Chapter Nine
Profit Planning
COPYRIGHT © 2012 Nelson Education Ltd.
Learning Objectives
1. Define budgeting and discuss its role in planning, control,
and decision making
2. Define and prepare the operating budget, identify its major
components, and explain the interrelationships of its
various components
3. Define and prepare the financial budget, identify its major
components, and explain the interrelationship of its various
components
4. Describe the behavioural dimension of budgeting
9-2
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OBJECTIVE 1
Define budgeting and
discuss its role in
planning, control, and
decision making
Budgeting and Planning and
Control
Planning and Control are tied together
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
9-4
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Budgets
• Key component of planning
• Financial plans for the future
• Identify objectives and actions
needed to achieve them
Before a budget is prepared, a
strategic plan should be
developed
9-5
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Strategic Plan
Identifies strategies for future activities
and operations
Long- and short-term objectives
Objectives form the
basis of the budget
9-6
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Advantages of Budgeting
1.Forces managers to plan
2.Provides information that can be used to
improve decision making
3.Provides a standard for performance
evaluation
4.Improves communication and coordination
9-7
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Master Budget
Comprehensive financial plan for the
organization as a whole
Can be broken down into quarterly
and monthly budgets
9-8
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Continuous Budget
A moving 12-month budget
January February
December January
2011
2011
2012
2011 …………….
9-9
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Budget Committee &
Director Roles
Budget Committee:
• Reviews the budget
• Provides policy guidelines and budgetary goals
• Resolves differences that arise as the budget is prepared
• Approves the final budget
• Monitors actual performance as the year unfolds
Budget Director:
• Responsible for directing and coordinating overall
budgeting process
• Usually the controller
9-10
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Major Components of the
Master Budget
Master budget can be divided into…
• Operational budgets
– Describe the income-generating
activities of a firm
• Financial budgets
– Detain the inflows and outflows of cash
and the overall financial position
9-11
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OBJECTIVE 2
Define and prepare the
operating budget, identify its
major components, and
explain the interrelationships
of its various components
Example: Cornerstone 9-1
How to Prepare a Sales Budget
Information:
Budgeted units to be sold for each quarter:
1,000 1,200 1,500 and 2,000
Selling price is $10 per t-shirt
Required:
Prepare a sales budget for each quarter and for the
year
9-13
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Sales Budget
• Projection approved by budget
committee
– describes expected sales in units and
dollars
• Basis for all other operating and most of
the financial budgets
9-14
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Sales Budget Preparation
Steps
1. Develop a sales forecast
-
responsibility of marketing department
bottom-up approach
•
Salespeople submit sales projections
2. Forecast is reviewed by budget
committee
3. Budget committee recommends
changes prior to approval
9-15
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Moose Patties Inc.
Sales Budget
For the Year Ending December 31, 2011
Quarter
1
2
3
4
Units
1,000
1,200
1,500
2,000
Year
5,700
Unit selling
price
× $10 × $10 × $10 × $10 × $10
Budgeted
sales
$10,000 $12,000 $15,000 $20,000 $57,000
Most sales happen in summer and fall
9-16
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Production Budget
Describes how many units must be
produced in order to meet sales needs and
satisfy ending inventory requirements
Formula:
Units to
Expected
be
unit
+
=
produced
sales
Units in
Units in
ending - beginning
inventory
inventory
9-17
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Example: Cornerstone 9-2
How to Prepare the Production Budget
Information:
• Sales budget:
–
–
–
–
•
•
1st quarter = 1,000 units
2nd quarter = 1,200 units
3rd quarter = 1,500 units
4th quarter = 2,000 units
Beginning inventory is 180 t-shirts
Ending inventory:
–
–
Desired quantity = 20% of the following quarter’s sales
Sales for the first quarter of 2008 = 1,000 units
Required:
Prepare a production budget for each quarter and for the year
9-18
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Moose Patties Inc.
Production Budget
For the Year Ending December 31, 2011
Quarter
From the sales budget
1
2
3
4
Sales
Desired ending inv.
20% of second
quarter’s sales
20% × 1,200 units
Year
1,000
1,200
1,500
2,000
5,700
240
300
400
200
200
20% of third
quarter’s sales
20% × 1,500
units
20% of the next
year’s first
quarter sales
20% × 1,000
units
9-19
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Production Budget
For the Year Ending December 31, 2011
Quarter
1
2
3
4
Sales
1,000
Desired ending inv.
240
300
1,240 1,500
(180) (240)
Total needs
Less: Beg. inventory
1,200
1,500
400
1,900
(300)
1st quarter’s ending inventory is
2nd quarter’s beginning inventory
2,000
Year
5,700
200
200
2,200 5,900
(400)
(180)
Beginning inventory as
of January, 1, 2011
9-20
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Moose Patties Inc.
Production Budget
For the Year Ending December 31, 2011
Quarter
1
2
3
4
Sales
1,000
Desired ending inv.
Total needs
Less: Beg. inventory
240
300
1,240 1,500
(180) (240)
Units to be produced
1,060
1,240 needed, we already
have 180, so we need to
produce 1,060 units
1,200
1,260
Year
1,500
2,000
5,700
400
200
200
1,900
(300)
1,600
2,200 5,900
(400)
(180)
1,800
5,720
All four quarter’s production
added together
COPYRIGHT © 2012 Nelson Education Ltd.
9-21
Direct Materials Purchases
Budget
Tells the amount and cost of raw materials to be
purchased in each time period
Formula:
Direct materials needed for production
+ Desired direct materials in ending inventory
- Direct materials in beginning inventory
Direct materials to be purchased
9-22
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Example: Cornerstone 9-3
How to Prepare a Direct Materials Purchases Budget
Information:
• Production budget
– Units to be produced:
•
•
•
•
•
•
1st quarter = 1,060 units
2nd quarter = 1,260 units
3rd quarter = 1,600 units
4th quarter = 1,800 units
Total for the year = 5,720 units
Per-unit basis
– One plain t-shirt, $3 each
– 5 grams of ink, $0.20 per gram
9-23
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Example
Information continued:
• Beginning inventory
– 58 plain t-shirts and 390 grams of ink
• Ending inventory
– 10% of the following quarter’s production
– Desired ending inventory is 106 t-shirts and 530
grams of ink
Required:
Prepare a direct materials purchases budget for:
plain t-shirts and ink
9-24
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
Direct materials per unit
Production needs
Desired ending inv.
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
126
10% of next quarter’s
production needs
Each unit required
1 plain t-shirt
From production
budget
9-25
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
Direct materials per unit
Production needs
Desired ending inv.
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
126
160
180
106
106
10% of the next year’s 1st quarter
production needs
9-26
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
Direct materials per unit
Production needs
Desired ending inv.
Total needs
Less: Beg. inventory
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
126
160
180
106
106
1,186
(58)
1,420
(126)
1,780
1,906
5,826
1st quarter’s ending inventory is the 2nd
quarter’s beginning inventory
9-27
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Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
Direct materials per unit
Production needs
Desired ending inv.
Total needs
Less: Beg. inventory
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
126
160
180
106
106
1,186
(58)
1,420
(126)
1,780
(160)
1,906
(180)
5,826
(58)
Beginning of the year
inventory
9-28
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
Desired ending inv.
126
160
180
106
106
Total needs
Less: Beg. inventory
Qty to be purchased
1,186
(58)
1,420
(126)
1,780
(160)
1,906
(180)
5,826
(58)
1,128
1,294
1,620
1,726
5,768
Cost per t-shirt
× $3
Direct materials per unit
Production needs
Turning # of t-shirts into $ amount
9-29
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Plain T-Shirts
Units to be produced
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×1
×1
×1
×1
×1
1,060
1,260
1,600
1,800
5,720
Desired ending inv.
126
160
180
106
106
Total needs
Less: Beg. inventory
Qty to be purchased
1,186
(58)
1,420
(126)
1,906
(180)
5,826
(58)
1,128
1,294
1,780
(160)
1,620
1,726
5,768
Cost per t-shirt
× $3
× $3
× $3
× $3
$3,384
$3,882
$5,178
$17,304
Direct materials per unit
Production needs
Total cost
× $3
$4,860
9-30
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Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Ink
We can do the
same thing for ink
Units to be produced
Direct materials per unit
1
1,060
Quarter
2
3
1,260
1,600
4
1,800
Year
5,720
×5
It takes 5 grams of ink for each t-shirt
9-31
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Ink
Units to be produced
1
Quarter
2
3
4
Year
1,060
1,260
1,600
1,800
5,720
×5
×5
×5
×5
×5
5,300
6,300
8,000
9,000
28,600
Desired ending inv.
630
800
900
530
530
Total needs
Less: Beg. inventory
Qty to be purchased
5,930
(390)
7,100
(630)
9,530
(900)
29,130
(390)
5,540
6,470
8,900
(800)
8,100
8,630
28,740
Direct materials per unit
Production needs
Cost per t-shirt
Total cost
× $0.20 × $0.20 × $0.20 × $0.20 × $0.20
$1,108
$1,294
$1,620
$1,726
$5,748
9-32
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2011
Quarter
1
2
3
4
Total purchase cost
of t-shirts
Total purchase
cost of ink
Year
$3,384 $3,882 $4,860 $5,178 $17,304
1,108
1,294
1,620
1,726
5,748
Total direct materials
$4,492 $5,176 $6,480 $6,904 $23,052
purchase cost
9-33
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Direct Labour Budget
Shows the total direct labour hours needed
and the associated cost for the number of units
in the production budget
9-34
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Example: Cornerstone 9-4
How to Prepare a Direct Labour Budget
Information:
• Production budget
–
•
•
Units to be produced:
•
1st quarter = 1,060 units
•
2nd quarter = 1,260 units
•
3rd quarter = 1,600 units
•
4th quarter = 1,800 units
•
Total for the year – 5,720 units
It takes 0.12 hour to produce one t-shirt
Average wage cost per hour is $10
Required:
Prepare a direct labour budget
9-35
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Direct Labour Budget
For the Year Ending December 31, 2011
1
Quarter
2
3
4
Year
Units to be produced
1,060
1,260
1,600
1,800
5,720
Direct labour per unit
× 0.12
× 0.12
× 0.12
× 0.12
× 0.12
Total hours needed
127.2
151.2
192
216
686.4
Avg. wage per hour
× $10
× $10
× $10
× $10
× $10
Total direct labour cost
$1,272
$1,512
$1,920
$2,160
$6,864
9-36
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Overhead Budget
Shows the expected cost of all
production costs other than direct
materials and direct labour
Overhead costs are separated into
fixed and variable costs and a
variable rate is calculated
9-37
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Example: Cornerstone 9-5
How to Prepare an Overhead Budget
Information:
• Direct labour budget
–
Budgeted direct labour hours:
•
•
•
•
•
1st quarter = 127.2 hours
2nd quarter = 151.2 hours
3rd quarter = 192 hours
4th quarter = 216 hours
Total for the year = 686.4 hours
• Variable overhead rate is $5 per direct labour hour
• Fixed overhead is budgeted at $1,645 per quarter
Required:
Prepare an overhead budget
9-38
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Moose Patties Inc.
Overhead Budget
For the Year Ending December 31, 2011
Moose Patties bases
Quarter
its variable overhead
on direct labour hours
1
2
3
4
Budgeted direct
127.2
labour hours
Variable overhead rate x $5
Variable overhead
151.2
x $5
$ 636 $ 756
192
x $5
216
x $5
Year
686.4
x $5
$ 960 $1,080 $3,432
Budgeted fixed
overhead
Add in the fixed overhead
of $1,645 per quarter
9-39
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Moose Patties Inc.
Overhead Budget
For the Year Ending December 31, 2011
Quarter
1
2
3
4
Budgeted direct
127.2
labour hours
Variable overhead rate x $5
151.2
x $5
Variable overhead
$ 636 $ 756
Budgeted fixed
overhead
1,645
Total overhead
1,645
192
x $5
216
x $5
Year
686.4
x $5
$ 960 $1,080 $3,432
1,645
1,645
6,580
$2,281 $2,401 $2,605 $2,725 $10,012
9-40
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Ending Finished Goods
Inventory Budget
• Supplies information needed for the
balance sheet
• Important input for the preparation of the
cost of goods sold budget
9-41
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Example: Cornerstone 9-6
How to Prepare an Ending Finished Goods Inventory Budget
Information:
• Each shirt requires one plain t-shirt and 5 grams of ink
• Each t-shirt costs $3.00 and ink costs $0.20 per gram
• Takes 0.12 hours to produce one t-shirt
• Employees are paid an average of $10 per hour
• Variable overhead rate is $5 per direct labour hour
• Fixed overhead is budgeted at $1,645 per quarter
Required:
Prepare an ending finished goods inventory budget
9-42
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Moose Patties Inc.
Ending Finished Goods Inventory Budget
For the Year Ending December 31, 2011
Unit cost computation:
Direct materials
Direct labour
$4.00
1.20
T-shirt + Ink =
$3.00 + (5 grams @ $0.20) = $4.00
0.12 hours of direct labour × $10 per hour
9-43
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Ending Finished Goods Inventory Budget
For the Year Ending December 31, 2011
Unit cost computation:
Direct materials
$4.00
1.20
Direct labour
Overhead:
Variable
Fixed
$5 per direct labour hour
× 0.12 hours
0.60
1.15
Budgeted fixed overhead of
$6,580 / 686.4 budgeted direct labour hours
= $9.59 per hour
$9.59 × 0.12 hours
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Ending Finished Goods Inventory Budget
For the Year Ending December 31, 2011
Unit cost computation:
Direct materials
Direct labour
Overhead:
Variable
Fixed
Total unit cost
200 shirts × $6.95 = $1,390
COPYRIGHT © 2012 Nelson Education Ltd.
$4.00
1.20
0.60
1.15
$6.95
9-45
Example: Cornerstone 9-7
HOW TO Prepare a Cost of Goods Sold Budget
Information:
• Direct materials:
– T-shirts = $3 each × 5,720 shirts produced
– Ink = $0.20 per gram × 5 grams per shirt × 5,720 shirts produced
•
•
•
Direct labour = $10 per hour x 0.12 hours per shirt ×
5,720 shirts produced
Variable overhead = $5 per direct labour hour × 0.12
hours per shirt x 5,720 shirts
Fixed overhead = $1,645 per quarter × 4 quarters
9-46
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2011
Direct materials used
Direct labour used
$22,880
6,864
(5720 × $3 per t-shirt) +
(5 grams ink × $0.20 per gram × 5720)
5720 shirts × 0.12 hours per shirt × $10 per hour
9-47
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2011
Direct materials used
Direct labour used
Variable + Fixed
$22,880
6,864
10,012
Overhead
Budgeted manufacturing costs $39,756
Beginning finished goods
1,251
180 units @ $6.95 per unit cost
9-48
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2011
Direct materials used
Direct labour used
$22,880
6,864
10,012
Overhead
Budgeted manufacturing costs $39,756
Beginning finished goods
1,251
Goods available for sale
$41,007
Less: Ending finished goods
(1,390)
Budgeted cost of goods sold
$39,617
9-49
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Selling and Administrative
Expenses Budget
Outlines planned expenditures for
nonmanufacturing activities
Selling and administrative expenses
can be broken down into fixed and
variable components
9-50
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 9-8
How to Prepare a Selling and Administrative Expenses Budget
Information:
• Sales budget 1,000; 1,200; 1,500; and 2,000 units sold in
quarters 1 through 4, respectively
• Variable expenses = 0.10 per unit sold
• Fixed expenses:
–
–
–
–
–
Salaries average $1,420 per quarter
Utilities = $50 per quarter
Depreciation = $150 per quarter
Advertising = $100; $200; $300 and $500 for quarters 1 through 4
Insurance is $500 and is paid in the third quarter
9-51
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Selling and Administrative Expense Budget
For the Year Ending December 31, 2011
1
Planned sales in units
Variable expenses*
Total Variable exp.
Fixed expenses:
Salaries
Utilities
Advertising
Depreciation
Insurance
Total fixed exp.
Total Selling & Admin
Quarter
2
3
4
Year
1,000
1,200
1,500
× $0.10 × $0.10 × $0.10
2,000
× $0.10
5,700
× $0.10
$ 100
$ 120
$ 150
$ 200
$ 570
$1,420
50
100
150
----$1,720
$1,820
$1,420
50
200
150
----$1,820
$1,940
$1,420
50
300
$1,420
50
500
150
----$2,120
$2,320
$5,680
200
1,100
600
500
$8,080
$8,650
150
500
$2,420
$2,570
9-52
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Example: Cornerstone 9-9
How to Prepare a Budgeted Income Statement
Information:
• Sales budget, $57,000
• Cost of goods sold, $39,617
• Selling and administrative expenses, $8,650 (600 is
depreciation)
• Income tax rate, 40%
• Interest expense, $60
Required:
Prepare a budgeted income statement
9-53
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Moose Patties Inc.
Budgeted Income Statement
For the Year Ending December 31, 2011
Sales
Less: Cost of goods sold
Gross margin
Less: Selling and admin. exp.
Operating income
Less: Interest expense
Income before taxes
Less: Income taxes
Net income
$57,000
(39,617)
$17,383
(8,650)
$8,733
(60)
$8,673
(3,469)
$5,204
Income before taxes of $8,673 × 40% tax rate
9-54
COPYRIGHT © 2012 Nelson Education Ltd.
OBJECTIVE 3
Define and prepare the
financial budget, identify its
major components, and
explain the interrelationships
of its various components
Preparing the Financial
Budget
The usual financial budgets prepared are:
• Cash budget
• Budgeted balance sheet
• Budget for capital expenditures
9-56
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 9-10
How to Prepare an Accounts Receivable Aging Schedule
Information:
• 25% of total sales are cash
• 75% of total are on credit
–
•
•
90% paid during the quarter of sale, 10% paid the following quarter
2011 Sales:
(Q1 $10,000; Q2 $12,000; Q3 $15,000; Q4 $20,000)
Balance in Accounts Receivable at end of 2010: $1,350
–
Collected in cash during first quarter of 2011
Required:
• Calculate cash sales expected in each quarter of 2011
• Prepare a schedule showing cash receipts from sales
expected in each quarter of 2011
9-57
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Moose Patties Inc.
Cash Receipts from Credit Sales
For the Year Ending December 31, 2011
Quarter
1
2
3
Cash sales
$2,500
Received on account from:
Quarter 4, 2010
4
1st quarter sales × 25%
$10,000 × 25%
1,350
10% of 4th quarter 2010’s credit sales will
be collected in the 1st quarter of 2011
9-58
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Moose Patties Inc.
Cash Receipts from Credit Sales
For the Year Ending December 31, 2011
Quarter
1
2
3
Cash sales
4
$2,500
Received on account from:
Quarter 4, 2010
Quarter 1, 2011
1,350
6,750
90% of this quarter’s credit sales
9-59
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Moose Patties Inc.
Cash Receipts from Credit Sales
For the Year Ending December 31, 2011
Quarter
1
2
3
Cash sales
$2,500 $3,000
Received on account from:
Quarter 4, 2010
Quarter 1, 2011
Quarter 2, 2011
Quarter 3, 2011
Quarter 4, 2011
1,350
6,750
Total cash receipts
$10,600
750
8,100
COPYRIGHT © 2012 Nelson Education Ltd.
4
25% of 2nd
quarter’s sales
Remainder of 1st
quarter’s credit
sales are
collected along
with 90% of 2nd
quarter’s sales
Moose Patties Inc.
Cash Receipts from Credit Sales
For the Year Ending December 31, 2011
Quarter
1
2
3
Cash sales
$2,500 $3,000
$3,750
4
$5,000
Received on account from:
Quarter 4, 2010
Quarter 1, 2011
Quarter 2, 2011
Quarter 3, 2011
Quarter 4, 2011
Total cash receipts
1,350
6,750
750
8,100
900
10,125
1,125
13,500
$10,600 $11,850 $14,775 $19,625
9-61
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 9-11
How to Determine Cash Payments on Accounts Payable
Information:
•
All raw materials purchases on account
–
–
•
•
80% paid for in quarter of purchase
20% paid for in the quarter of purchase
4th quarter 2010 purchases; $5,000
Expected purchases for 2011:
–
–
–
–
Quarter 1; $4,492
Quarter 2; $5,176
Quarter 3; $6,480
Quarter 4; $6,904
Required:
Prepare a schedule showing anticipated payments for accounts
payable for materials
COPYRIGHT © 2012 Nelson Education Ltd.
9-62
Moose Patties Inc.
Cash Payments on Accounts Payable
For the Year Ending December 31, 2011
Quarter
1
2
3
Source
Quarter 4, 2010
1,000
Quarter 1, 2011
3,594
4
20% × $5,000
80% × $4,492
9-63
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Payments on Accounts Payable
For the Year Ending December 31, 2011
Quarter
1
2
3
Source
Quarter 4, 2010
1,000
Quarter 1, 2011
3,594
Quarter 2, 2011
898
4,141
1,035
5,184
Quarter 3, 2011
1,296
5,523
Quarter 4, 2011
Total cash payments
4
$4,594 $5,039
$6,219
$6,819
9-64
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 9-12
How to Prepare a Cash Budget
Information:
All previous budgets and the following specific details:
1. $1,000 minimum cash balance is required for end of each
quarter. Money can be borrowed and repaid in multiples
of $1,000. Interest is 12% per year. Interest payments
are made only for amount of principal being repaid. All
borrowing takes place at beginning of a quarter, and
repayment takes place at quarter end
2. Budgeted per quarter depreciation is $540 for overhead
and $150 for selling and administrative expenses
(Cornerstones 9-5 and 9-8)
9-65
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Information continued:
3. Capital budget for 2011 revealed plans to purchase
additional screen printing equipment. Cash outlay for
equipment, $6,500, will take place in Q1. Acquisition of
equipment is to be financed with operating cash,
supplementing it with short-term loans as necessary
4. Corporate income taxes are $3,469 and will be paid at end
of fourth quarter (Cornerstone 9-9)
5. Beginning cash balance equals $5,200
6. All amounts in budget are rounded to the nearest dollar
Required:
Prepare a cash budget for Moose Patties
9-66
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
$ 5,200
Beginning cash bal.
Cash sales and
collections on account: 10,600
Quarter
2
3
4
Year
Calculated in Cornerstone 9-10
Total cash available $15,800
Less disbursements:
Payments for:
$ (4,594)
Raw materials
(1,272)
Direct labour
Calculated in Cornerstone 9-11
Calculated in Cornerstone 9-4
COPYRIGHT © 2012 Nelson Education Ltd.
9-67
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
$ 5,200
Beginning cash bal.
Cash sales and
collections on account: 10,600
Total cash available $15,800
Less disbursements:
Payments for:
$ (4,594)
Raw materials
(1,272)
Direct labour
(1,741)
Overhead
Selling and
(1,670)
administrative
Quarter
2
3
4
Year
Budgeted overhead
(Cornerstone 9-5) minus $540
depreciation per quarter
Depreciation is removed
because it does not involve a
cash disbursement
Budgeted selling and
administrative expenses
(Cornerstone 9-8) minus $150
depreciation per quarter
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget continued
1
Selling and
(1,670)
administrative
Income taxes
---(6,500)
Equipment
Total disbursements $(15,777)
Excess of cash
available over needs $
23
Quarter
2
3
4
Year
Income taxes will be paid only in
the 4th quarter. Equipment will be
purchased only in the 1st quarter
Cash available – Cash needs
9-69
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget continued
1
Selling and
(1,670)
administrative
Income taxes
---(6,500)
Equipment
Total disbursements $(15,777)
Excess of cash
available over needs $
23
Financing:
1,000
Borrowings
---Repayments
Quarter
2
3
4
Year
Moose Patties Inc. must
borrow $1,000 to meet their
minimum ending cash
balance
9-70
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget concluded
1
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash
balance
Quarter
2
3
4
Year
1,000
------$1,000
$1,023
9-71
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
Quarter
2
3
4
Year
$ 5,200 $ 1,023
Beginning cash bal.
Cash sales and
collections on account: 10,600
1st quarter’s ending cash
Total cash available $15,800
balance is the 2nd quarter’s
beginning balance
Less disbursements:
Payments for:
$ (4,594)
Raw materials
(1,272)
Direct labour
(1,741)
Overhead
Selling and
(1,670)
administrative
9-72
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
Quarter
2
3
4
Year
$ 5,200 $ 1,023
Beginning cash bal.
Cash sales and
collections on account: 10,600 11,850
Total cash available $15,800 $12,873
Less disbursements:
Payments for:
$ (4,594) $ (5,039)
Raw materials
(1,272) (1,512)
Direct labour
(1,741) (1,861)
Overhead
Selling and
(1,670) (1,790)
administrative
COPYRIGHT © 2012 Nelson Education Ltd.
9-73
Cash Budget continued
1
Quarter
2
3
Selling and
(1,670) (1,790)
administrative
Income taxes
---------(6,500)
Equipment
Total disbursements $(15,777) $(10,202)
Excess of cash
available over needs $
23 $ 2,671
Financing:
---1,000
Borrowings
---(1,000)
Repayments
4
Year
Excess cash is used to
repay $1,000 borrowed
at end of Q1
9-74
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget concluded
1
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash
balance
Quarter
2
3
1,000
-------
---(1,000)
$1,000
(1,060)
$1,023
$1,611
4
Year
(60)
9-75
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
Quarter
2
3
4
Year
$ 5,200 $ 1,023 $ 1,611
Beginning cash bal.
Cash sales and
collections on account: 10,600 11,850 14,775
Total cash available $15,800 $12,873 $16,386
Less disbursements:
Payments for:
$ (4,594) $ (5,039) $(6,219)
Raw materials
(1,272) (1,512) (1,920)
Direct labour
(1,741) (1,861) (2,065)
Overhead
Selling and
(1,670) (1,790) (2,420)
administrative
COPYRIGHT © 2012 Nelson Education Ltd.
9-76
Cash Budget continued
1
Quarter
2
3
Selling and
(1,670) (1,790) (2,420)
administrative
Income taxes
---------------(6,500)
Equipment
Total disbursements $(15,777) $(10,202) $(12,624)
Excess of cash
available over needs $
23 $ 2,671 $ 3,762
Financing:
------1,000
Borrowings
------(1,000)
Repayments
4
Year
There is
enough
cash, so
none is
borrowed
9-77
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget concluded
1
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash
balance
Quarter
2
3
1,000
-------
---(1,000)
(60)
----------
$1,000
(1,060)
----
$1,023
$1,611
4
Year
$3,762
9-78
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
1
Quarter
2
3
4
Year
$ 5,200 $ 1,023 $ 1,611 $ 3,762
Beginning cash bal.
Cash sales and
collections on account: 10,600 11,850 14,775 19,625
Total cash available $15,800 $12,873 $16,386 $23,387
Less disbursements:
Payments for:
$ (4,594) $ (5,039) $(6,219)
Raw materials
(1,272) (1,512) (1,920)
Direct labour
(1,741) (1,861) (2,065)
Overhead
Selling and
(1,670) (1,790) (2,420)
administrative
COPYRIGHT © 2012 Nelson Education Ltd.
$(6,819)
(2,160)
(2,185)
(2,170)
9-79
Cash Budget continued
1
Quarter
2
3
4
Year
Selling and
(1,670) (1,790) (2,420) (2,170)
administrative
Income taxes
(3,469)
---------------(6,500)
---Equipment
Total disbursements $(15,777) $(10,202) $(12,624) $(16,803)
Excess of cash
available over needs $
23 $ 2,671 $ 3,762 $ 6,584
Financing:
---------1,000
Borrowings
---------(1,000)
Repayments
9-80
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget concluded
1
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash
balance
1,000
------$1,000
$1,023
Quarter
2
3
---(1,000)
4
(60)
----------
----------
(1,060)
----
----
$1,611
$3,762
Year
$6,584
9-81
COPYRIGHT © 2012 Nelson Education Ltd.
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
Quarter
2
3
4
Year
$ 5,200 $ 1,023 $ 1,611 $ 3,762
Beginning cash bal.
Cash sales and
collections on account: 10,600 11,850 14,775 19,625
$ 5,200
1
Total cash available $15,800 $12,873 $16,386 $23,387
Less disbursements:
Payments for:
$ (4,594) $ (5,039) $(6,219)
Raw materials
(1,272) (1,512) (1,920)
Direct labour
(1,741) (1,861) (2,065)
Overhead
Selling and
(1,670) (1,790) (2,420)
administrative
COPYRIGHT © 2012 Nelson Education Ltd.
$(6,819)
(2,160)
(2,185)
(2,170)
The
year
began
with
$5,200
in cash
9-82
Moose Patties Inc.
Cash Budget
For the Year Ending December 31, 2011
Quarter
2
3
4
Year
$ 5,200 $ 1,023 $ 1,611 $ 3,762
Beginning cash bal.
Cash sales and
collections on account: 10,600 11,850 14,775 19,625
$ 5,200
1
56,850
Total cash available $15,800 $12,873 $16,386 $23,387 $62,050
Less disbursements:
Payments for:
$ (4,594) $ (5,039) $(6,219)
Raw materials
(1,272) (1,512) (1,920)
Direct labour
(1,741) (1,861) (2,065)
Overhead
Selling and
(1,670) (1,790) (2,420)
administrative
COPYRIGHT © 2012 Nelson Education Ltd.
$(6,819) $(22,671)
(2,160) (6,864)
(2,185) (7,852)
(2,170)
(8,050)
9-83
Cash Budget continued
1
Quarter
2
3
4
Year
Selling and
(1,670) (1,790) (2,420) (2,170) (8,050)
administrative
Income taxes
(3,469) (3,469)
---------------(6,500)
---Equipment
(6,500)
Total disbursements (15,777) (10,202) (12,624) (16,803) (55,406)
Excess of cash
available over needs $
23 $ 2,671 $ 3,762 $ 6,584 $ 6,644
Financing:
---------1,000
1,000
Borrowings
---------(1,000)
(1,000)
Repayments
During the year $1,000 is borrowed and repaid
COPYRIGHT © 2012 Nelson Education Ltd.
Cash Budget concluded
1
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash
balance
Quarter
2
3
1,000
-------
---(1,000)
(60)
----------
$1,000
(1,060)
----
$1,023
$1,611
$3,762
4
Year
----------
1,000
(1,000)
----
(60)
$6,584
(60)
$6,584
9-85
COPYRIGHT © 2012 Nelson Education Ltd.
Budgeted Balance Sheet
Information: Last year’s balance sheet:
Moose Patties Inc.
Balance Sheet
December 31, 2010
Assets
Current assets:
Cash
Accounts receivable
Raw materials inventory
Finished goods inventory
Total current assets
$ 5,200
1,350
252
1,251
$ 8,053
9-86
COPYRIGHT © 2012 Nelson Education Ltd.
Example
Property, plant and equipment (PP&E):
Land
$ 1,100
30,000
Building and equipment
Accumulated depreciation
(5,000)
Total PP&E
Total assets
Liabilities and Owner’s Equity:
Current liabilities:
Accounts payable
Owner’s equity:
Retained earnings
33,153
Total owner’s equity
Total liabilities and owner’s equity
COPYRIGHT © 2012 Nelson Education Ltd.
Using this balance sheet
and the budgets, we can
prepare the December
31, 2011 balance sheet
26,100
$34,153
$1,000
33,153
$34,153
9-87
Moose Patties Inc.
Balance Sheet
December 31, 2011
Assets
Current assets:
Cash
Accounts receivable
Raw materials inventory
$ 6,584
1,500
424
1,390
Finished goods inventory
Total current assets
Property, plant and equipment (PP&E):
Land
$ 1,100
Building and equipment
36,500
Accumulated depreciation
Total PP&E
(7,760)
COPYRIGHT © 2012 Nelson Education Ltd.
Ending cash
balance from cash
budget
$ 9,898
2010 balance
$5,000 + $2,760
2011 depreciation
29,840
9-88
Balance Sheet continued
Total PP&E
Total assets
Liabilities and Owner’s Equity:
Current liabilities:
Accounts payable
Owner’s equity:
Retained earnings
29,840
$39,738
$1,381
38,357
2010 balance $33,153 + $5,204
2011’s projected net income
9-89
COPYRIGHT © 2012 Nelson Education Ltd.
Balance Sheet continued
Total PP&E
Total assets
Liabilities and Owner’s Equity:
Current liabilities:
Accounts payable
Owner’s equity:
Retained earnings
Total liabilities and owner’s equity
29,840
$39,738
$1,381
38,557
$39,738
9-90
COPYRIGHT © 2012 Nelson Education Ltd.