Chapter 9
Financial Planning and
Analysis: The Master
Budget
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McGraw-Hill/Irwin
9-1
Learning Objective 9-1 – Explain the relationship between
financial planning and analysis and the master budget.
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9-2
9-2
Financial Planning and
Analysis (FP&A) Systems
A financial planning and
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.
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9-3
Learning Objective 9-2 – List and explain five purposes of
budgeting.
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9-4
9-4
Purposes of Budgeting Systems
Budget
A detailed plan, expressed
in quantitative terms, that
specifies how resources
will be acquired and used
during a specified period
of time.
1. Planning
2. Facilitating
Communication and
Coordination
3. Allocating Resources
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives
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9-5
Types of Budgets
Detail
Budget
Detail
Budget
Covering all
phases of
a company’s
operations.
Production
Master
Budget
Detail
Budget
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9-6
Pro-forma Financial Statements
Income
Statement
Budgeted
Financial
Statements
Balance
Sheet
Statement of
Cash Flows
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9-7
Long Range Budgets
Capital budgets with acquisitions
that normally cover several years.
Financial budgets with financial
resource acquisitions.
Long Range Budgets
2017
Continuous or
Rolling Budget
2018
2019
2020
This budget is usually a twelve-month
budget that rolls forward one month
as the current month is completed.
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9-8
Learning Objective 9-3 – Describe the similarities and
differences in the operational budgets prepared by manufacturers,
service-industry firms, merchandisers, and nonprofit organizations.
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9-9
9-9
Components of a Master Budget
Sales of Services or Goods
Ending
Inventory
Budget
Production
Budget
Work in Process
and Finished
Goods
Ending
Inventory
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Overhead
Budget
Direct Materials
Cash Budget
Budgeted Statement
of Cash Flows
Selling and
Administrative
Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
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9-10
Financing Budgets 1/2
Cash Receipts Budget
Provides information about cash
inflows. Considers things such as
the timing of sales and collections,
collection patterns, and sales that
will never be collected.
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9-11
Financing Budgets 2/2
Cash Disbursements
Budget
Portrays spending plans based on
other budgets prepared
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9-12
Learning Objective 9-4 – Explain the concept of activitybased budgeting and the logic it brings to the budgeting
process.
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9-13
Activity-Based Costing (ABC) versus
Activity-Based Budgeting (ABB)
Resources
Resources
Activity-Based
Costing (ABC)
Activities
Cost objects:
products and services
produced, and
customers served.
Activities
Activity-Based
Budgeting (ABB)
Forecast of products
and services to be
produced and
customers served.
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9-14
Learning Objectives 9-5 & 9-6 – Prepare each of the budget
schedules that make up the master budget in a nonmanufacturing firm, and that
exist in manufacturing budgets as well (LO 9-5) . Prepare the additional master
budget schedules required by a manufacturing firm (LO 9-6).
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9-15
9-15
Sales Budget 1/2
 Breakers, Inc. is preparing budgets for the quarter ending June
30.
 Budgeted sales for the next five months are:
 April
 May
 June
 July
 August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
 The selling price is $10 per unit.
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9-16
Sales Budget 2/2
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
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9-17
Production Budget 1/2
The management of Breakers, Inc. wants ending
inventory to be equal to 20% of the following
month’s budgeted sales in units.
On March 31, 4,000 units were on hand.
Let’s prepare the production budget.
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9-18
From
sales
budget
Sales in units
Add: desired
end. inventory
Total needed
Less: beg.
inventory
Units to be
produced
Production Budget 2/2
April
20,000
10,000
30,000
May sales
50,000 units
Desired percent
20%
May
June
Quarter
Desired inventory
10,000 units
50,000
30,000
100,000
Ending inventory becomes
6,000
5,000
5,000
beginning inventory the
56,000
35,000
105,000
next month
4,000
10,000
6,000
4,000
26,000
46,000
29,000
101,000
March 31
ending inventory
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9-19
Direct-Material Budget 1/3
 At Breakers, five pounds of material are required per unit of
product.
 Management wants materials on hand at the end of each month
equal to 10% of the following month’s production.
 On March 31, 13,000 pounds of material are on hand.
Material cost $.40 per pound.
Let’s prepare the direct materials budget.
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9-20
From our
production
budget
Direct-Material Budget 2/3
Production in units
Materials per unit
Production needs
Add: desired
ending inventory
Total needed
Less: beginning
inventory
Materials to be
purchased
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
Quarter
101,000
5
505,000
23,000
153,000
14,500
244,500
11,500
156,500
11,500
516,500
13,000
23,000
14,500
13,000
140,000
221,500
142,000
503,500
10% of the following
month’s production
March 31
inventory
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9-21
Direct-Material Budget 3/3
July Production
April 25,000 May
Sales in units
Add: Production
desired ending
inventory26,000 3,000 46,000
in units
TotalMaterials
units needed
per unit
528,000
5
Less:Production
beginning inventory
needs
130,000 5,000 230,000
Production in units
23,000
June
29,000
5
145,000
Add: desired
ending inventory
23,000
14,500
11,500
Total needed
153,000
244,500
156,500
Less: beginning
June
Ending Inventory
inventory
13,000
23,000
14,500
July
in units
23,000
Materials
toproduction
be
Materials per unit
5142,000
purchased
140,000
221,500
Total units needed
115,000
Inventory percentage
10%
June desired ending inventory
11,500
Quarter
101,000
5
505,000
11,500
516,500
13,000
503,500
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9-22
Direct-Labor Budget 1/2
 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.
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9-23
Direct-Labor Budget 2/2
April
26,000
0.10
2,600
Production in units
Direct labor hours
Labor hours required
Guaranteed labor
hours
3,000
Labor hours paid
3,000
Wage rate
$
8
Total direct labot cost $ 24,000
From our
production
budget
May
46,000
0.10
4,600
June
29,000
0.10
2,900
Quarter
101,000
0.10
10,100
3,000
4,600
$
8
$ 36,800
3,000
3,000
$
8
$ 24,000
10,600
$
8
$ 84,800
This is the greater of
labor hours required or
labor hours guaranteed.
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9-24
Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.
April
Indirect labor
Indirect material
Utilities
Rent
Insurance
Maintenance
$
$
17,500
7,000
4,200
13,300
5,800
8,200
56,000
May
$
$
26,500
12,600
8,400
13,300
5,800
9,400
76,000
June
$
$
17,900
8,600
5,200
13,300
5,800
8,200
59,000
Quarter
$
61,900
28,200
17,800
39,900
17,400
25,800
$ 191,000
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9-25
Selling, General, and Administrative
Expense Budget 1/2
 At Breakers, variable selling and administrative
expenses are $0.50 per unit sold.
 Fixed selling and administrative expenses are $70,000
per month.
 The $70,000 fixed expenses include $10,000 in
depreciation expense that does not require a cash
outflow for the month.
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9-26
Selling, General and Admin. Expense Budget 2/2
Sales in units
Variable S&A rate
Variable expense
Fixed S&A
expense
Total expense
Less: noncash
expenses
Cash
disbursements
April
20,000
$ 0.50
$ 10,000
May
50,000
$ 0.50
$ 25,000
June
30,000
$ 0.50
$ 15,000
Quarter
100,000
$
0.50
$ 50,000
70,000
80,000
70,000
95,000
70,000
85,000
210,000
260,000
10,000
10,000
10,000
30,000
$ 70,000
$ 85,000
$ 75,000
$ 230,000
From our
Sales budget
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9-27
Cash Receipts Budget 1/2
 At Breakers, all sales are on account.
 The company’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following the sale,
5% is uncollected.
 The March 31 accounts receivable balance of $30,000 will be
collected in full.
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9-28
Cash Receipts Budget 2/2
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 170,000
$ 400,000
Quarter
$ 30,000
$ 125,000
350,000
125,000
210,000
$ 335,000
210,000
$ 905,000
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9-29
Cash Disbursement Budget 1/3
 Breakers pays $0.40 per pound for its materials.
 One-half of a month’s purchases are paid for in the
month of purchase; the other half is paid in the
following month.
 No discounts are available.
 The March 31 accounts payable balance is $12,000.
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9-30
Cash Disbursement Budget 2/3
Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash payments
for materials
April
$ 12,000
May
June
28,000
28,000
28,000
$ 28,000
44,300
$ 40,000
$ 72,300
Quarter
$ 12,000
$ 44,300
44,300
44,300
28,400
28,400
$ 72,700
$ 185,000
140,000 lbs. × $.40/lb. = $56,000
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9-31
Cash Disbursement Budget 3/3
Breakers:
 Maintains a 12% open line of credit for $75,000.
 Maintains a minimum cash balance of $30,000.
 Borrows and repays loans on the last day of the month.
 Pays a cash dividend of $25,000 in April.
 Purchases $143,700 of equipment in May and
$48,300 in June paid in cash.
 Has an April 1 cash balance of $40,000.
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9-32
From our Cash
Receipts Budget
Cash Budget 1/5
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
May
June
Quarter
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.
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9-33
Cash Budget 2/5
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
May
$ 30,000
400,000
430,000
72,300
36,800
76,000
85,000
143,700
413,800
June
Quarter
Breakers must
borrow an
additional $13,800
to maintain a
cash balance
of $30,000.
$ 16,200
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9-34
Cash Budget 3/5
(Collections and Disbursements)
April
May
Beginning
$ 40,000
At thecash
endbalance
of June,
Breakers$ 30,000
Add: cash collections
has enough cash170,000
to repay 400,000
Total cash available
210,000
430,000
the $48,800 loan plus interest
Less: disbursements
at 12%. 40,000
Materials
72,300
Direct labor
24,000
36,800
Mfg. overhead
56,000
76,000
Selling and admin.
70,000
85,000
Equipment purchase
143,700
Dividends
25,000
Total disbursements
215,000
413,800
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
$ 16,200
June
$ 30,000
335,000
365,000
Quarter
72,700
24,000
59,000
75,000
48,300
279,000
$ 86,000
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9-35
Cash Budget 4/5
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)
May
$ 30,000
400,000
430,000
June
$ 30,000
335,000
365,000
Quarter
$ 40,000
905,000
945,000
72,300
36,800
76,000
85,000
143,700
413,800
72,700
24,000
59,000
75,000
48,300
279,000
185,000
84,800
191,000
230,000
192,000
25,000
907,800
$ 16,200
$ 86,000
$ 37,200
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9-36
Ending cash
balance for April
is the beginning
May balance.
Excess (deficiency) of
Cash available over
disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance
Interest
Rate
12% / 12 = 1%
12% / 12 = 1%
Cash Budget 5/5
(Collections and Disbursements)
April
May
June
Quarter
$ (5,000)
$ 16,200
$ 86,000
$ 37,200
35,000
35,000
$ 30,000
13,800
13,800
$ 30,000
(48,800)
(838)
(49,638)
$ 36,362
48,800
(48,800)
(838)
(838)
$ 36,362
Borrowing
$35,000
$13,800
Monthly
Interest Rate
×
1%
×
1%
×
×
Months
Outstanding
2
1
Interest
Expense
=
$700
=
138
$
838
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9-37
Cost of Goods Manufactured
April
Direct material:
Beg.material inventory
$ 5,200
Add: Materials purchases
56,000
Material available for use
61,200
Deduct: End. material inventory
9,200
Direct material used
52,000
Direct labor
24,000
Manufacturing overhead
56,000
Total manufacturing costs
132,000
Add: Beg. Work-in-process inventory
3,800
Subtotal
135,800
Deduct: End.Work-in-process inventory
16,200
Cost of goods manufactured
$ 119,600
May
$
9,200
88,600
97,800
5,800
92,000
36,800
76,000
204,800
16,200
221,000
9,400
$ 211,600
June
$
5,800
56,800
62,600
4,600
58,000
24,000
59,000
141,000
9,400
150,400
17,000
$ 133,400
Quarter
$
5,200
201,400
206,600
4,600
202,000
84,800
191,000
477,800
3,800
481,600
17,000
$ 464,600
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9-38
Cost of Goods Sold
Cost of goods manufactured
Add: Beg. finished-goods inventory
Cost of goods available for sale
Deduct: End. finished-goods inventory
Cost of goods sold
April
May
$ 119,600 $ 211,600 $
18,400
46,000
138,000
257,600
46,000
27,600
$ 92,000 $ 230,000 $
June
Quarter
133,400 $ 464,600
27,600
18,400
161,000
483,000
23,000
23,000
138,000 $ 460,000
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9-39
Budgeted Income Statement
Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
Revenue (100,000 × $10)
Cost of goods sold
Gross margin
Operating expenses:
Selling and admin. expenses
Interest expense
Total operating expenses
Net income
$ 1,000,000
460,000
540,000
$ 260,000
838
$
260,838
279,162
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9-40
Budgeted Statement of Cash Flows
April
May
Cash flows from operating activities:
Cash receipts from customers
$ 170,000 $
Cash payments:
To suppliers of raw material
(40,000)
For direct labor
(24,000)
For manufacturing-overhead expenditures
(56,000)
For selling and administrative expenses
(70,000)
For interest
Total cash payments
(190,000)
Net cash flow from operating activities
Cash flows from investing activities:
Purchase of equipment
$
Net cash used by investing activities
Cash flows from financing activities:
Payment of dividends
Principle of bank loan
Repayment of bank loan
$
Net cash provided by financing activities
$
Net increase in cash
Balance in cash, beginning
Balance in cash. end of month
(20,000) $
-
Quarter
400,000 $
335,000 $
(72,300)
(36,800)
(76,000)
(85,000)
-
(72,700)
(24,000)
(59,000)
(75,000)
(838)
(185,000)
(84,800)
(191,000)
(230,000)
(838)
(270,100)
(231,538)
(691,638)
129,900 $
(143,700)
- $ (143,700) $
(25,000)
35,000
-
June
103,462 $
905,000
213,362
(48,300)
(192,000)
(48,300) $
(192,000)
13,800
-
(48,800)
(25,000)
48,800
(48,800)
10,000 $
13,800 $
(48,800) $
(25,000)
$
(10,000) $
40,000
- $
30,000
6,362 $
30,000
(3,638)
40,000
$
30,000 $
30,000 $
36,362 $
36,362
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9-41
Budgeted Balance Sheet 1/2
Breakers reports the following account balances on
March 31 prior to preparing its budgeted financial
statements for June 30:
• Land - $50,000
• Building (net) - $148,000
• Common stock - $217,000
• Retained earnings - $46,400
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9-42
Budgeted Balance Sheet 2/2
25%of June
sales of
$300,000
11,500 lbs. at
$.40 per lb.
5,000 units at
$4.60 per unit
50% of June
purchases
of $56,800
Beginning balance
Add: net income
Deduct: dividends
Ending balance
$ 46,400
279,162
(25,000)
$300,562
Breakers, Inc.
Budgeted Balance Sheet
June 30
Current assets
Cash
Accounts receivable
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Total current assets
Property and equipment
Land
Building
Equipment
Total property and equipment
Total assets
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
$
$
$
$
36,362
75,000
4,600
17,000
23,000
155,962
50,000
148,000
192,000
390,000
545,962
28,400
217,000
300,562
545,962
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9-43
Learning Objective 9-7 – Discuss the role of assumptions
and predictions in budgeting.
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9-44
9-44
Financial Planning Model
Sales of Services or Goods
Ending
Inventory
Budget
Production
Budget
Work in Process
and Finished
Goods
When the interactions of the elements
Ending
Direct budget
Directare expressedSelling
of the master
as and
Overhead
Inventory
Materials
Labor
Administrative
Budget
a
set
of
mathematical
relations,
it Budget
Budget
Budget
Budget
Direct Materials
becomes a financial planning model
that can be used to answer “what if”
Cash Budget
questions about unknown variables.
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
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9-45
Learning Objective 9-8 – Describe a typical organization’s
process of budget administration.
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9-46
Budget Administration
The Budget Committee is a standing
committee responsible for . . .
overall policy matters relating to the
budget.
 coordinating the preparation of the
budget.

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9-47
International Aspects of Budgeting
Firms with international operations face
special problems when preparing a budget.
 Fluctuations in foreign currency exchange rates.
 High inflation rates in some foreign countries.
 Differences in local economic conditions.
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9-48
Learning Objective 9-9 – Discuss the behavioral issues in
budgeting.
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9-49
Behavioral Impact of Budgets
Budgetary Slack: Padding the Budget
People often perceive that their performance
will look better in their superiors’ eyes if they
can “beat the budget.”
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9-50
Participative Budgeting
Top Management
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Supervisor
Flow of Budget Data
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9-51
End Chapter 9
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9-52