OctoberChapter 9 – The Master Budget9.1 Strategic Planning- Setting long-term goals for the company- May extend 5 – 10 years into the futureBudget- Quantifies management’s plans- Helps management determine how best to use resources- Used in planning, directing, and controllingBudget Periods- Usually prepared for an ANNUAL periodo Further broken down into quarters or months- Continuous (rolling) budget – continuously updated so that a 12-month period is always budgetedBudget Process On-going process – reviewed and revised during year as neededTop Down (Imposed) top management determines the budget- Not used by many companiesParticipative - participation at many levels of management- Benefitso Lower level managers have better informationo Enhances motivation- Disadvantageso More complex process and time consumingo Budget “slack” – intentionally overestimating expenses or underestimating revenues Make performance look better Guard against cutsBudget Committee- Cross-functional team that reviews and approves final budgetStarting PointLast year’s budget and/or actual results modified for- New products, customers, strategies- Competitive changes- General inflation and expected changes in costs – fuel, raw materials, etc.ZERO-BASED budgeting- Begin with budget of zero and justify every dollar- Time-consuming and labor intensive- Often used for certain sensitive or high-dollar line items0Benefits of Budgeting- Forces managers to plan - Promotes coordination and communication o Across the entire value chain- Provides a benchmark for performance measuremento Budget performance report Master Budget- Comprehensive planning document for the entire organization- Includes all supporting budgets in theo Operating Budget Budgets needed to run daily operations Starts with the sales or revenue budget Ends with budgeted income statemento Financial Budget Projects collection and payment of cash (including capital expenditures) Forecasts budgeted balance sheet9.2OPERATING BUDGETSales Budget- Basis for every other budget - Prepared by sales or marketing manager o consideration past trends and current economic factors, market demand , etc.Operating BudgetCapital ExpenditureBudgetBudgeted Balance SheetCash BudgetsFinancial Budget- Total sales revenue = Number of units to be sold x Selling price per unit - Includes both cash and credit salesProduction Budget- Starts with sales budget- Production budget is in units only- Safety stock is inventory kept on hand o desired level of ending inventory must be factored in when deciding how much to produce- The basic format for the production budget is:+Units needed for sales + Desired ending inventory= Total units needed- Units in beginning inventory= Units to produceMason Manufacturing produces self-watering planters. Sales projections in units for the next five months are as follows:January 3,500February 3,400March 3,600April 4,000May 4,200Inventory at the start of the year was 350 planters. Desired inventory at the end of each month is 10% of the next month’s sales. Req. 1 Prepare a production Budget for each month in the first quarter.Mason ManufacturingProduction BudgetFor the Months of January through March JanuaryFebruaryMarch QuarterUnit sales Desired end inventory (10% of next month’s unit sales)Total neededBeginning inventoryUnits to produceEach planter requires 2 pounds of plastic and costs 25 cents per pound. The company wants to have 20% of the plastic needed for the next month’s production on hand at the end of each month.Req. 2 Prepare a direct materials budget for the first quarterMason ManufacturingDirect Materials BudgetFor the Months of January through March JanuaryFebruaryMarch QuarterUnits to be produced (from Production Budget)Quantity (lbs) of DM needed per unit Quantity (lbs) needed for productionDesired End Inventory of DM (20% of the amount needed for next month’s production)Total Quantity (lbs) NeededBeginning Inventory of DMQuantity (lbs) to purchaseCost per poundTotal Cost of DM purchasesApril units to be produced: April MayUnit Sales Desired End InventoryTotal NeededBeginning InventoryUnits to produceDM needed per unitDM needed for productionDesired ending inventory for March: Direct Materials Budget- Similar to the production budgeto Includes “safety stock” provision- Usually reports quantity (units) and cost ($)+ Units to be producedX units of DM per units produced= Quantity of DM needed for production+ Desired DM ending inventory= Total quantity of DM needed- DM beginning inventory= Quantity of DM to purchase X cost per unit= Cost of materials to be purchasedComplete Previous Exercise for Mason ManufacturingDirect Labor BudgetSimilar to Production Budget- Starts with units from production budgeto Determine total DLH based on production o Multiply DLH x average rates- Average labor rates include all fringe benefits and taxes- Format for Direct Labor Budget: Units to be produced × DLH per unit = Total DLH needed × Cost per DLH = Total Direct Labor CostManufacturing Overhead Budget-Highly dependent on cost behavioro Separate sections for fixed and variable components-Includes noncash expenses such as depreciation Sales and production for Carlyle Co. are projected to be 40,000 units. Information about various manufacturing overhead costs follows:Variable Costs per Unit Total Fixed CostsIndirect materials $1.00Supplies .80Indirect labor .50 $60,000Plant utilities .10 30,000Repairs and maintenance .40 12,000Depreciation 48,000Insurance 20,000Plant supervision 65,000Req 1. Prepare the manufacturing overhead budget for the upcoming year.The Carlyle CompanyManufacturing Overhead BudgetFor the Upcoming YearProjected ProductionVariable MOH costs:Indirect materials ($1.00 per unit)Supplies ($0.80 per unit)Indirect labor ($0.50 per unit)Plant utilities ($0.10 per unit)Repairs and maintenance ($0.40 per unit)Total Variable MOHFixed MOH costs:Indirect laborPlant utilitiesRepairs and maintenanceDepreciation on plant and equipmentInsurance on plant and equipmentPlant supervisionTotal Fixed MOHTotal MOHLess Depreciation Cash paid for MOHOperating Expense Budget- Period Costs - all value chain components except Production/Purchases- Both fixed and variable costs- Includes noncash items such as depreciation and bad debt expense Davenport Corporation estimates the following:July