Question: Developing a master budgain is an extensive procedure. Where carry out suppliers begin when preparing a understand budget?

Answer: Study Figure 9.1 “Master Budget Plan Schedules” closely, as it serves as the road map for the master budget presented throughout this chapter for Jerry’s Ice Cream. Notice that the budgeting procedure starts via the sales budgain. Also, note that the budgets defined following are for a manufacturing agency. Manufacturing carriers tfinish to have actually even more budgain schedules than other forms of institutions bereason their operations are more complex. Once you understand budgeting in a manufacturing environment, you deserve to conveniently modify the process to percreate budgeting in various other organizations, as disputed later in the chapter. As we work-related through the master budobtain for Jerry’s Ice Cream, assume the company prepares quarterly budgets.

You are watching: The usual starting point for preparing a master budget is forecasting or estimating


Sales Budget

Question: The sales budgain is the beginning allude for the master budget, as shown in Figure 9.1 “Master Budget Plan Schedules”. What is a sales budget, and also exactly how is it prepared?

Answer: The sales budgain is an estimate of systems of product the company expects to sell times the meant sales price per unit. This is possibly the most vital budgain as it drives a lot of of the other budgets. For example, the manufacturing budgain and also connected materials, labor, and also overhead budgets are based upon supposed sales.

Forespreading sales often involves substantial research and countless sources. Companies, such as Jerry’s Ice Cream, typically begin via their sales staff since salespeople have day-to-day call via customers and direct information around customer demand also. Some suppliers pay for sector trend information to learn about market and also product trends. Many type of organizations hire sector research study consultants to attain and testimonial sector information and also inevitably to predict customer demand also. Larger service providers occasionally employ financial experts to construct innovative models provided to task sales. Smaller, less sophisticated establishments sindicate base their approximates on previous trends. Figure 9.2 “Estimating Sales” mirrors exactly how suppliers attain sales information from sales human being, industry research study consultants, and economists.

Tom Benkid, sales manager at Jerry’s Ice Cream, talked via his salespeople and reperceived market patterns for ice cream making use of information acquired from a industry study firm. His estimate, shown in Figure 9.3 “Sales Budget Plan for Jerry’s Ice Cream”, assumes the agency will certainly rise sales 15 percent this coming year. Therefore, to acquire projected sales for quarter 1, Tom ssuggest multiplied last year’s initially quarter sales by 1.15. The average price per unit last year was $6 (1 unit = 1 gallon), and also Tom does not intend any type of change in this price. The sales budobtain is presented in Figure 9.3 “Sales Budget for Jerry’s Ice Cream”.


Figure 9.3 Sales Spending Plan for Jerry’s Ice Cream


Production Budget

Question: The manufacturing budacquire is occurred next and also is based upon sales budobtain projections. What is a production budgain, and exactly how is it prepared?

Answer: If the organization offers a just-in-time production mechanism, wright here manufacturing occurs simply in time to ship the assets to the customer, devices created each quarter would certainly be specifically the exact same as projected sales. However before, most providers, including Jerry’s Ice Cream, preserve a certain level of finiburned goods inventory. Therefore manufacturing is generally not the same as projected sales. The production budget is an estimate of devices to be created and is based upon sales projections plus an estimate of wanted ending finiburned products inventory much less start finimelted products inventory, as summarized in the following:


Key Equation

Units to beproduced=Expected salesin units+Desired unitsof ending inventory−Units inbeginning inventory


Jerry’s Ice Cream plans to sell 40,000 devices in the initially quarter, as shown in Figure 9.3 “Sales Spending Plan for Jerry’s Ice Cream”. For the sake of simplicity, assume work-in-process inventory is inconsiderable, and also therefore beginning and also finishing work-in-process inventory is zero. (We assume beginning and also finishing work-in-process inventory is zero throughout this chapter.) The management pdescribes keep 10 percent of next quarter’s sales in finishing inventory. Thus 4,800 systems will be in inventory at the end of the initially quarter (= 48,000 unit sales in second quarter × 10 percent). Units needed for the first quarter total 44,800 (= 40,000 unit sales + 4,800 systems wanted ending inventory). However before, Jerry’s will certainly not develop 44,800 devices bereason inventory will certainly be left over from the fourth quarter of last year. This start inventory will be 4,000 units (= 40,000 unit sales in initially quarter × 10 percent). Therefore actual manufacturing will certainly full 40,800 units:

40,800=40,000+4,800−4,000Units to beproduced=Expected salesin units+Desired units ofending inventory−Units inbeginning inventory

Figure 9.4 “Production Spending Plan for Jerry’s Ice Cream” presents the manufacturing budobtain for each of the 4 quarters of the coming year. Examine this number very closely, especially the last line labeled systems to be produced. Lynn Young, the manufacturing manager, will be concerned around the spike in manufacturing throughout the 3rd quarter of 59,200 systems. The third quarter, from July 1 via September 30, is the top sales seakid for ice cream. It will be hard for Lynn to plan for this increase in manufacturing from the first and second quarters to the 3rd quarter. However, this is exactly why providers prepare budgets—to plan for the future!


Figure 9.4 Production Spending Plan for Jerry’s Ice Cream

*Information from Figure 9.3 “Sales Budget for Jerry’s Ice Cream”.

**Desired finishing inventory = 10 percent × Next off quarter sales; for the first quarter, 4,800 = 0.10 × 48,000. 4th quarter preferred finishing inventory of 4,400 units is based upon an estimate of sales in the initially quarter of next year.

***Beginning inventory = Inventory at end of previous quarter; for example, second quarter beginning inventory = First quarter finishing inventory.


Once Jerry’s Ice Cream knows how many kind of devices it have to produce each quarter, budgets are establimelted for the individual components of production: straight materials, direct labor, and production overhead. We current these budgets next.


Resee Problem 9.3

Carol’s Cookies produces cookies for resale at grocery stores throughout The United States and Canada. The firm is presently in the process of establishing a grasp budobtain on a quarterly basis for this coming fiscal year, which ends December 31. Prior year quarterly sales were as adheres to (1 unit = 1 batch):


First quarter64,000 units
Second quarter76,800 units
Third quarter96,000 units
Fourth quarter83,200 units

Unit sales are intended to increase 25 percent, and also each unit is expected to sell for $8. The administration pdescribes keep ending finiburned products inventory equal to 10 percent of following quarter’s sales. Assume finished products inventory at the finish of the fourth quarter budacquire period is estimated to be 9,000 units.

Prepare a sales budgain for Carol’s Cookies using a format equivalent to Figure 9.3 “Sales Budget Plan for Jerry’s Ice Cream”. (Hint: be certain to boost last year’s unit sales by 25 percent.)Prepare a manufacturing budacquire for Carol’s Cookies using the format displayed in Figure 9.4 “Production Spending Plan for Jerry’s Ice Cream”.

Equipment to Review Problem 9.3


Direct Materials Purchases Budget

Question: The variety of devices of finiburned goods to be produced each quarter from the production budacquire is the founding point for the direct materials purchases budget. What is a straight products purchases budacquire, and just how is it prepared?

Answer: The straight materials purchases budget is an estimate of raw materials required to achieve a desired level of production. Figure 9.4 “Production Budget for Jerry’s Ice Cream”, the manufacturing budobtain, shows that 40,800 finished devices will certainly be created in the first quarter. We will currently create a straight products purchases budget that answers the questions: exactly how many type of pounds of material need to be purchased in the time of the initially quarter to accomplish this production, and what is the expense of these materials?

Assume two pounds of material are forced to develop one unit of product. Therefore the amount of products required to produce 40,800 devices of ice cream is 81,600 pounds (= 40,800 devices × 2 pounds per unit). This amount is labeled as materials necessary in production in the direct materials purchases budget displayed in Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”. (To simplify this example, assume sugar is the just material offered. However before, other materials, such as cream and vanilla, are commonly forced to develop ice cream.)


Figure 9.5 Direct Materials Purchases Spending Plan for Jerry’s Ice Cream

*Indevelopment from Figure 9.4 “Production Budget Plan for Jerry’s Ice Cream”.

**Desired ending inventory = 20 percent × Next quarter production needs; for the first quarter, 19,680 = 0.20 × 98,400. Fourth quarter preferred ending inventory of 20,000 pounds is based upon an estimate of products required in production initially quarter of next year.

***Beginning inventory = Inventory at end of previous quarter; for example, Second quarter beginning inventory = First quarter ending inventory.

****$2 straight products cost per unit = 2 pounds of materials required per unit × $1 per pound.


Will the agency buy 81,600 pounds of product in the initially quarter? Probably not. Jerry’s will certainly have products in beginning raw products inventory and also pdescribes maintain a specific level of ending raw materials inventory. Thus direct products purchased is based upon products necessary in production plus an estimate of desired ending raw materials inventory much less start raw materials inventory. We summarize this in the complying with equation. Notice the similarity of this equation to the inventory equation presented previously for the production budget.


Key Equation

Materials tobe purchased=Materials neededin production+Desired materialsin ending inventory−Materials inbeginning inventory


Assume the administration pdescribes keep raw products ending inventory equal to 20 percent of next quarter’s materials essential in production. Therefore 19,680 pounds of material will be in inventory at the end of the initially quarter (= 98,400 pounds of products essential in production in second quarter × 20 percent). Materials required in inventory total 101,280 pounds (= 81,600 pounds of materials essential in manufacturing + 19,680 pounds of product in preferred finishing inventory). However, Jerry’s will certainly not purchase 101,280 pounds of products because inventory will be left over from the fourth quarter of last year. This start inventory will be 16,320 pounds (= 81,600 pounds of material necessary in manufacturing in first quarter × 20 percent). Hence straight products purchased in the initially quarter will complete 84,960 pounds:

84,960=81,600+19,680−16,320Materials=Materials neededin production+Desired materialsin ending inventory−Materials inbeginning inventory

To estimate the cost of purchasing 84,960 pounds of material, multiply the variety of pounds to be purchased by the price per pound. Assume the cost per pound of product for Jerry’s is $1. This outcomes in a expense of $84,960 for products to be purchased in the time of the first quarter, as displayed at the bottom of Figure 9.5 “Direct Materials Purchases Budget for Jerry’s Ice Cream” (= 84,960 pounds to be purchased × $1 per pound).

Recheck out the direct materials purchases budobtain displayed in Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream” very closely, specifically the line labeled straight products to be purchased. The purchasing manager at Jerry’s Ice Cream supplies this information, in addition to the price per pound, to negotiate the purchase of products through service providers.


Direct Labor Budget

Question: The straight materials purchases budobtain is the first of three sustaining budgets for manufacturing. The second is the direct labor budget. What is the direct labor budacquire, and exactly how is it prepared?

Answer: The straight labor budobtain is an estimate of straight labor hrs, and also associated costs, vital to attain a preferred level of production. Knowing Jerry’s Ice Cream plans to create 40,800 units of ice cream during the first quarter, this budacquire answers the questions: exactly how many type of straight labor hours will certainly be crucial to accomplish this production, and also what will certainly this labor cost?

Assume it takes 0.10 straight labor hours (or 6 minutes) to create 1 unit of product. Therefore 4,080 hrs of straight labor will be forced to produce 40,800 units of product (= 40,800 finished systems produced × 0.10 direct labor hours per unit). Given an average hourly price of $13, the straight labor expense for the first quarter totals $53,040 (= 4,080 hrs × $13 per hour). This indevelopment is displayed in the direct labor budget presented in Figure 9.6 “Direct Labor Budget Plan for Jerry’s Ice Cream”.


Figure 9.6 Direct Labor Budget for Jerry’s Ice Cream

*From Figure 9.4 “Production Budget Plan for Jerry’s Ice Cream”.

**$1.30 straight labor cost per unit = 0.10 direct labor hrs per unit × $13 per hour.


Caretotally evaluation the direct labor budobtain displayed in Figure 9.6 “Direct Labor Spending Plan for Jerry’s Ice Cream”. The production manager at Jerry’s Ice Cream, Lynn Young, provides this information to ensure the appropriate variety of employees is obtainable to fulfill production purposes. Notice that the number of straight labor hrs necessary in production for the 3rd quarter is substantially higher than each of the two previous quarters. Aget, this is why institutions prepare budgets: to arrangement for these forms of events. Lynn will certainly have to begin planning for this spike in direct labor hrs, either by asking employees to work overtime or by hiring extra employees.


Manufacturing Overhead Budget

Question: The production overhead budget is the third of three sustaining production budgets. What is a production overhead budacquire, and also exactly how is it prepared?

Answer: The manufacturing overhead budget is an estimate of all manufacturing expenses, various other than direct products and also direct labor, important to accomplish a desired level of production. This budgain is presented in Figure 9.7 “Manufacturing Overhead Budget Plan for Jerry’s Ice Cream”. Notice that overhead expenses are separated into variable and also fixed components.


Figure 9.7 Manufacturing Overhead Budget for Jerry’s Ice Cream

*From Figure 9.4 “Production Budget Plan for Jerry’s Ice Cream”.

**$1.20 = $240,480 complete overhead price ÷ 200,400 devices to be created for the year.

^Deduct depreciation to obtain the actual cash payment for overhead. This information is necessary for the cash budobtain presented in Figure 9.11 “Cash Budget for Jerry’s Ice Cream”.


By interpretation, total variable overhead prices change with alters in manufacturing and are calculated by multiplying systems to be developed by the price per unit. For instance, indirect products cost for the first quarter of $6,120 is calculated by taking 40,800 units to be developed × $0.15 expense per unit. Fixed costs mostly execute not readjust through changes in production and therefore remain the very same each quarter. (Note: In some situations, addressed overhead costs deserve to adjust from one quarter to the next. For instance, hiring additional salaried personnel in the time of the year would certainly rise fixed overhead expenses, and also purchasing tools throughout the year would rise depreciation expenses. In this instance, we assume resolved overhead prices do not readjust throughout the year.)

Depreciation is deducted at the bottom of the production overhead budget to determine cash payments for overhead because depreciation is not a cash transaction. We usage this indevelopment later in the chapter for the cash budobtain.


Recheck out Problem 9.4

Carol’s Cookies, the firm featured in the last review difficulty and in the following 3, is currently preparing the budobtain for straight products purchases, direct labor, and also production overhead.

Direct Materials Purchases Budget Information

Each unit of product calls for 1.5 pounds of straight products per unit, and also the cost of straight materials is $2 per pound. Management prefers to maintain ending raw products inventory equal to 30 percent of following quarter’s materials needed in manufacturing. Assume raw products inventory at the finish of the fourth quarter budgain duration is estimated to be 41,000 pounds.

Direct Labor Budget Plan Information

Each unit of product calls for 0.20 straight labor hrs at a cost of $12 per hour.

Manufacturing Overhead Spending Plan Information

Variable overhead prices are:


Indirect materials$0.20 per unit
Instraight labor$0.15 per unit
Other$0.35 per unit

Fixed overhead prices each quarter are:


Salaries$28,000
Rent$22,000
Depreciation$16,165

Prepare a direct materials purchases budget for Carol’s Cookies making use of the format shown in Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”.Prepare a direct labor budacquire for Carol’s Cookies using the format presented in Figure 9.6 “Direct Labor Spending Plan for Jerry’s Ice Cream”.Prepare a production overhead budgain for Carol’s Cookies utilizing the format shown in Figure 9.7 “Manufacturing Overhead Budget for Jerry’s Ice Cream”.

Solution to Review Problem 9.4


Selling and also Administrative Budget

Question: Now that the sales and also production-associated budgets are finish, it is time to estimate offering and also administrative expenses. What is a offering and also bureaucratic budobtain, and how is it prepared?

Answer: The marketing and also administrative budobtain is an estimate of all operating prices other than manufacturing. This budget is presented in Figure 9.8 “Selling and also Administrative Budget for Jerry’s Ice Cream”.

Although many kind of organizations might have actually variable and solved costs in this budacquire, Jerry’s Ice Cream treats all selling and also administrative costs as addressed prices. Once aget, depreciation is deducted at the bottom of this budgain to identify cash payments for marketing and also bureaucratic costs, which we use later in the chapter for the cash budget.


Figure 9.8 Selling and Administrative Budget for Jerry’s Ice Cream

*Deduct depreciation to acquire the actual cash payment for marketing and also governmental prices.

**This indevelopment is required for the cash budacquire presented in Figure 9.11 “Cash Spending Plan for Jerry’s Ice Cream”.


Budgeted Income Statement

Question: Budgets completed to this suggest include sales (Figure 9.3 “Sales Budget for Jerry’s Ice Cream”), production (Figure 9.4 “Production Spending Plan for Jerry’s Ice Cream”), straight products (Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”), straight labor (Figure 9.6 “Direct Labor Budget for Jerry’s Ice Cream”), manufacturing overhead (Figure 9.7 “Manufacturing Overhead Spending Plan for Jerry’s Ice Cream”), and also offering and governmental (Figure 9.8 “Selling and Administrative Budget for Jerry’s Ice Cream”). Jerry’s Ice Cream currently has actually enough information to prepare the budgeted income statement. What is a budgeted income statement, and also exactly how is it prepared?

Answer: The budgeted income statement is an estimate of the organization’s profit for a provided budget period. Most institutions, consisting of Jerry’s Ice Cream, prepare the budgeted revenue statement utilizing the accrual basis of accounting: revenues are recorded as soon as earned and also costs are videotaped as soon as incurred. The budgeted revenue statement for Jerry’s Ice Cream is presented in Figure 9.9 “Budgeted Income Statement for Jerry’s Ice Cream”. The cash budget we prepare later on in the chapter will certainly show when cash is obtained and passist.


Figure 9.9 Budgeted Income Statement for Jerry’s Ice Cream

*Cost of products offered = Per unit expense of $4.50 (check out above) × Units marketed (from Figure 9.3 “Sales Budget Plan for Jerry’s Ice Cream”); for the first quarter, $180,000 cost of goods sold = $4.50 unit expense × 40,000 units.


The first line in the budgeted income statement, sales, comes from the sales budget in Figure 9.3 “Sales Budget for Jerry’s Ice Cream”. The following line, expense of goods sold, is calculated by multiplying unit sales from Figure 9.3 “Sales Spending Plan for Jerry’s Ice Cream” by the expense per unit. The price per unit calculation is shown at the bottom of Figure 9.9 “Budgeted Income Statement for Jerry’s Ice Cream”. Carecompletely testimonial this calculation. Due to the fact that Jerry’s Ice Cream uses full-absorption costing, all manufacturing prices regarded goods marketed are contained (or totally absorbed) in expense of items sold. Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”, Figure 9.6 “Direct Labor Budget Plan for Jerry’s Ice Cream”, and Figure 9.7 “Manufacturing Overhead Budget Plan for Jerry’s Ice Cream” administer this information on a per unit basis for straight materials, direct labor, and also production overhead, respectively.

The 3rd line, gross margin, is sindicate sales minus expense of goods marketed. The fourth line, selling and bureaucratic costs, comes from the marketing and administrative budacquire in Figure 9.8 “Selling and Administrative Spending Plan for Jerry’s Ice Cream”. The bottom line of the budgeted earnings statement, net income, is gross margin minus selling and governmental expenses. Income tax expense is not consisted of in this instance for the sake of simplicity. However, earnings taxes have the right to considerably reduce projected net revenue and also cash flows.

Question: How carry out providers usage the budgeted earnings statement to enhance operations?

Answer: The budgeted revenue statement is possibly the most very closely scrutinized component of the master budacquire. The monitoring and also employees throughout the company use this information for planning functions and also to evaluate company performance. The board of directors and budacquire committee are responsible for granting the budgain and regularly evaluation regular reports comparing actual net inpertained to budgeted net income to identify if profit goals are being accomplished. Lenders and owners frequently review the budget to ensure the company is on track to fulfill its objectives. The budgeted income statement answers the question: what earnings does the organization suppose to achieve?

After completing the budgeted earnings statement, only three budgets remain: the resources expenditures budgain, the cash budobtain, and the budgeted balance sheet. We comment on the capital expenditures budget next.


Review Problem 9.5

Carol’s Cookies approximates that all offering and administrative prices are addressed. Quarterly selling and administrative cost estimates for the coming year are


Prepare a selling and also governmental budobtain for Carol’s Cookies using the format displayed in Figure 9.8 “Selling and also Administrative Spending Plan for Jerry’s Ice Cream”.Prepare a budgeted earnings statement for Carol’s Cookies utilizing the format displayed in Figure 9.9 “Budgeted Income Statement for Jerry’s Ice Cream”.

Equipment to Review Problem 9.5


Capital Expenditures Budget

Question: What is a capital expenditures budacquire, and how is it prepared?


Figure 9.10 Capital Expenditures Budget for Jerry’s Ice Cream

Note: These acquisitions will have actually no result on depreciation cost in the fourth quarter. Items will certainly be purchased at the end of the year. Therefore depreciation starts the adhering to year.


Because long-term asset purchases happen at the end of the year, depreciation will certainly start the adhering to year. Therefore depreciation displayed in the production overhead and also selling and also governmental budgets will not be affected till the complying with year. The cash outlay forced to make these purchases is reflected in the cash budobtain presented next.


Cash Budget

Question: What is a cash budacquire, and just how is it prepared?

Answer: The cash budobtain is an estimate of the amount and timing of cash inflows and outflows for the budget period. Although the budgeted revenue statement gives an estimate of profitcapability, it stops brief of providing cash flow indevelopment. For instance, some of the $240,000 in initially quarter sales revenue will be built up in the time of the initially quarter and also some will certainly be collected the following quarter. A area of the cash budgain will certainly show as soon as cash from sales will be obtained.

The cash budget has actually the complying with sections, each of which is explained after Figure 9.11 “Cash Budget Plan for Jerry’s Ice Cream”:

Cash collections from salesCash payments for purchases of materialsOther cash collections and payments

Figure 9.11 “Cash Spending Plan for Jerry’s Ice Cream” shows the cash budacquire for Jerry’s Ice Cream. Amounts displayed in parentheses reexisting cash outflows; quantities without parentheses recurrent cash inflows.


Figure 9.11 Cash Budget for Jerry’s Ice Cream

*Based on sales budgain presented in Figure 9.3 “Sales Budget for Jerry’s Ice Cream”. All sales are on credit: 60 percent gathered in the quarter of sale and 40 percent built up the following quarter.

**Based on purchases budacquire shown in Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”. All purchases are on credit: 70 percent paid in the quarter of purchase and 30 percent phelp the following quarter.

***Does not encompass depreciation given that depreciation expense does not involve a cash payment. See connected figures for calculations.

^Excess of collections over payments = Cash collections from sales – Cash payments for products purchases – Other cash payments.

^^ Beginning cash balance = Cash balance at finish of previous duration. Balance for first quarter is given.

^^^ Ending cash balance = Excess of collections over payments for the quarter + Beginning cash balance.


Cash Collections from Sales

Question: Assume all sales at Jerry’s Ice Cream are on crmodify. How long does it take, on average, for Jerry’s to collect on crmodify sales?

Answer: On average, 60 percent of crmodify sales are built up in the quarter offered and also the remaining 40 percent is accumulated the complying with quarter. These percentage approximates are based upon previous experience and also take right into consideration credit terms offered to customers. Because Jerry’s Ice Cream only sells to customers through a great credit document, it anticipates no negative debts.

As you study the cash collections from sales area of Jerry’s cash budgain, notice that $180,000 in cash will certainly be accumulated in the initially quarter pertained to credit sales made in the previous quarter (this amount is given). Next off, you will see $144,000 in cash collected in the first quarter regarded initially quarter sales (= 60 percent built up in quarter of sale × $240,000 initially quarter sales). The continuing to be $96,000 will be gathered in the second quarter, as presented in Figure 9.11 “Cash Budget for Jerry’s Ice Cream” (= 40 percent × $240,000 first quarter sales).


Cash Payments for Purchases of Materials

Question: Assume all purchases at Jerry’s Ice Cream are on crmodify. How lengthy does it take, on average, for Jerry’s to pay for these credit purchases?

Answer: On average, 70 percent of purchases are passist in the quarter purchased and the continuing to be 30 percent is paid the adhering to quarter. These percentage estimates are based on previous endure and also take right into account crmodify terms offered by companies.

As you look at the cash payments for purchases of materials section of Jerry’s cash budacquire, notification that $30,000 in cash will certainly be paid in the first quarter concerned purchases made in the previous quarter (this amount is given). Next off, you will watch $59,472 in cash paid in the initially quarter related to initially quarter purchases (= 70 percent phelp in quarter purchased × $84,960 initially quarter purchases). The staying $25,488 will certainly be paid in the second quarter, as presented in Figure 9.11 “Cash Spending Plan for Jerry’s Ice Cream” (= 30 percent × $84,960 initially quarter purchases). Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream” mirrors just how cash flows right into the company for customer sales and also out of the firm for purchases of products.


Other Cash Collections and also Payments

Question: What other cash collections and cash payments must be thought about at Jerry’s Ice Cream?

Answer: Assume Jerry’s Ice Cream has various other cash payments yet no other cash collections. Direct labor cash payments are from Figure 9.6 “Direct Labor Budget Plan for Jerry’s Ice Cream”. Manufacturing overhead cash payments are from Figure 9.7 “Manufacturing Overhead Budget Plan for Jerry’s Ice Cream”. Recall that depreciation was subtracted from full overhead expenses in Figure 9.7 “Manufacturing Overhead Budget Plan for Jerry’s Ice Cream” to calculate the cash payments for overhead. Selling and governmental cash payments are from Figure 9.8 “Selling and also Administrative Spending Plan for Jerry’s Ice Cream”, where a similar depreciation adjustment was made. Capital expenditure cash payments are from Figure 9.10 “Capital Expenditures Budget for Jerry’s Ice Cream”.

The other cash collections and also payments area is likewise where institutions encompass financing tasks such as cash collections from the sale of bonds or cash payments for the repayment of bank loans. Jerry’s Ice Cream does not have actually any kind of of these financing activities.

The bottom section of the cash budacquire is where the ending cash balance is calculated for each budget period. The manager responsible for cash planning, commonly the treasurer, scrutinizes this area carefully. Some establishments have to borrow cash to fund the timing difference between once cash is offered for manufacturing and also as soon as cash is received from sales. The cash budobtain will signal when momentary borrowing is important and permits time for the treasurer to arvariety for financing. The cash budobtain presented in Figure 9.11 “Cash Budget for Jerry’s Ice Cream” shows that Jerry’s will not have to borrow cash in any of the four quarters. In reality, Jerry’s Ice Cream will certainly have a hefty reserve of cash totaling $155,576 at the finish of the fourth quarter.


Resee Problem 9.6

Carol’s Cookies has the following information pertaining to the funding expenditures and cash budgets.

Capital Expenditures

The firm plans to purchase offering and also governmental devices totaling $20,000 and manufacturing tools totaling $28,000. Both will certainly be purchased at the finish of the fourth quarter and also will not impact depreciation expense for the coming year.

Cash Budget

All sales are on credit. The firm expects to collect 70 percent of sales in the quarter of sale, 25 percent of sales in the quarter complying with the sale, and also 5 percent will not be accumulated (poor debt). Accounts receivable at the end of last year totaled $200,000, every one of which will certainly be accumulated in the first quarter of this coming year.

All direct materials purchases are on crmodify. The firm expects to pay 80 percent of purchases in the quarter of purchase and also 20 percent the complying with quarter. Accounts payable at the end of last year totaled $50,000, every one of which will be passist in the first quarter of this coming year.

The cash balance at the end of last year totaled $20,000.

Prepare a funding expenditures budobtain for Carol’s Cookies using the format shown in Figure 9.10 “Capital Expenditures Spending Plan for Jerry’s Ice Cream”.Prepare a cash budget for Carol’s Cookies utilizing the format displayed in Figure 9.11 “Cash Budget Plan for Jerry’s Ice Cream”.

Systems to Resee Problem 9.6


Budgeted Balance Sheet

Question: The budgeted balance sheet is the last item of the budgain procedure. What is the budgeted balance sheet, and also how is it prepared?

Answer: The budgeted balance sheet is an estimate of the ending balances for all balance sheet accounts. Managers usage this to assess the influence that budgeted sales and prices will have on the financial condition of the organization. We existing the budgeted balance sheet for Jerry’s Ice Cream in Figure 9.12 “Budgeted Balance Sheet for Jerry’s Ice Cream”.

Indevelopment essential to prepare the budgeted balance sheet for Jerry’s Ice Cream is displayed throughout the chapter and also is referenced in Figure 9.12 “Budgeted Balance Sheet for Jerry’s Ice Cream”. Further information is provided here:

Plant and also devices (net) supposed at the finish of the budobtain duration (December 31) is $530,000.Typical stock issued and also impressive at the finish of the budget duration (December 31) is expected to be $650,000.Actual kept revenue at the end of last year totaled $101,600, and also no cash dividends will be phelp throughout the current budgain duration ending December 31.

Figure 9.12 Budgeted Balance Sheet for Jerry’s Ice Cream

*$124,800 = $312,000 in fourth quarter sales (Figure 9.3 “Sales Budget Plan for Jerry’s Ice Cream”) × 40 percent to be built up next quarter (Figure 9.11 “Cash Budget Plan for Jerry’s Ice Cream”).

**$20,000 = 20,000 pounds (Figure 9.5 “Direct Materials Purchases Budget for Jerry’s Ice Cream”) × $1 per pound (Figure 9.5 “Direct Materials Purchases Budget for Jerry’s Ice Cream”).

***$19,800 = 4,400 units (Figure 9.4 “Production Spending Plan for Jerry’s Ice Cream”) × $4.50 (Figure 9.9 “Budgeted Income Statement for Jerry’s Ice Cream”).

^Given.

^^ $30,576 = $101,920 in fourth quarter purchases (Figure 9.5 “Direct Materials Purchases Spending Plan for Jerry’s Ice Cream”) × 30 percent to be phelp next quarter (Figure 9.11 “Cash Spending Plan for Jerry’s Ice Cream”).

^^^$169,600 = $101,600 in preserved income at finish of last year (given) + $68,000 budgeted net income for the year (Figure 9.9 “Budgeted Income Statement for Jerry’s Ice Cream”).


Computer Application

Using Excel to Develop an Operating Budget

Managers regularly usage spreadsheets to build operating budgets. Spreadsheets aid supervisors perform what-if analysis by linking the components of the understand budacquire and immediately making alters to budget schedules when specific approximates are revised. For instance, if managers at Jerry’s Ice Cream wanted to watch what would certainly happen if sales in units were lessened by 10 percent from the initial estimate displayed in Figure 9.3 “Sales Budget Plan for Jerry’s Ice Cream”, they would certainly sindicate mitigate sales by 10 percent, and also all budobtain schedules affected by this change would automatically be updated in the spreadsheet.

An example of exactly how to usage Excel to develop an operating budgain for Jerry’s Ice Cream adheres to. Notice the tabs at the bottom of the spreadsheet. The first tab is for the sales budget worksheet, the second tab is for the production budacquire worksheet, the following tab is for the direct products purchases budobtain worksheet, and so on. All these worksheets are linked so alters to particular estimates are reflected in the proper budget schedules.



Spreadsheet programs are not the only method managers use innovation to facilitate the budgeting procedure. As indicated in Note 9.30 “Firm in Action 9.2” the Web is likewise a helpful tool as soon as it pertains to efficient budgeting.


Firm in Action 9.2

Moving from Spreadsheets to Intranet Budgeting

The Pacific Northwest National Laboratory (PNNL) is among nine multiregime nationwide laboratories of the UNITED STATE Department of Energy. PNNL is operated by Battelle Science and also Technology International, a worldwide scientific research and modern technology enterprise that conducts $3,000,000,000 worth of research and also advance each year.

The Facilities & Operations (F&O) Firm Office at PNNL has over 130 budacquire tasks, each of which requires an yearly budacquire. The full yearly budobtain is $70,000,000. Prior to 2000, task supervisors were compelled to use Excel to procedure budobtain indevelopment. The F&O Company Office then uploaded this information to formulate the division’s budobtain.

As the F&O Company Office started the budget process for 2001, management made a decision to develop a Web-based, or intranet, budobtain and also planning device. The brand-new device enabled managers to usage the Internet to input budget indevelopment straight, for this reason eliminating the need to upload initial budgets and subsequent budgain transforms.

Moving to intranet budgeting benefited PNNL’s F&O Company Office in a number of ways. Activity supervisors no longer had actually to usage Excel to enter budgain information, which conserved 450 hours. The F&O Business Office conserved 60 hrs by no longer having actually to upfill Excel budget indevelopment. Spending Plan reports are straightforward to produce, and the system provides real-time reports for evaluation and project monitoring.

Many type of institutions are adopting intranet budgeting as the major source of planning and also manage. As the financial specialist at PNNL declared, intranet budgeting provides “a tool that is easy to usage, precise, and also simple and also will certainly proceed to save us time and also money.”


Sources: Mary F. Astley, “Intranet Budgeting,” Strategic Finance, May 2003; Pacific Northwest National Laboratory, “Home Page,” http://www.pnl.gov.


Review Problem 9.7

Assume Carol’s Cookies will certainly collect 25 percent of fourth quarter budgeted sales in complete next year (this represents accounts receivable at the finish of the fourth quarter). The complying with account balances are supposed at the end of the fourth quarter:

Property, plant, and devices (net): $320,000Typical stock: $450,000

Retained income at the finish of last year totaled $56,180, and also no cash dividends are anticipated for the budobtain period finishing December 31.

Prepare a budgeted balance sheet for Carol’s Cookies making use of the format shown in Figure 9.12 “Budgeted Balance Sheet for Jerry’s Ice Cream”.

Solution to Rewatch Problem 9.7


*$208,000 = $832,000 in fourth quarter sales (from sales budget) × 25 percent to be collected next quarter (given).**$82,000 = 41,000 pounds × $2 per pound (from direct materials budget).***$60,840 = 9,000 systems (from production budget) × $6.76 expense per unit (from budgeted revenue statement).

^Given.

^^ $59,492 = $297,460 in fourth quarter purchases (from direct products budget) × 20 percent to be paid following quarter (given).

^^^ $208,180 = $56,180 in preserved revenue end of last year (given) + $152,000 budgeted net earnings (from budgeted earnings statement).


Jerry:Tom, I respeak to you saying we have to intend expansion between 10 percent and 25 percent following year. Have you been able to narrow this dvery own a bit?
Tom:Yes, I’ve talked with our salescivilization and industry contacts. We likewise acquired trend data from a industry study firm. Based on this indevelopment, sales have to rise around 15 percent this coming year. Many agree this growth is a result of our high-high quality product and our capability to conveniently readjust seasonings to accommodate consumer tastes.
Jerry:This is excellent news. It looks choose our ice cream is really capturing on!
Michelle:I got Tom’s projection a couple of days ago and currently have a preliminary budgain for following year. Lynn, you will have to execute some severe planning to guarantee we have actually sufficient products and also employees for the third quarter spike in sales.
Lynn:Yes, I realize we have some work-related to execute to ensure we have sufficient resources to satisfy budgeted manufacturing levels.
Jerry:Can’t we just hire a couple of more employees and also let our suppliers recognize we will certainly need more materials?
Lynn:The difficulty is that we have a spike in production during the 3rd quarter. Production goes from 49,200 units in the second quarter to 59,200 systems in the 3rd quarter and earlier dvery own to 51,200 devices in the fourth quarter. I don’t think products will certainly be an issue—our supplier has actually currently assured me this will not be a trouble. But I can’t just hire brand-new employees in the third quarter and also fire them in the fourth quarter.
Jerry:Perhaps our existing employees deserve to work-related overtime, or we deserve to hire short-term employees.
Lynn:Hiring temporary employees would be my preference, specifically since college students are searching for part-time work during the summer months. Working overtime would really cause problems through our budgeted hourly rate of $13.
Jerry:Michelle, carry out we have actually any cash flow problems via the anticipated growth?
Michelle:Fortunately not. If all goes as planned, we must have more than $90,000 in the financial institution at the finish of each quarter.
Jerry:Excellent! Let’s carry out our best to stay on track. Michelle, I’d choose an upday at the end of the initially quarter to view if actual profit meets or exceeds budgeted profit.
Michelle:No difficulty. I’ll have actually it for you as shortly as the publications are closed for the first quarter.
Jerry:Now that we all have actually some principle of what to mean this coming year, we have the right to make sure the sources are in place to make it happen. This need to be an exciting and also challenging year for us. Let’s meet aobtain following month to talk about our progression in preparing for following year.

This narrative offers an example of just how the grasp budget is used for planning objectives. It is much more efficient to setup in advance for considerable increases in sales and also production than to wait and deal with production problems as they take place. The understand budget deserve to additionally be provided for control functions by evaluating company performance. We comment on the regulate phase of budgeting even more in Chapter 10 “How Do Managers Evaluate Performance Using Cost Variance Analysis?”.

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Key Takeaway

The understand budget for a manufacturing company contains budgain schedules for sales, production, straight products, straight labor, manufacturing overhead, marketing and also governmental, the revenue statement, resources expenditures, cash, and the balance sheet. The sales budget is a lot of vital because sales projections drive the various other budgets.