Chapter 8: Master Budgeting Accounting Terms

Ending Finished Goods Budget

A budget showing the dollar amount of unsold finished goods inventory that will appear on the ending balance sheet.

Budget

A detailed plan for the future that is usually expressed in formal quantitative terms. 1. Budgeting provide a means of allocating resources to their most effective uses 2. Budgeting uncovers potential bottlenecks. 3. Budgets communicate management's plans throughout the organization. 4. Budgeting provides goals that serve as benchmarks for evaluating subsequent performance.

Cash Budget

A detailed plan showing how cash resources will be acquired and used over a specific time period.

Direct Materials Budget & Direct Labor Budget

A detailed plan showing the amount of raw materials that must be purchased to fulfill the production budget and to provide for adequate inventories. A detailed plan that shows the direct labor-hours required to fulfill the production budget.

Production Budget

A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs.

Manufacturing Overhead Budget

A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period.

Merchandise Purchasing Budget

A detailed plan used by a merchandising company that shows the amount of goods that must be purchased from suppliers during the period.

Selling & Administrative Expense Budget

A detailed schedule of planned expenses that will be incurred in areas other than manufacturing during a budget period.

Purpose of Budgets & Budgeting

1. Budgeting provide a means of allocating resources to their most effective uses 2. Budgeting uncovers potential bottlenecks. 3. Budgets communicate management's plans throughout the organization. 4. Budgeting provides goals that serve as benchmarks for evaluating subsequent performance.

Four Major Sections of a Cash Budget

1. The receipts section. - The receipts section lists all of the cash inflows, except from financing, expected during the budget period. Generally, the major source of receipts is from sales. 2. The disbursements section. - The disbursements section summarizes all cash payments that are planned for the budget period. These payments include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as equipment purchases and dividends are listed. 3. The cash excess or deficiency section. - The disbursements section summarizes all cash payments that are planned for the budget period. These payments include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on, as contained in their respective budgets. In addition, other cash disbursements such as equipment purchases and dividends are listed. 4. The financing section. - The financing section of the cash budget details the borrowings and principal and interest repayments projected to take place during the budget period.

Master Budget

A number of separate but interdependent budgets that formally lay out the company's sales, production, and financial goals and that culminates in a cash budget, budgeted income statement, and budgeted balance sheet. If the sales budget is inaccurate, the rest of the budget will be inaccurate. The sales budget is based on the company's sales forecast, which may require the use of sophisticated mathematical models and statistical tools that are beyond the scope of this course.

Advantages of Budgeting

Budgets communicate management's plans throughout the organization. Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all of their time dealing with day-to-day emergencies. The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively. The budgeting process can uncover potential bottlenecks before they occur. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

What (10) financial questions does a master budget answer for manufacturing firm?

How much sales revenue will we earn? How much cash will we collect from customers? How much raw material will we need to purchase? How much manufacturing cost (including direct materials, direct labor, and manufacturing overhead) will we incur? How much cash will we pay to our suppliers and our direct laborers, and how much will we pay for manufacturing overhead resources? What is the total cost that will be transferred from finished goods inventory to cost of goods sold? How much selling and administrative expense will we incur and how much cash will we pay related to those expenses? How much money will we borrow from or repay to lenders—including interest? How much net operating income will we earn? What will our balance sheet look like at the end of the budget period?

The Budgeted Balance Sheet

The budgeted balance sheet is developed using data from the balance sheet from the beginning of the budget period (see Exhibit 8-3) and data contained in the various schedules.

Budgeted Income Statement

The budgeted income statement is one of the key schedules in the budget process. It shows the company's planned profit and serves as a benchmark against which subsequent company performance can be measured.

Computing the Ending Cash Balance at the End of Each Period

The ending cash balance for each period is computed by taking the excess (deficiency) of cash available over disbursements plus the total financing. For example, in the first quarter, Hampton Freeze's cash deficiency of $(94,000) plus its total financing of $130,000 equals its ending cash balance of $36,000. The ending cash balance for each quarter then becomes the beginning cash balance for the next quarter.

Finance Section of the Cash Budget and Projecting if a Firm will Need a Loan

The first row in the financing section of the cash budget relates to projected borrowings. In any period where a company's excess of cash available over disbursements is greater than its desired minimum cash balance, the company will not need to borrow money during that period. In the case of Hampton Freeze, the company wants to maintain a minimum cash balance of $30,000; therefore, it will not need to borrow money in any quarter where its excess of cash available over disbursements is greater than $30,000. However, in the first quarter of 2014 Hampton Freeze estimates that it will have a cash deficiency of $94,000; consequently, the company's minimum required borrowings at the beginning of the first quarter would be computed as follows: