Comprehensive Budgeting Example: © The Mcgraw-Hill Companies, Inc., 2006. All Rights Reserved
Comprehensive Budgeting Example: © The Mcgraw-Hill Companies, Inc., 2006. All Rights Reserved
Comprehensive Budgeting Example: © The Mcgraw-Hill Companies, Inc., 2006. All Rights Reserved
Royal Company is preparing budgets for the second quarter ending June
30.
• Budgeted sales of the company’s only product for the next five months
are:
April....... 20,000 units
May....... 50,000 units
June...... 30,000 units
July........ 25,000 units
August... 15,000 units
• The selling price is $10 per unit.
• The following elements of the master budget will be prepared in this
example:
1. Sales budget (with a schedule of expected cash collections).
2. Production budget.
3. Direct materials budget (with a schedule of expected cash
disbursements for materials).
4. Direct labor budget.
5. Manufacturing overhead budget.
6. Ending finished goods inventory budget.
7. Selling and administrative expense budget.
8. Cash budget.
9. Budgeted income statement.
10. Budgeted balance sheet.
SALES BUDGET
April May June Quarter
Budgeted sales (units).... 20,000 50,000 30,000 100,000
Selling price per unit...... × $10 × $10 × $10 × $10
Total sales..................... $200,000 $500,000 $300,000 $1,000,000
PRODUCTION BUDGET
Additional data:
• The company desires to have inventory on hand at the end of each
month equal to 20% of the following month’s budgeted unit sales.
• On March 31, 4,000 units were on hand.
Note: Many companies do not fully adjust their direct labor work force
every month and in such companies direct labor behaves more like a fixed
cost, with additional cost if overtime is necessary.
CASH BUDGET
Additional data:
1. A line of credit is available at a local bank that allows the company to
borrow up to $75,000.
a. All borrowing occurs at the beginning of the month, and all
repayments occur at the end of the month.
b. Any interest incurred during the second quarter will be paid at the
end of the quarter. The interest rate is 16% per year.
2. Royal Company desires a cash balance of at least $30,000 at the end
of each month. The cash balance at the beginning of April was
$40,000.
3. Cash dividends of $51,000 are to be paid to stockholders in April.
4. Equipment purchases of $143,700 are scheduled for May and $48,800
for June. This equipment will be installed and tested during the second
quarter and will not become operational until July, when depreciation
charges will commence.
CASH BUDGET
Royal Company
Cash Budget
For the Quarter Ending June 30
April May June Quarter
Cash balance, beginning....... $ 40,000 $ 30,000 $ 30,000 $ 40,000
Add receipts:
Cash collections [TM 9-5]...... 170,000 400,000 335,000 905,000
Total cash available.............. 210,000 430,000 365,000 945,000
Less disbursements:
Direct materials [TM 9-8]...... 40,000 72,300 72,700 185,000
Direct labor [TM 9-9]............. 13,000 23,000 14,500 50,500
Manufacturing overhead
[TM 9-10].............................. 56,000 76,000 59,000 191,000
Selling & administrative
70,000
[TM 9-12].............................. 85,000 75,000 230,000
Equipment purchases......... 0 143,700 48,800 192,500
Dividends.......................... 51,000 0 0 51,000
Total disbursements.............. 230,000 400,000 270,000 900,000
Excess (deficiency) of cash
available over
disbursements................... (20,000) 30,000 95,000 45,000
Financing:
Borrowings........................ 50,000 0 0 50,000
Repayments....................... 0 0 (50,000) (50,000)
Interest*........................... 0 0 ( 2,000) ( 2,000)
Total financing...................... 50,000 0 (52,000) ( 2,000)
Cash balance, ending............ $ 30,000 $ 30,000 $ 43,000 $ 43,000
* $50,000 × 16% × (3 months/12 months) = $2,000.
Royal Company
Budgeted Income Statement
For the Quarter Ending June 30
Net sales [see below]........................................... $950,000
Less cost of goods sold [see below]...................... 500,000
Gross margin....................................................... 450,000
Less selling & administrative expenses [TM 9-12].... 260,000
Net operating income........................................... 190,000
Less interest expense [TM 9-14]............................. 2,000
Net income.......................................................... $188,000
Royal Company
Balance Sheet
March 31
Current assets:
Cash................................................ $ 40,000 (a)
Accounts receivable.......................... 30,000 (b)
Raw materials inventory................... 5,200 (c)
Finished goods inventory.................. 20,000 (d) $ 95,200
Plant and equipment:
Land................................................ 400,000 (e)
Buildings and equipment................... 1,610,000 (f)
Accumulated depreciation................. (750,000) (g) 1,260,000
Total assets........................................ $1,355,200
Liabilities:
Accounts payable............................. $ 12,000 (h)
Stockholders’ equity:
Common stock................................. $ 200,000 (i)
Retained earnings............................ 1,143,200 (j) 1,343,200
Total liabilities and stockholders’ equity $1,355,200
Royal Company
Budgeted Balance Sheet
June 30
Current assets:
Cash................................................ $ 43,000 (a)
Accounts receivable.......................... 75,000 (b)
Raw materials inventory................... 4,600 (c)
Finished goods inventory.................. 25,000 (d) $ 147,600
Plant and equipment:
Land................................................ 400,000 (e)
Buildings and equipment................... 1,802,500 (f)
Accumulated depreciation................. (841,500) (g) 1,361,000
Total assets........................................ $1,508,600
Liabilities:
Accounts payable............................. $ 28,400 (h)
Stockholders’ equity:
Common stock................................. $ 200,000 (i)
Retained earnings............................ 1,280,200 (j) 1,480,200
Total liabilities and stockholders’ equity $1,508,600