Budgeting

Responsibility Accounting: Master Budget

This is part one in our responsibility accounting series and we will be discussing types of budgets. So we are going to talk about the master budget here. Master budget is the set of budget financial statements and the supporting schedules for organization and includes three types of budgets. The first one is called the operating budget, the second is the capital expenditures budget and the third is financial budgets. We are going to look at each one of these and what makes up each of these types.

The first one being the operating budget-- the first part of the operating budget, which is also the cornerstone of the master budget, is the sales budget. The sales budget will determine what our sales are going to be; this will forecast what we anticipate our sales to be. It’s where an older company would probably forecast this by looking at past sale levels and in projecting hopefully our sales to increase in coming periods and budget accordingly. However, a new company we may have to do industry research to see where other companies in our industry are so that we have an idea for sales budget needs to be now. Once we determine what we are planning to sell, we need to create our inventory budget and determine how much inventory we plan to have left in our ending inventory. With these numbers, we are able to determine, “Well, if we’re going to sell this much and we want to have a certain amount at the end of the period—how much then do we have to purchase?” So if we have our sales budget and our ending inventory (our sales would be directly related to how much we plan to sell—CGS) then we can determine how much inventory we need to purchase. Then we want to project our operating expenses budget; just like it sounds, we want to determine or project what our operating expenses for our business is going to be. Then we can create our budgeted income statement. Part of this master budget is of course a budget for our budget financial statements, this is the first one: budgeted income statement. So that makes up the first set of budgets, called the operating budget.

The second part of the master budget is the capital expenditures budget, which is really just one part on its own. The capital expenditures budget is what we plan to invest in; capital expenditures are depreciable assets like buildings or equipment. So if you plan to invest in the future and if so — in what way and how much and that will all be part of our capital expenditures budget.

The last set that makes up the master budget is the financial budget. The first part of the financial budget is the cash budget. Cash going in, cash going out—that would be part of this budget. Then with the budgeted income statement and the cash budget, we are able to create our budgeted balance sheet. The last part would be the budgeted statement of cash flows. Note here we have our budgeted income statement, our budgeted balance sheet, and our budgeted statement of cash flows that all make up our master budget. All of these parts work together to make that master budget.

Responsibility Accounting: Sales Budget

This is part two in our responsibility accounting series where we are going to be discussing sales budget. So recall in our prior discussion on the master budget, we discussed that sales budget was the first budget you complete in the master budget process. Because sales budget is the cornerstone of that master budget, it affects so many levels of the master budget-- one being expenses and many other levels. Here is an example of a sales budget, what I want to point out is remember this here is a budget—it is something we anticipate or project will happen. In this case, it’s April through July, so here we have our April, May, June, July, four months. We have our sales types, and notice we have two ways we can make a sale; we have cash and we have credit. You want to keep them separate because think about when they are collected. Cash sales are collected when the sale is made, credit sales can be collected one-two-three or more months after the sale. When we get into our future budgets, for example our cash budget, we would need to know what percent of our sales from credit we anticipate collecting those sales. We typically collect 10% of credit sales the following month and 30% the second month etc. We would need to make those projections when we make our cash budget.

Let’s look at an example:

Grippers expects to sell 4,000 pairs of shoes for $185 each in January, and 3,500 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.

The first thing I would do is set up my little grid and then set up my months, January and February, and set up my total column. The first thing I need to do is place my sales price per pair. My sales price per pair in January was $185, and in February it was $220. Next thing I need to do is multiply those numbers times the number of pairs I anticipate selling each month. In January I anticipate selling 4000 pairs, and in February I anticipate selling 3500 pairs. For total sales in January $740,000 and in February $770,000. For the entire period, total sales would be $1,510,000. That’s a very simple sales budget, in this particular case all sales were for cash so we didn’t really have to separate out cash and credit sales in this particular instance. If you did need to do that, you can simply take the sales and say 60% is cash and 40% is credit, you would separate those out for each month.

Let’s give you a chance to look at one:

Mountaineer sells its rock-climbing shoes worldwide. Mountaineers expects to sell 4,000 pairs of shoes for $165 each in January, and 2,000 pairs of shoes for $220 each in February. All sales are cash only. Prepare the Sales Budget for January and February.

Set up your grid and you set up your months, January and February, and your total column. Sales price per pair is $165 in January and $220 in February. The next line is the number of pairs you anticipate selling, 4000 in $440,000. Total sales for the period of $1,100,000. 

Responsibility Accounting: Inventory, Purchases, Cost of Goods Sold budget

This is the third part in our responsibility accounting series. We’re going to be looking at inventory, purchases, and cost-of-goods-sold budget. So in our discussion we’re going to combine these budgets into one so instead of having a separate inventories, purchases, and CGS budgets, we’re going to have one “inventories, purchases, and CGS budgets”. So in demonstrating this, I’m going to use our good old-fashioned T accounts. So because most of us are familiar with that and we know where things go, and we can see this nice pretty picture as opposed to memorizing this form down here at the bottom. So we’re just going to kind of throw in some things on this T account that we already know. For example, we know the beginning inventory and assets carries a debit balance. Beginning inventory we would know because that would come from the prior period’s ending inventory. We would also be able to figure out our cost of goods sold for the next period because that would be a direct result of our sales budget we created in the prior lecture.  And of course we would decide what we want our ending inventory to be, so how much inventory so would we want to have leftover at the end of the period? So once we have these three numbers: Beginning is a given number, and of course cost of goods sold at the end would be estimated, we can then calculate what purchases would be. So remember, beginning plus purchases has to cover the cost of goods sold plus the ending because CGS plus ending is that total inventory that’s required that must be covered again by beginning plus purchases. So hopefully that was a good visual for you of what we’re going to be looking at in this section.  So look at the form of the bottom, you can see it’s basically what we just discussed. We start with our CGS, we’re going to add our desired ending inventory, so that’s going to give us our total inventory required. If you subtract out your beginning inventory, which comes from last period’s ending, that’s going to give you the amount that you need to purchase to make that happen.  So one thing to point out before we move on is to remember that ending from the prior period is going to be the next period beginning inventory…so that’s where that comes from.