Responsibility Accounting: Master Budget
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
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
So let’s look at a couple of examples here for this budget. So here we have Gripper’s, and they expect CGS to average 65% of sales revenue, and the company expect to sell 4300 pairs of shoes in March for $240 each. Gripper’s target ending inventory is $10,000 plus 50% of the next month’s CGS. Use this information and the sales budget you completed in an earlier video lecture (provided below) to prepare Gripper’s inventory, purchases, and CGS budget for January and February (using t accounts).
So you’ll see I have a January inventory T account and a February inventory T account, so we’re again just going to fill in the information that we know. So the first thing is, they tell me that CGS is 65% of sales revenue, so I can look at my sales budget there and I can find that January sales revenue is $740,000, so CGS for January must be 65% of that, which comes out to be $481,000.
So next, if we move on, they tell me that ending inventory is 10,000 plus 50% of next month’s CGS, but the story doesn’t really tell me anything about beginning inventory so we have to remember where beginning inventory comes from. Remember beginning inventory for January will be ending inventory from December. So let’s use that statement in the story to calculate December’s ending inventory which is also equal to January’s beginning inventory. So they tell me that ending inventory is 10,000 plus 50% of the next month’s CGS, so that means that January’s beginning inventory will be $10,000 plus 50% of January’s CGS, which comes to $250,500.
So before we move away from these two topics, let’s calculate CGS for February. Again, CGS is 65% of sales revenue. So February’s sales revenue is $770,000 and 65% of that would be $500,500. Now they tell me in the ending inventory is $10,000 plus 50% of next month’s CGS, so now we can calculate January’s ending inventory because that will be $10,000 plus 50% of February’s CGS. Ending inventory for January will be $260,250. Now we can calculate our budgeted purchases for January, just solving for our unknown. So CGS plus ending inventory in January minus beginning should equal purchases of $490,750. So again, you’re just solving for the unknown.
Now we move over to February’s beginning inventory. We know January’s ending (which we’ve already calculated), so we’re just going to move that over to February’s beginning: $260,250. And now we’ll calculate ending for February. So in ending is $10,000 plus 50% of next month’s CGS, but we don’t have March on here. So we, to calculate CGS, we actually have to have sales revenue as well, but they do tell me how much I’m selling in (or expect to sell in) March. They tell me it’s going to be 4,300 pairs of shoes at $240 each, so that’s my sales revenue. To get CGS, it’s multiplied by 65%. Ending inventory for February will be that $10,000 plus 50% of March’s CGS, which is revenue times 65%. So ending inventory for February will be $345,400.
Now we just solve for our unknown, which is our purchases for February. So we add our CGS plus our ending, subtract our beginning, and that gives you purchases of $585,650.
Now I want you to try one very similar to this one, except this one will be Mountaineers. So Mountaineers expects CGS to average 75% of sales revenue, and the company expects to sell 4,600 pairs of shoes in March for $240 each. Mountaineers’ target ending inventory is $18,000 plus 45% of the next month’s CGS. Use this information and the sales budget prepared in an earlier online lecture (provided below) to prepare Mountaineers’ inventory, purchases, and CGS budget for January and February (using T accounts). Of course, I’m using T accounts. You can use a form, as you saw in the prior slides, or you can use T accounts as I’m using.
So let’s just go in the same order that we did in the first one. We’ll calculate January’s CGS first. So what you should do is take sales for January of $660,000 times 75%, which gives us $495,000. The next thing is to calculate beginning inventory for January (so we have to calculate ending from December), which would be $18,000 plus 45% of the next month’s CGS, which is January’s CGS, which gives me $240,750 for ending inventory in December, which I just simply moved into the January inventory T account.
Now I’m going to move over to CGS for February. Again, it’s 75% of sales revenue, which gives us $330,000. Now I can calculate ending inventory for January because ending inventory is $18,000 plus 45% of CGS. That gives me ending inventory for January of $166,500. Now I can calculate my unknown in January, which is my purchases. If you take your CGS plus your ending, minus your beginning, that will give you purchases in January of $420,750. Now we’ll complete February’s inventory T account. Beginning inventory from February is again ending from January. We’ve already calculated ending for January, so I’m just going to move that over to my beginning for February. Now we can calculate ending for February. Remember ending inventory is $18,000 plus 45% of next month’s (which is March’s) CGS. So we have to have sales revenue to calculate CGS.
They tell me that I plan to sell 4,600 pairs of shoes at $240 each. That will be my sales revenue, times 75% will give me my cost of goods sold…and my ending inventory is $18,000 plus 45% of CGS for the next month, so my ending inventory for February will be $390,600.
I can now solve for the unknown, which is purchases, so it will be my CGS plus my ending inventory, less my beginning, to give me purchases of $550,100.
Responsibility Accounting and Budgeting: Cash Collections Budget
To demonstrate the cash budget, lets start with a cash t-account. We know that cash, beiung an asset, carries a debit balance. We have our beginning and ending balance there. Any payments made in cash would be credited to our t account. If we borrow money or collect moneyt from customers, that would make our cash balance go up. So each part of the cash t account would actually have its own budget.
We want to start with collections in this first example:
You prepared Grippers’ sales budget above (previous video). Now assume that Grippers’ sales are 25% cash and 75% on credit. Grippers’ collection history indicares that credit sales are collected as follows:
30% in the month of the sale
60% in the month after the sale
6% two months after the sale
4% are never collected
November sales totaled $391,599 and December sales were $398,250. Prepare a schedule for the budgeted cash collections for January and February.
Let’s start with January, we know that if we make cash sales we’re going to collect those cash sales immediately. We are specifically looking at cash collections for January, so we want to include cash sales inthese collections schedules. Sales in January were $740,000 and that came from our sales budget. 25% of that total is for cash, $185,000 would be collected in cash sales. The credit sales, 30% of credit sales ($555,000) from our collection schedule is going to be collected in January, $166,000.
Now we can move to the month prior, December. We are going to collect some of December’s credit sales in the month of January, 60% of December’s credit sales. December sales, $398,250 x 75% x 60%, which gives me $179,213 that we plan to collect in January.
We also plan to collect 6% of credit sales from November, $391,500 x 75% x 6%, which gives me $17,618 that will be collected in January from November sales. Total cash collections for the month of January to be $548,331.
Next we will look at total cash collections for February. You should have found that the cash collections would equal $716,671. This came from the total collections from the month of February, we are goint o collect all of our cash sales. In addition we are going to collect 30% of credit sales from the month of February, 60% of credit sales from January, and 6% of credit sales from December.