The Master Budget
Sales
Forecast
Sales Budget
EI Budget
Production
Budget
S&A Exp
Budget
DM Budget
DL Budget
Overhead
Budget
Capital
Budget
Cash Budget
Pro Forma
Inc. Stmt
Pro Forma
Bal. Sht
Pro Forma
SCF
The
Master Budget
The Text Example
Hampton Freeze
Tom Willis is the majority stockholder
and chief executive officer of Hampton
Freeze, Inc., a company he started in
2001. The company makes premium
popsicles using only natural
ingredients and featuring exotic flavors
such as tangy tangerine and minty
mango. The company’s business is
highly seasonal, with most of the sales
occurring in spring and summer.
In 2002, the company’s second year
of operations, a major cash crunch
in the first and second quarters
almost forced the company into
bankruptcy. In spite of this cash
crunch, 2002 turned out to be
overall a very successful year in
terms of both cash flow and net
income.
With the full backing of Tom Wills,
Larry Giano set out to create a
master budget for the company for
the year 2003.
In his planning for the budgeting
process, Larry drew up the
following list of documents that
would be a part of the master
budget.
1
6
2
3
4
5
8
9
10
7
The Sales
Budget
A budget showing the
number of units, sales
price and total sales for
each quarter (or month).
Research into the history of cash
collections at Hampton Freeze
indicated that
– 70% of sales are collected in the
quarter in which the sale is made and
– the remaining 30% are collected in
the following quarter.
The Production
Budget
A budget showing the
number of units that must be
produced during each
budget period to meet sales
needs and to provide for the
desired ending inventory.
Finished
Units
to be
Produced
=
Expected
Sales in
Units
+
Desired
EI of
Finished
Units
-
BI of
Finished
Units
• Hampton Freeze would like the ending
inventory of finished goods to be equal
to 20% of next quarter’s sales.
• The company has 2,000 units of
beginning inventory.
2. Equals expected
sales in units
4. Less BI of finished
units.
3. Plus Desired EI of
finished units.
1. Finished units to be
produced
Desired Ending
Inventory of Finished
Goods equals 20% of
next quarter’s sales.
Ending Inventory for one quarter equals
Beginning Inventory for next quarter.
Notice how inventories are accounted for on
the spreadsheet.
Required
Purchases
of Raw
Materials
=
Amount
Required
for
Production
+
Desired
EI of Raw
Materials
-
BI of Raw
Materials
The Direct Materials
Purchases Budget
A budget showing the raw
materials that must be
purchased to fulfill the
production budget and to
provide for adequate
inventories.
• Hampton Freeze has
established a policy of
maintaining RM equal to 10% of the
amount required for production in
the subsequent quarter.
• In the first quarter the company
plans on producing 14,000 units
(from the production budget)
• Each unit requires parts costing
$0.20.
• To prepare the Schedule of
Expected Cash Disbursements for
Materials, Hampton’s policy is to
– Pay for 50% of purchases in the
quarter in which the purchase is
made, and
– Pay the remaining 50% in the
following quarter.
2. Equals amount
required for
production.
3. Plus Desired EI of
raw materials.
4. Less BI of raw
materials.
1. Required purchases of
Direct Materials
The Direct
Labor Budget
A budget showing the direct
labor hours (and total
amount) needed to produce
the number of units specified
in the production budget.
• Each case produced requires 0.4 direct
labor hour.
• Each hour costs $15
The Direct Labor Budget
The MOH
Budget
A budget showing all
costs of production other
than direct materials and
direct labor.
The MOH Budget
The Ending Finished
Goods Inventory
Budget
A budget showing the
carrying cost of the unsold
units remaining in inventory.
The Ending FG Inventory Budget
The Selling and
Administrative
Expense Budget
A budget showing
expenses for areas other
than manufacturing.
The S&A Expense Budget
HAMPTON FREEZE, INC.
Selling and Administrative Cash Disbursement
For the Year Ended December 31, 2003
Quarter
1st
2nd
3rd
4th
Year
Salaries
Freight out
Advertising
Other expense
Total
93,000
$
130,900
$
184,750
$
129,150
$
537,800
HAMPTON FREEZE, INC.
Other Cash Disbursements Projections
For the Year Ended December 31, 2003
Quarter
Equipment Purchase
Dividends
1st
2nd
3rd
4th
Year
50,000
40,000
20,000
20,000
130,000
8,000
8,000
8,000
8,000
32,000
The Cash
Budget
The Budgeted
(Pro-Forma)
Income
Statement
The Budgeted
Balance Sheet