MASTER BUDGET - EXAMPLE
Sales IN UNITS for the previous two months (of last quarter), as well as the sales
forecast for next quarter are as follows:
Sales Budget
Units
May sales (ACTUAL)
20
June sales (ACTUAL)
30
July sales (FORECAST)
30
August sales (FORECAST)
40
September sales (FORECAST)
50
The company forecasts that it will be able to sell its units for $10 each, as it did in
May and June. Therefore, the actual and forecasted sales IN DOLLARS per above are:
May sales (ACTUAL)
Dollars
$200
June sales (ACTUAL)
$300
July sales (FORECAST)
$300
August sales (FORECAST)
$400
September sales (FORECAST)
$500
Page 2
The company assumes it will collect sales (Cash!!) as follows: 70% in the month of sales,
20% in the month following sales, and the final 10% two months following sales. (This
causes the "diagonal" appearance in the table below.) All sales are assumed to be on account.
Based the above information, collections are budgeted as follows for the next quarter:
Expected Cash Collections
July
August
Sept.
Total Qtr
May sales ($200)
20 [10%]
June sales ($300)
60 [20%]
30 [10%]
July sales ($300)
210 [70%]
60 [20%]
30 [10%]
300
280 [70%]
80 [20%]
360
350 [70%]
350
August sales ($400)
20
September sales ($500)
TOTALS
$290
$370
90
$460
(This bottom cash "TOTALS" row will be carried forward onto the "Cash Budget.")
$1,120
page 3
The company would like to maintain 10% of the next month's sales in inventory.
The inventory balance at the end of June was 3 units. Therefore, based on the sales
forecast and inventory requirements, the production (purchases) budget is as follows:
Merchandise Purchases Budget (in units)
Units
July
Sales Requirement
add: Ending Inventory
August
30
4 [10%]
Sept.
40
5 [10%]
50
4 *
34
45
54
less: Beginning Inventory
3
4
5
UNITS to produce/purch.
31
41
49
* Assume the sales forecast for October is 40 units, so the September desired
Ending Inventory = (40 units) x (10%) = 4 units.
Let's assume the company is a merchandising entity, for simplicity. Therefore,
the above represents purchases of units (rather than manufactured units).
page 4
The company assumes that units will cost $6 each, as was the case in the past
quarter. Therefore, purchases IN DOLLARS for the next quarter, as well as purchases
made in June are as follows:
Merchandise Purchases Budget (in dollars)
June (actual)
July: 31 x $6
August: 41 x $6
September: 49 x $6
$180
186
246
294
The company assumes that it will pay (cash!) for the above purchases as follows:
50% in the month of purchases, and 50% in the month following the purchases.
Therefore, cash payments will be as follows next quarter:
Cash Payments for Merchandise Purchases
Payments
[$180]
[186]
[246]
[294]
June purchases
July purchases
Aug. purchases
Sept. purchases
Totals
July
$90 [50%]
93 [50%]
n/a
n/a
$183
August
n/a
$93 [50%]
123 [50%]
n/a
$216
Sept.
n/a
n/a
$123 [50%]
147 [50%]
$270
(This bottom cash "Totals" row will be carried forward onto the "Cash Budget.")
Total Qtr.
$90
186
246
147
$669
page 5
Following is the Selling & Administrative Expense Budget for the next quarter
(all expenses are expected to be paid in the same month incurred):
Selling & Administrative Expense Budget
Selling expense
Administrative expense
Total expense*
July
$27
August
$34
September
$39
Total Qtr.
$100
38
46
51
135
$65
$80
$90
$235
* Total expenses include depreciation and other non-cash expenses as follows:
Depreciation
Other non-cash expenses
Total non-cash expenses
July
$10
5
August
$10
10
$15
$20
September
$10
20
Total Qtr.
$30
35
$30
$65
Therefore, expected cash payments for selling & administrative expenses for the next quarter are:
Cash selling & admin. exp.
July
$50
August
$60
September
$60
Total Qtr.
$170
(The bottom row, "Cash selling & admin. exp.", will be carried forward onto the "Cash Budget.")
page 6
Now we collect the "cash totals" ending rows of the above schedules, and place them into the Cash Budget.
Assuming that the company wishes to maintain a minimum cash balance =$200, and that the ending
cash balance at June 30 was $210, the company's Cash Budget for the next quarter is as follows:
Cash Budget
July
Cash beginning balance
add: cash collections
$210 (given)
290
August
September
Total Qtr.
$202
370
$200
460
$210
1120
Cash inflow
500
572
660
$1330
Cash payments:
Purchases
Selling & admin.
Dividends
Plant, Prop. & Equip.
Taxes *
183
50
25
0
40
216
60
25
121
0
270
60
25
15
0
669
170
75
136
40
Cash outflow
298
422
370
1090
$202
$150
$290
$240
[1]
[50]
50
[1]
[50]
$239
$239
Net cash inflow (outflow)
Financing:
Loan
Interest **
Repayments
Cash ending balance
50
$202
$200
* Income tax from the prior quarter is paid this quarter (in the first month - July).
** Interest accrues for the full month and is paid when loan(s) mature. The interest rate is 12%.
(The cash Interest from this schedule, plus any accrued-but-not-yet-paid Interest, will be carried forward
onto the Income Statement.)
page 7
Now we collect "Total Quarter" account balances from several of the above schedules to build
the Budgeted Income Statement for the next quarter ending September 30, as follows:
Budgeted Income Statement
Sales
COGS:
($300 + 400 + 500)
Beg Inv (3 x $6)
add: Purchases ($186 + 246 + 294)
Cost of Goods Avail. for Sale
less: End Inv (4 X $6)
$1,200
18
726
744
24
720 *
Gross Margin
480
Selling & Admin. Expenses ($65 + 80 + 90)
235
Income Before Interest and Taxes
245
Interest Expense
($50 x 12% x 2/12)
Income Before Taxes
Income Tax Expense
1
244
(244 x 25%)
Net Income
* from 120 units sold x $6 cost per unit.
61
$183
page 8
We must prepare the Budgeted Statement of Retained Earnings next, so that we then can carry
its new number for Retained Earnings forward onto the Budgeted Balance Sheet.
The Budgeted Statement of Retained Earnings for the next quarter ending Sept. 30 is as follows:
Budgeted Statement of Retained Earnings
Retained Earnings at July 1 (given)
add: budgeted net income for third quarter
$
100
183
283
less: budgeted dividends for the third quarter
Retained Earnings at Sept. 30
.
.
.
.
.
(continued)
.
.
.
.
.
75
$208
page 9
Lastly, we collect the quarter-ending balances of Asset, Liability, and Equity accounts from the above
schedules to build the Budgeted Balance Sheet for the next quarter ended Sept. 30, as follows:
Budgeted Balance Sheet
Assets
Cash
Accts Receivable*
Current Assets
Liabilities & Stockholders' Equity
$239
190
429
Beg. Net PP& E 144 (given)
+ Additions
136
- Depreciation
30
Net Plant, Prop. & Equip.
Liabilities:
Accounts Payable**
Income Tax Payable
Current Liabilities
Long-Term Liabilities
250
Total Liabilities
$147
61
208
0
208
Stockholders' Equity:
Total Assets
$679
Capital Stock (given)
Retained Earnings
263
208
Total Stockholders' Equity
471
Total Liab. & S/E
* Accts. Receivable = $400 x 10% for Aug. sales + $500 x 30% for Sept. sales
** Accts. Payable = $294 September Purchases x 50%
(the end)
$679