockey Den.
20-10
P1
Merchandise Purchases
Budget
HOCKEY DEN
Merchandise Purchases Budget
October 2011 – December 2011
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
20-11
P1
Selling Expense Budget
HOCKEY DEN
Selling Expense Budget
October 2011 – December 2011
Budgeted sales
Sales commission %
Sales commission
Sales manager 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
$
×
$
$
Total
320,000
10%
32,000
6,000
38,000
From Hockey Den’s sales budget
20-12
P1
General and Administrative
Expense Budget
HOCKEY DEN
General and Administrative Expense budget
October 2011 – December 2011
October
Administrative salaries $
4,500
Equipment depreciation
1,500
Total
$
6,000
November
$
4,500
1,500
$
6,000
December
$
4,500
1,500
$
6,000
Total
$ 13,500
4,500
$ 18,000
20-13
P2
Financial Budgets
Cash
Budget
(Expected
Receipts &
Disbursements)
Budgeted
Income
Statement
Budgeted
Balance
Sheet
20-14
P2
Budgeted Cash Receipts

40% of Hockey Den’s
sales are for cash.

60% are credit sales
(collected in full in the
month following sale).
Let’s prepare the cash receipts budget for Hockey Den.
20-15
P2
Budgeted Cash Receipts
From Hockey Den’s sales budget
HOCKEY DEN
Cash Receipts Budget
October 2011 – December 2011
Budgeted sales
Accounts receivable
Cash receipts from:
Cash sales
Collection of receivables
Total cash receipts
September
$ 70,000
$ 42,000
60 percent of September
sales are collected in October
October
$ 100,000
$ 60,000
November
$ 80,000
$ 48,000
December
$ 140,000
$ 84,000
$
$
$
40,000
32,000
60% of sales
56,000
40% of sales
20-16
P2
Budgeted Cash Receipts
HOCKEY DEN
Cash Receipts Budget
October 2011 – December 2011
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
20-17
P2
Cash Disbursements for
Purchases

Hockey Den’s purchases
of merchandise are
entirely on account.

Full payment is made in
the month following
purchase.

The September 30
balance of Accounts
Payable is $58,200.
Let’s look at cash disbursements
for purchases for Hockey Den.
20-18
P2
Cash Disbursements for
Purchases
HOCKEY DEN
Cash Disbursements for Purchases
October 2011 - December 2011
October payments (September 30 balance)
November payments (October purchases)
December payments (November purchases)
$ 58,200
49,200
80,400
From merchandise purchases budget
20-19
P2
Cash Budget
Hockey Den:

Will pay a cash dividend of $3,000 in November.

Will purchase $25,000 of equipment in
December.

Has an income tax liability of $20,000 from the
previous quarter that will be paid in October.

Has a September 30 cash balance of $20,000.

Has an agreement with its bank for loans at the
end of each month to enable a minimum cash
balance of $20,000.
Continue
20-20
P2
Cash Budget
Hockey Den:

Pays interest 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.
Let’s prepare the cash budget for Hockey Den.
20-21
P2
HOCKEYFrom
DEN Cash Receipts
Cash Budget
October 2011 - December 2011
October
$ 20,000
82,000
$ 102,000
November
Budget
December
Beginning cash balance
Receipts from customers
92,000
104,000
Total cash available
Disbursements
Payments for merchandise $ 58,200
$ 49,200
$ 80,400
Sales commissions
Sales salaries
Administrative salaries
Income taxes
From Cash Disbursements
Dividends
for Purchases
Interest
Equipment purchase
Total disbursements
Preliminary balance
20-22
Exh.
20-11
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October
$ 20,000
82,000
$ 102,000
November
Beginning cash balance
Receipts from customers
92,000
Total cash available
Disbursements
Payments for merchandise $ 58,200
$ 49,200
Sales commissions
10,000
8,000
Sales salaries
2,000
2,000
Administrative salaries
Income taxes
Dividends
From Selling Expense
Interest
Equipment purchase
Total disbursements
Preliminary balance
December
104,000
$ 80,400
14,000
2,000
Budget
20-23
Exh.
20-11
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
October
$ 20,000
82,000
$ 102,000
November
December
Beginning cash balance
Because
Hockey
Den
Receipts from customers
92,000
104,000
maintains a minimum
Total cash available
cash balance of $20,000,
Disbursements
Payments for merchandise $ 58,200 the
$ 49,200
80,400
company$ must
Sales commissions
10,000
8,000 $12,800.
14,000
borrow
Sales salaries
2,000
2,000
2,000
Administrative salaries
4,500
4,500
4,500
Income taxes
20,000
Dividends
.01 × $10,000
Interest
100
Equipment purchase
Total disbursements
$ 94,800
Preliminary balance
$ 7,200
20-24
P2
Cash Budget Continued
HOCKEY DEN
Cash Budget
October 2011 - December 2011
Preliminary balance
Additional borrowing
Loan repayment
Ending cash balance
Ending loan balance
October
$ 7,200
12,800
November
December
$ 20,000
$ 22,800
Ending cash balance for October
is the beginning November balance.
20-25
Exh.
20-11
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
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
.01 × $22,800
Dividends
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.
20-26
Exh.
20-11
P2
HOCKEY DEN
Cash Budget
October 2011 - December 2011
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
20-27
P2
Cash Budget Continued
HOCKEY DEN
Cash Budget
October 2011 - December 2011
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
20-28
P2
From the Sales Budget
Exh.
20-14
HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100)
$ 320,000
Cost of goods sold (3,200 units @ $60)
192,000
Gross profit
$ 128,000
Operating expenses:
Sales commissions
$ 32,000
Sales salaries
6,000
From the Merchandise
Administrative salaries
13,500
Purchases
Budget
Equipment depreciation
4,500
Interest expense
328
56,328
Net income before taxes
$ 71,672
Income tax expense
28,669
Net income
$ 43,003
20-29
Exh.
20-14
P2
HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100)
Cost of goods sold (3,200 units @ $60)
Gross profit
Operating expenses:
Sales commissions
$ 32,000
Sales salaries
6,000
Administrative salaries
13,500
Equipment depreciation
4,500
Interest expense
328
Net income before taxes
From the Selling
Income tax expense
Expense Budget
Net income
$ 320,000
192,000
$ 128,000
56,328
$ 71,672
28,669
$ 43,003
20-30
Exh.
20-14
P2
HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100)
Cost of goods sold (3,200 units @ $60)
Gross profit
Operating expenses:
Sales commissions
$ 32,000
Sales salaries
6,000
Administrative salaries
13,500
Equipment depreciation
4,500
Interest expense
328
Net incomeFrom
before
taxes
the
General and Administrative
Income tax expense Expense Budget
Net incomeDepreciation is a non-cash expense.
$ 320,000
192,000
$ 128,000
56,328
$ 71,672
28,669
$ 43,003
20-31
Exh.
20-14
P2
HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100)
Cost of goods sold (3,200 units @ $60)
Gross profit
Operating expenses:
Sales commissions
$ 32,000
Sales salaries
6,000
Administrative salaries
13,500
Equipment depreciation
4,500
Interest expense
328
Net income before taxes
Income tax expense
From the Cash Budget
Net income
$ 320,000
192,000
$ 128,000
56,328
$ 71,672
28,669
$ 43,003
20-32
Exh.
20-14
P2
HOCKEY DEN
Budgeted Income Statement
For Three Months Ended December 31, 2011
Sales (3,200 units @ $100)
Cost of goods sold (3,200 units @ $60)
Gross profit
Operating expenses:
Sales commissions
$ 32,000
Sales salaries
6,000
Administrative salaries
13,500
Equipment depreciation
4,500
Interest expense
328
Net income before taxes
Income tax expense
$71,672 × .40
Net income
$ 320,000
192,000
$ 128,000
56,328
$ 71,672
28,669
$ 43,003
20-33
P2
Preparing a Budgeted
Balance Sheet
Hockey Den reports the following account
balances on September 30 prior to preparing its
budgeted financial statements:
 Equipment
$200,000
 Accumulated depreciation
$ 36,000
 Common stock
$150,000
 Retained earnings
$ 41,800
Let’s prepare the budgeted balance
sheet for Hockey Den.
20-34
P2
Exh.
20-15
HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash
From the Cash
Accounts receivable
Inventory
Equipment
Less accumulated depreciation
Total assets
Budget
$ 225,000
40,500
$ 20,000
84,000
48,600
184,500
$337,100
Liabilities and Equity
Liabilities
Accounts payable
Income taxes payable
Bank loan payable
Stockholders' equity
Common stock
Retained earnings
Total liabilities and equity
$ 57,000
28,669
19,628
$ 150,000
81,803
$105,297
231,803
$337,100
20-35
P2
Exh.
20-15
HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash
Accounts receivable
Inventory
Equipment From the Merchandise
Less accumulated depreciation
Purchases Budget
Total assets
$ 20,000
84,000
48,600
$ 225,000
40,500
184,500
$337,100
Liabilities and Equity
Liabilities
Accounts payable
Income taxes payable
Bank loan payable
Stockholders' equity
Common stock
Retained earnings
Total liabilities and equity
$ 57,000
28,669
19,628
$ 150,000
81,803
$105,297
231,803
$337,100
20-36
P2
Exh.
20-15
HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash
Accounts receivable
Inventory
Equipment
Less accumulated
Fromdepreciation
the Budgeted
Total assets
$ 20,000
84,000
48,600
$ 225,000
40,500
Income Statement
184,500
$337,100
Liabilities and Equity
Liabilities
Accounts payable
Income taxes payable
Bank loan payable
Stockholders' equity
Common stock
Retained earnings
Total liabilities and equity
$ 57,000
28,669
19,628
$ 150,000
81,803
$105,297
231,803
$337,100
20-37
P2
Exh.
20-15
HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash
Accounts receivable
Inventory
Equipment
Less accumulated depreciation
Total assets
$ 20,000
84,000
48,600
$ 225,000
40,500
184,500
$337,100
From theLiabilities
Cash Budget
and Equity
Liabilities
Accounts payable
Income taxes payable
Bank loan payable
Stockholders' equity
Common stock
Retained earnings
Total liabilities and equity
$ 57,000
28,669
19,628
$ 150,000
81,803
$105,297
231,803
$337,100
20-38
P2
Exh.
20-15
HOCKEY DEN
Budgeted Balance Sheet
December 31, 2011
Assets
Cash
Accounts receivable
Inventory
Equipment
Less accumulated depreciation
Total assets
$ 20,000
84,000
48,600
$ 225,000
40,500
184,500
$337,100
Beginning retained earnings
$ 41,800
Liabilities and Equity
Add
net
income
43,003
Liabilities
Deduct
dividends
Accounts
payable
$ 57,000 (3,000)
Ending
retained
$ 81,803
Income
taxes
payable earnings
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
20-39
A1
Activity-Based Budgeting
Activity-based budgeting is based on
activities rather than traditional items
such as salaries, supplies, depreciation,
and utilities.
20-40
End of Chapter 20
20-41