Running head: MASTER BUDGET AND ITS COMPONENTS 1

Master Budget and its Components

Sunil Punjabi

06-16-2019

BUS 535

Dr. Yvan Nezerwe

MASTER BUDGET AND ITS COMPONENTS 2

Master Budget and its Components

The purpose of this paper is to explore the components of a master budget through

two numerical problems. The first problem will focus on the preparation of a budgeted

income statement, and an estimation of whether the management should adopt the proposed

changes, as evidenced by the budget. The second numerical problem is the preparation of the

master budget and all its components

Numerical Problem One

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Part One of the Numerical Problem

Based on the information given in the problem, following is the calculation of the

budgeted income statement for Merline Manufacturing, as shown in Table 1.

Table 1: Budgeted Cashflow Statement

Actual Budgeted
Dec 31, Jan 31, Feb 29, Mar 31,
2015 2016 2016 2016
Unit cost $75 $75 $75 $75
Selling price $150 $125 $125 $125
Units sold 15000 16500 18150 19965
Sales $22,50,000 $20,62,500 $22,68,750 $24,95,625
Cost of goods sold $11,25,000 $12,37,500 $13,61,250 $14,97,375
Gross profit $11,25,000 $8,25,000 $9,07,500 $9,98,250
Operating Expenses
Sales Commission 10% $2,25,000 $2,06,250 $2,26,875 $2,49,563
Advertising $2,50,000 $2,87,500 $2,87,500 $2,87,500
Store rent $30,000 $30,000 $30,000 $30,000
Administrative Salaries $45,000 $45,000 $45,000 $45,000
Depreciation - Office equipment $50,000 $50,000 $50,000 $50,000
Other expenses $10,000 $10,000 $10,000 $10,000
Total expenses $6,10,000 $6,28,750 $6,49,375 $6,72,063
Net Income $5,15,000 $1,96,250 $2,58,125 $3,26,188

Part Two of the Numerical Problem

As per the suggestion of the management, with the increased spend on advertising and

decreased selling price, despite the increase in the sales on a month-on-month basis, the net

income is likely to drop from $515,000 in December 2015, to $196,250 in January 2016,

$258,125 in February 2016, and $326,188 in March 2016. The increase in sales units is not

sufficient to recoup the additional expenditure incurred on advertising, which has moved

from $250,000 in December 2015, to $287,500 each for the months of January 20116,

February 2016, and March 2016.

This indicates that the proposal by the management is not in the best interest of

Merline Manufacturing and as such, the recommendation would be to not accept the
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management’s proposal, and continue without the increase in advertising expenses, or a

reduction in the selling price.

Numerical Problem Two

Preparing the Master Budget

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For the master budget, based on the information available, the individual components

have also been prepared. Table 2 represents the sales budget.

Table 2: Sales budget

April May June Quarter
Projected unit sales 20500 19500 20000
Selling price per unit $24 $24 $24
Projected Sales $4,88,925 $4,65,075 $4,77,000 $14,31,000

Table 3 represents the production budget

Table 3: Production Budget

April May June
Next month's unit sales 19500 20000 20500
Ending inventory percent 80% 80% 80%
Desired ending inventory 15600 16000 16400
Current period's unit sales 20500 19500 20000
Units to be available 36100 35500 36400
Less beginning inventory 16400 15600 16000
Units to be produced 19700 19900 20400

Table 4 represents the budgeted cost of goods sold

Table 4: Budgeted cost of goods sold

April May June Quarter
Projected unit sales 20500 19500 20000
Budgeted cost per unit $20 $20 $20
Projected cost of goods sold $406,925 $387,075 $397,000 $1,191,000

Table 5 represents the budgeted inventory for June 30

Table 5: Budgeted inventory for June 30

Units 16400
Cost per unit $19.85
Total $325,540

Table 6 represents the selling expense budget

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Table 6: Selling Expense Budget

April May June
Budgeted Sales $488,925 $465,075 $477,000
Commission percent 8% 8% 8%
Sales commissions $39,114 $37,206 $38,160
Manager's salary $3,000 $3,000 $3,000
Projected selling expenses $42,114 $40,206 $41,160 $123,480

Table 7 represents the general and administrative expense budget

General and administrative expense budget

April May June
Administrative salaries $12,000 $12,000 $12,000
Interest on long term note (0.9% on 500,000) $4,500 $4,500 $4,500
Projected expenses $16,500 $16,500 $16,500

Table 8 represents expected cash receipts from customers

Table 8: Expected cash receipts from customers

April May June
$4,88,92 $4,65,07 $4,77,00
Budgeted sales 5 5 0
$3,42,24 $3,25,55 $3,33,90
Ending accounts receivable (70%) 8 3 0
Cash receipts
$1,46,67 $1,39,52 $1,43,10
Cash Sales (30%) 8 3 0
$3,42,24 $3,42,24 $3,25,55
Collections of prior period's receivables 8 8 3
$4,88,92 $4,81,77 $4,68,65
Total cash to be collected 5 0 3

Table 9 represents expected cash payments to suppliers

Expected cash payments to suppliers

Ma Jun
April y e Quarter
Cash payments (equal to prior period's purchase) $2,00,500 0 0 $2,00,500
Expected June 30 balance of accounts payable 0
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Table 10 represents the cash budget

Table 10: Cash budget

April May June
Beginning cash balance $40,000 $83,466 $34,915
Cash receipts (part 5) $4,88,925 $4,81,770 $4,68,653
Total cash available $5,28,925 $5,65,236 $5,03,568
Cash payments
Payments for merchandise (part 6) $2,00,500 $2,97,500 $2,04,000
Variable Overhead $26,595 $26,865 $27,540
Labor $1,47,750 $1,49,250 $1,53,000
Sales commissions (part 3) $39,114 $37,206 $38,160
Salaries
Sales (part 3) $3,000 $3,000 $3,000
Administrative (part 4) $12,000 $12,000 $12,000
Interest on long-term note (part 4) $4,500 $4,500 $4,500
Total cash payments $4,33,459 $5,30,321 $4,42,200
Preliminary balance $95,466 $34,915 $61,368
Additional loan $0 $0 $0
Loan repayment $12,000 $0 $0
Ending cash balance $83,466 $34,915 $61,368
Ending short-term notes $0 $0 $0

Table 11 represents the direct materials budget

Table 11: Direct Materials Budget

April May June
Budget production (units) 19700 19900 20400
Materials requirements per unit 0.5 0.5 0.5
Materials needed for production (units) 9850 9950 10200
Add budgeted ending inventory (units) 9950 10200 4000
Total materials requirements (units) 19800 20150 14200
Deduct beginning inventory (units) 4925 9950 10200
Materials to be purchased (units) 14875 10200 4000
Material price per unit $20 $20 $20
$297,50 $204,00
Total cost of direct materials purchases 0 0 $80,000
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Table 12 represents the labor budget

Table 12: Labor Budget

April May June
Budgeted production 19700 19900 20400
Labor requirements per unit 0.5 0.5 0.5
Total labor hours needed 9850 9950 10200
Labor rate (per hour) $15 $15 $15
Labor dollars $1,47,750 $1,49,250 $1,53,000

Table 13 represents factory overhead budget

Factory overhead budget

April May June
Budgeted production (units) 19700 19900 20400
Variable overhead rate $3 $3 $3
Budgeted variable overhead $26,595 $26,865 $27,540
Budgeted fixed overhead $20,000 $20,000 $20,000
Budgeted total overhead $46,595 $46,865 $47,540

Table 14 represents the budgeted income statement

Table 14: Budgeted income statement

Sales (part 1) $14,31,000

Cost of goods sold (part 2) $11,91,000
Gross profit $2,40,000
Operating expenses
Sales commissions (part 3) $1,14,480
Sales salaries (part 3) $9,000
Administrative salaries (part 4) $36,000
Interest on long-term note (part 4) $13,500
Total operating expenses $1,72,980
Income before income taxes $67,020
Income taxes (not known)
Net income $67,020
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Table 15 represents the budgeted balance sheet as on June 30

Table 15: Budgeted balance sheet as on June 30

Assets
Cash $61,368
Accounts receivable $3,33,900
Inventory
RM $80,000
FG $3,25,540 $4,05,540
Total current assets $8,00,808
Equipment $6,00,000
Less accumulated depreciation $2,10,000 $3,90,000
Total assets $11,90,808
Liabilities and equity
Accounts payable $80,000
Income taxes payable $0
Total current liabilities $80,000
Long term note payable $5,00,000
Total liabilities $5,80,000
Common Stock $3,35,000
Retained earnings $2,75,808
Total stockholder's equity $6,10,808
Total liabilities and equity $11,90,808

Conclusion

This paper illustrates that in order to prepare the master budget, the involvement of all

departments is needed, so that costs can be apportioned accurately and legitimately to each

department, in the overall budget.

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References:

Wild, J., and Shaw, K., 2010, Managerial Accounting, Master Budgets, and Performance

Planning, 10th edition, New York, McGraw-Hill, p. 236-275